The chief executive of the Financial Services Council, John Brogden, wasted no time first thing on Thursday morning zipping off a letter to the new prime minister, Kevin Rudd, pleading for a last-minute extension to the financial advice revolution that was due to kick off today.
Perhaps John forgot that the Future of Financial Advice reforms were begun in April 2010 by the then minister for financial services, Chris Bowen and his then boss, Kevin Rudd.
And now, in a huge twist of fate, the same two men will preside over its implementation three years and 66 days later, this time as PM and Treasurer.
In those intervening years, Bowen’s successor as financial services minister, Bill Shorten, and his PM Julia Gillard, to their great credit, withstood one of the most ferocious and sustained lobbying efforts ever seen in Australia. The end result is not perfect, but it’s a good start, and Shorten is to be congratulated for it.
Happily PM Rudd had better things to do last Thursday than delay FoFA, such as get sworn in and remind parliament what a tangled bore he can be, and so the long-awaited reforms do, indeed, start today, ready or not.
And many are not ready. Suddenly financial advisers have to put their clients first (shock). They have to reveal to them what they are charging, not the percentage but the dollars (horror). They have to actually talk to their clients and recruit them all over again every two years (groan).
And most of all, trailing commissions are banned – not existing ones, but future ones. That was a big win for the industry, making it a prospective ban only, but the two-yearly opt-in and the clear the statement of dollar fees should result in the disappearance of trails over time.
So a service industry that has been a confusing, scandalous mixture of unscrupulous floggers and genuine advisers should gradually turn into one where you can go to any financial adviser reasonably confident you won’t just be sold something, and then ripped off.
The many genuine advisers who have always put their clients first will no longer be tarred with the same brush as those who are merely members of a bank ‘dealer network’, providing commissioned distribution of wealth management products for their employers.
One of the unfortunate consequences of FoFA will be that the banks and other wealth management ‘manufacturers’ will simply keep the trailing commissions they have been paying and not boost the returns paid to clients by that amount, unless forced to do so by the clients. That means unwary clients will just fork out more – paying for advice directly, but not getting the benefit of the removal of the trailing commission.
That was the main argument of the lobbyists, of course, but I think it is a small price to pay for a clean industry. Clients should pay for advice and they should know what they are paying for it: it should not just be quietly deducted from their account as a percentage year after year, with the adviser not having to do any more work.
FoFA is just the beginning of what will probably be a long process of reform, just like the increase in the superannuation guarantee levy today from 9 to 9.25 per cent is the first step in a long process towards 12 per cent by July 1, 2019.
Perhaps by then we will also have an entirely transparent and trustworthy system of handling that money, in which financial advisers, like doctors, do not get kickbacks from the suppliers of the products they prescribe.
Australia’s much-vaunted superannuation system was only ever half-done: the cash flow into long-term saving was legislated, but while Australians were forced to put money aside for retirement, they were left to their own devices about its investment – no protections were put in place to make sure the money didn’t just become a honey-pot for marauding bears, which it did.
Savings that were not lost completely though fraudulent or incompetent advice (and there has been a lot of that) have been skimmed of fat, poorly-disclosed commissions and percentage fees. A vast industry has grown rich on it – rich enough to ensure that nothing was done to fix the problem.
Last Thursday’s letter by John Brogden was the last throw of the dice.
Now, 21 years after the SG levy was legislated by the Keating government, something is finally being done about commission selling of financial products by people who masquerade as independent advisers.
Nice try, Mr Brogden.