The introduction of the changes in the Future of Financial Advice legislation is another step closer with the release last week of a regulatory guide by the Australian Securities and Investments Commission.
It details what ASIC regards as conflicted remuneration. Its issue has caused concern in some sectors of the financial advice industry, and has reinforced that from July 1 there will be two classes of investors.
Two of the main changes are a statutory duty placed on financial advisers to act in the best interests of clients and a ban on conflicted remuneration, which includes commissions and volume bonuses.
The problem with the legislation is it only applies to advice given after July 1. Anyone who received advice before its introduction will continue to have the value of their investments eroded by commissions, while those receiving advice after the introduction will be protected.
The legislation was prompted by the financial havoc wreaked during the GFC and came out of a parliamentary joint committee into corporations and financial services in 2009.
One of the main findings was that "a significant conflict of interest for financial advisers occurs when they are remunerated by product manufacturers for a client acting on a recommendation to invest in their financial product".
The ASIC guide defines conflicted remuneration as "any benefit given to an Australian Financial Services licensee, or its authorised representative, who provides financial advice to retail clients that because of the nature of the benefit or circumstances it is given in could reasonably be expected to influence the choice of financial products recommended to clients".
In other words where a person who provides financial advice to a retail investor receives commission, remuneration or benefits based on the products recommended, this will be conflicted remuneration and is banned. Benefits can include free or subsidised business equipment, entertainment and subsidised travel.
Conflicted remuneration will not include a base salary paid to an employee of an AFS licensee, but it will include a salary based on and dependent upon the value of financial products sold. This inclusion of salaries based on investment products sold has people in the financial services industry worried.
Andrew Baker, managing partner of Tria Investment Partners, on the boutique consulting firm's website posted a blog this week stating that the ban had gone too far.
Although saying that ASIC's guide to conflicted remuneration was praiseworthy in its ambitions, he believed that some parts of the ban were excessive. Baker wrote: "A good example is how it goes to tortuous lengths to restrict the remuneration of employees who sell their employer's financial products to retail investors. You can receive a salary, but you can't receive a bonus based primarily on sales success."
Baker goes on to criticise the ban on conflicted remuneration because it stops people who want to pursue a career in selling financial products from doing so. Unfortunately, Baker appears to be missing the main point of the reforms and the ban on conflicted remuneration.
Many of the people who lost money during the GFC were advised to invest in products by commission-driven advisers more intent on improving their own financial position to the detriment of their clients.
If the broad scope of the ban on conflicted remuneration forces product and commission-driven advisers out of the industry, and encourages more strategy-based advisers focused on improving a client's financial situation, the reforms will have been successful.
Max Newnham is a fee-for-service chartered accountant financial planning specialist.