Eureka Correspondence

Challenging FoFA assertions

Having read your article ‘Here we go again‘ in Eureka Report on 23 November 2013, the Financial Planning Association of Australia (FPA) feels it is important to clarify some of the facts and the degree to which any reforms to FoFA might affect consumer outcomes and professional standards in the financial advice sector.

Alan, your sensationalist blanket assertions are to balanced reporting what trail commissions are to professional financial planning. The two should never be mentioned in the same sentence! In fact there is much already in place to protect consumers that pre-dates FoFA. We feel compelled to bring these facts to your attention.

The FoFA reforms are arguably the biggest piece of reform change on the financial planning sector and the majority of financial planners are not only supportive of the reforms but have been conducting themselves accordingly before FoFA was even proposed, especially those who are members of the FPA.

You assert that the best interest requirement will be watered down to ‘box-ticking’ by the Coalition’s proposed removal of section 961B(2)(g). Firstly a statutory requirement to act in the best interest of the client is now a legal requirement that had never previously existed, and this is not being removed and will continue to play a key role in improving the conduct and behaviour of financial planners. Further it should be noted that members of the FPA are bound by an over-arching ethics principle in the FPA Code – which is to put the client’s interest first.

In relation to the opt-in requirement, most clients receive advice under a client service agreement, which is negotiated to meet the service needs of the client and enables the client to Opt-out at any time. The legislated Opt-In requirements negate these contracts.

Practice Standard 1 of our Code details the professional obligations and considerations our members must adhere to prior to entering a financial planning engagement with a client. It requires our members to work with their client to determine the parameters of the engagement to suit the client’s advice needs. The terms of engagement must include (for example) the service deliverables and timeframes, frequency of contact, and the duration of the engagement and how the engagement can be terminated.

Your article states that “the Government is proposing to exempt volume-based rebates, commissions for general advice”. Firstly the FPA has voiced concern with this proposed amendment and definitely does not support the return of commissions on investment in any form. As part of our professional rules, in October 2009 (prior to FoFA), the FPA launched a new Remuneration Policy banning investment commissions on new business from July 2012. When combined with the professional requirements of our Code, these standards restrict our practitioner member’s from receiving remuneration which is not “client-directed”, including the supposed commissions related to SMSF property investments as purported in your article. Our ban on investment commissions stands irrespective of any proposed changes to FoFA and supports our ethics principle to place the client’s interests first.

You make reference to life insurance commissions. The proposal continues to ban commissions on automatic risk insurance provided through a super fund, where no ‘personal’ financial advice has been provided. This does not open up commission on a ‘group scale’ as you imply.

The FPA would agree with you – the Government does need to strengthen the FoFA legislation. It is our strong belief that to strengthen the consumer protections of FoFA, consideration must be given to restricting the term financial planner/financial adviser to only those that have the highest level of education, competency, ethics and standards, and are a member of a Regulator ‘prescribed professional body’.

The FoFA reforms are a fundamental building block in consumer protection for all Australians and their financial wellbeing. However, a mistake with the legislation is that it is trying to legislate good behaviour, which is determined by the motivation and conduct of the financial planner. Issues of conduct and behaviour are most effectively addressed through higher education and professional standards which impose obligations that exceed the minimum requirements set in the law.

Professional standards speak universally to all members of the profession as they are business model agnostic. They encourage individual professionals to strive for client-centred outcomes and to resist adverse commercial interests.

Mark Rantall
Chief Operating Officer, Financial Planning Association

Newsat’s questionable performance

Hello Brendon. I read your articles for outperforms and underperforms of the Uncapped 100 and I have bought Newsat before its latest announcement of debt acquired and subsequent issue of shares to the creditor (see Five bargains for under a buck).

I can now tell you what will happen with Newsat: I expect the share price will go down as more and more people lose trust in the management of this company. I spoke to another person who is a financial analyst of a leading LIC and he has told me that the risk of Newsat is extremely high.

Managers of LICs meet with listed company management and gain an insight into the company before making an investment – that is the advantage they have over the retail investor. I like to try to have a go at some of these small caps but for the most part I get burned. I chose Newsat because of your point that it trades lower by about 3% for the year and all the other stocks in the Uncapped 100 had multiple rises up to 1500%, so I thought I had missed the boat on these. But as it has turned out the market knows something about Newsat and its management that has meant the share price has remained stagnant.

Peter Wiseman

Brendon’s response: Thanks for your letter. You have brought up a number of good points and the stock has dipped 2 cents to 38 cents from when I recommended it as “outperform”. I have met with Newsat management a number of times over the past 2-3 years and I had some initial doubts about the company.

However, management has done everything they said they would and that is why I took a more favourable view on the stock. Make no mistake, it’s no mean feat for a market minnow to actually get enough cash to launch a $600 million satellite and one has to give management credit for that. I didn’t think they would be able to.

The subsequent revelation about the Orbital Capital finance has raised a red flag for me (click here to read my take on this development), but the end game was, and continues to be, the satellite launch. It is this reason I recommended readers buy the stock.

If they pull it off, the stock will be re-rated, regardless of what anyone thinks of management. This is the point of contention between the bulls and bears. The bears think Newsat will fail, but the reality is the success of the launch now has nothing to do with the quality of management. The cash has been paid and it’s now all up to Lockheed and Arianespace to pull it off. I hold the stock in my portfolio (as you can see here) and I will continue to hold my position until I believe the probability of a successful launch is less than 50%.

Asset allocations for super funds

What do you think of super funds which have asset allocations of 0-90%, 0-45% etc (see Q super)? Is this so that they can react quickly to a “black swan event”, or is it that they don’t want to commit to any long-term strategy?

KD

Bruce Brammall’s response: Thanks for the email. As a financial adviser, I’m not a fan of it at all and would never use funds with such wide discretion for my clients. I’m not a big fan of active investment management from fund managers in general, because half of them will get it right and half will get it wrong. And I want to know that any fund managers I choose for clients operate on a very, very short leash. Pretty much, they need to have a gap of 5-10% max for me. Preferably a few percent.

It is for both the reasons you’ve suggested, plus a few more. But largely, they want to run the fund as they see fit. If they want to take a position (long Aussie equities, long international bonds, property, etc), they can do it without having to seek permission from anywhere.

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