Financial planners have fought tooth and nail to hold on to the "passive" income they enjoy and it looks as if they may have won the day on that point. The financial advice reforms passed by the lower house of parliament last month leave consumers vulnerable to paying fees for getting nothing or little in return. Planners are unique among professionals in that they get paid mostly by way of asset-based fees, where they clip a percentage of their clients' investments. We are talking about, in many cases, older people who are being advised on a good portion of their life savings.
Under the reform package, among other measures, commissions on new clients of planners from July 1, 2013 will be banned and planners will be put under a legal responsibility to act in their clients' best interests. The regulator will be given more powers to deal with the financial advice industry's bad apples. But asset-based fees are here to stay.
As a protection that disengaged clients of planners would not keep paying open-ended asset-based fees, opt-in would have required planners to contact their clients every two years to get them to agree to continuing the relationship. But as part of the negotiations, the "opt-in" proposal was effectively dropped. It was dropped to secure the support of the package by the lower-house regional independents after they came under intense pressure by the financial services lobby.
As long as the associations representing planners have their codes of conduct approved by the Australian Securities and Investments Commission their members will be exempt from opt-in. On the face of it everyone's a winner. Consumers win because the regulator will have more power to shape professional standards through approval of codes of conduct and break the sales culture that is still a big part of the industry. The planners win because they have their passive income secured and avoid what they argue are the high costs of opt-in. The planners argued the costs of contacting their clients at least once every two years was going to be prohibitive, but that was not the major reason for opposing opt-in.
It was mostly about concerns that in sending a renewal notice to clients, many would not renew. An even bigger concern for the institutions who run retail superannuation funds was that opt-in may be applied to superannuation accounts. Hundreds of millions of dollars each year come out of members' accounts as "advice" fees where members have received no advice.
The success or otherwise of the reforms will depend on how hard the regulator is prepared to go in forcing through higher professional standards. The government has hinted that to get approval the code may have to forbid planners from taking open-ended fees without providing ongoing advice. But I wouldn't be holding my breath on that score. The associations have three years to get the regulator to sign-off on their codes of conduct. That is because the government has delayed the start of opt-in until the middle of 2013 and, as it is meant to be a renewal notice every two years, the first renewal notices would not go out until the middle of 2015. Opt-in would have only applied to new clients, not to those who were already paying asset-based fees. Planners argue that the new legal responsibility to put the interests of their clients first and the enhanced powers of the regulator will make redundant the need for opt-in.
The major association representing planners, the Financial Planning Association of Australia (FPA), is expecting the regulator to rubber-stamp its professional standards, perhaps after a few amendments. The other associations representing planners will write into their codes whatever it takes to get the tick from the regulator as their members cannot afford to be required to send their clients renewal notices.
The reforms will have the consequence of drawing all financial planners to become members of a professional association and that's undoubtedly a good thing.
While the track record of the FPA on dealing with those members who flaunt the rules has been patchy, it is improving. But the industry still has some way to go before becoming a fully-fledged profession. ASIC recently concluded a shadow shop of financial advice. It said the shadow shop shows a "significant level of poor advice". Almost 40 per cent of the financial advice plans evaluated from throughout Australia for the shadow shop were graded as "poor". ASIC says that while the method of remuneration was not considered when the quality of advice was being evaluated, none of the advice examples where the adviser was paid by commissions or by asset-based fees were rated as "good".
All in all, the reforms fall short of what consumers are entitled to expect. The reality was that the regional independents' support the reform package was needed. The Coalition had wanted to make 16 changes to the bill. It was a choice between a reform package that would have had its heart cut from it on its way through parliament or the one that looks likely to become law.