New reforms might be largely redundant
There are clear signs the most significant financial planning shift in decades could end in a classic Claytons result: reforms you have when you're not having reforms.
There are clear signs the most significant financial planning shift in decades could end in a classic Claytons result: reforms you have when you're not having reforms.Or, to put it bluntly, business as usual with some clever box ticking.The reforms are being introduced to break the link between the way financial planners are paid and the advice they give customers.And yet the owner of the biggest financial planning business in Australia, AMP, believes the reforms will have no real impact on the revenues its financial planners direct to its funds management coffers.There is a fundamental disconnect between these two statements. At face value, you can't have reforms designed to change financial planners' behaviour that don't actually change their behaviour.The disconnect raises an uncomfortable question for supporters of the Future of Financial Advice (FoFA) reforms.If the reforms are not changing the amount of business AMP receives from its network of "tied" financial planners, are the reforms that sweeping after all?The two headlines from the reforms that aim to change financial planners' behaviour are the introduction of a "best interests" obligation and the removal of product-related commissions.The first measure lifts the duty planners owe their clients from a current test of "reasonable basis for advice" to a more onerous obligation that they always put their customers' interests above their own (and the interests of their employers).The second measure removes the influence of product-based commissions paid to planners, with the goal of stopping dodgy products being so darn attractive to certain planners and financial planning "dealer groups".Yes, that means you, Professional Investment Services, with your greedy predisposition to putting clients into high commission duds such as Westpoint and Timbercorp.It would be tempting to say that such measures are aimed at addressing rogue elements in the financial planning community, with the goal of stopping blow-ups such as Storm Financial.On this perspective, the big banks and funds management businesses are simply implementing changes to the financial planning business model that their already high standards address. Therefore, so the argument goes, they only need minimal changes to the way they operate.Sadly, recent history tells us that the practice of commission-based product flogging has existed extremely widely among financial planners inside our big banks and fund managers.How else do you explain the widespread use in recent times of volume-based league tables for big bank financial planners (you sell more, you get rewarded more)? Or the fact that in the pre-global financial crisis boom time Westpac's highest-level financial planners were being told they could receive $150,000 in base and $350,000 in commissions?In the past, Westpac financial planners have had included in their job descriptions the need to "increase revenue through acquisition of new clients or up-selling to an existing client".AMP is no clean skin in these areas either. In 2006, AMP signed an enforceable undertaking with the corporate regulator and it was ordered to contact 7000 customers its planners had switched into superannuation products, because there were concerns the customers had received inappropriate advice.And you can bet many of those customers were being switched by the AMP financial planners into AMP products.You could argue that these practices are on the way out. Westpac, for example, is engaged in a fundamental retraining of its financial planners. AMP has also, no doubt, lifted its game ahead of the deadline of July 1 next year to introduce the reforms.After all, the head of AMP Financial Planning at the time of the enforceable undertaking was Craig Dunn, who is now chief executive of the whole business."Probably the biggest change in the FoFA reforms the industry has already moved to, and that is moving away from commissions," Dunn said after AMP's most recent half-year results."When that shift was first talked about, a lot of people had concerns about what that would mean for the capacity of financial planners and advisers to make the shift ..."If you look at the flows in AMP Financial Planning they are up 12 per cent this half and much stronger this quarter in a world where all that new business is written without commissions ..."It's a significant adjustment and it has taken a significant amount of work by both planners and the business but I think it demonstrates the resilience of the sector."The financial services sector prides itself on innovation and its ability to change.But when it comes to jumping through hoops to keep revenue streams, some of the so-called innovation looks downright sneaky.Witness the mini gold rush among some planner groups (not in this instance AMP) to become "platform providers" so they can continue to receive a share of $3 billion in volume rebates from fund managers.On this more sceptical perspective of the industry, Dunn's insistence that AMP's existing "tied" financial planning model will survive the introduction of the reforms takes us back to the fundamental disconnect.Are they reforms, or is it business as usual with some clever box ticking?