The problem with financial advice is that it’s too expensive. A financial plan costs at least $2000, usually more. The truth is, it’s not worth it.
It has become so expensive not because of the years of study by the practitioner or the expensive equipment being used. In fact, health check-ups usually cost less than wealth check-ups, even though they’re carried out by someone who has studied for at least seven years and who is probably using very expensive equipment indeed.
Why has financial advice become so expensive? Because of regulation. Clients are paying for attempts to protect them, as much as they are paying for the advice itself.
Over the years, regulation has focused on disclosure, so that any financial advice now comes with huge volumes of expensive paperwork that no one reads. That’s why clients know the advice is not worth the real cost. Most of the price pays for disclosure that they’re not going to read.
And the reason that sort of misguided regulation was introduced was that financial advice arose from a sales culture -- that is, from life insurance.
The early financial planners were insurance sales people who switched to selling investment products.
Calling themselves financial planners, or advisers, was a brilliant idea. It set up a very profitable knowledge gap in which they knew they were selling but the clients thought they were advising.
The definitions in the laws that control what advisers do, and the training now required to be financial planner, are all about products and disclosure rather than simply financial advice.
The result is that regulation has had the perverse effect of driving people towards disguised ways of paying for it: that is, commissions and percentages. Would you go to someone who sends you a bill for $5000, or someone who says: “Don’t worry about the cost -- someone else will pick that up.”
In other words, the regulation of financial advice has created a kind of whirlpool effect, where the regulation increases the cost and the high cost produces the need for more regulation.
In that context, the Coalition government’s attempt to cut regulation is a good thing. The trouble is that Assistant Treasurer Arthur Sinodinos is allowing a sales culture back into financial advice at the same time.
The Future of Financial Advice reforms, introduced a year ago, were the first attempt to eliminate the idea that a financial planner is really a sales person -- usually for a bank -- by banning commissions.
The Financial Planning Association had already banned commissions for its members from July 2012 because it wanted to move the industry towards a professional advisory footing, instead of being an association of salespeople.
But financial planners don’t have to be members of the FPA, so it was clear that its efforts needed to be supported by legislation that roped in everyone.
All the big financial operations that have collapsed over the years, costing Australians billions of dollars, were based on commissions paid to financial planners. Westpoint, Timbercorp and Great Southern paid 10 per cent upfront commissions, Storm paid 6-7 per cent upfront plus a trailing commission, Opes Prime paid a trail of 0.75 per cent, Trio paid 4 per cent upfront and 1.1 per cent trail.
Property developers are now paying commissions on apartment investments.
The proposed amendments to FoFA do cut regulation, which is good, but they also allow commissions to be paid in some circumstances.
Senator Sinodinos and his colleagues should be sending a message loud and clear to all financial planners that they are not sales people -- they are pure advisers. That would be in the best interests of the many financial planners who are pure advisers, and are usually members of the FPA.
The only way to do that is to ensure that no adviser can be paid for selling, only for advice.
Unfortunately, a welcome attempt to cut in the cost of financial advice by removing regulation has been completely nullified by the reintroduction of sales commissions. Senator Sinodinos and his team should just focus on getting the price of advice down.