The government's draft legislation to end commissions will raise the cost of financial advice without fixing the real problems.
FEE, fi, FOFA! I smell the blood of a financial adviser, only this is one fairytale without a happy ending.
And nary a golden egg in sight.
FOFA is the acronym-loving government's Future of Financial Advice reforms, which will come in several legislative instalments, naturally containing more regulations and red tape, the highlight of which is banning commissions to financial planners.
Or, same thing, giving union-run industry super funds a leg-up.
Either way, "more Australians will seek financial advice following the announcement of the draft legislation", says the Assistant Treasurer, Bill Shorten, who, if he believes that, must be daft.
While I'm no fan of commissions, at least they give access to an adviser without a hefty fee.
Sure you're billed more furtively - there's a trailing commission year in and year out which comes out of your return - but I suspect those who most need a financial adviser don't go because they can't afford the upfront fee.
Up in the clouds of FOFA, an adviser who was previously paid by commission for selling an investment from a fund manager will charge the client directly.
So a $500 commission you never see becomes a $500 upfront fee for services provided. True, you're paying either way but I'm blowed if I can see how getting a bill on the spot is going to lure more Australians to an adviser.
On the contrary, anybody I've ever sent off to an adviser returns regaling me about how they'd be charged $3000 for a financial plan.
Truth is, it's probably the best investment they'll ever make but you try telling them.
Certainly, there's an incentive for advisers to flog products when the better advice might have been to pay down the mortgage or postpone the holiday in Hawaii, for which they don't get paid.
FOFA won't fix that.
The fee in the new order, would you believe, can be a percentage of how much is invested.
That's the same deal really, since the more you part with the higher the commission, sorry, fee.
And it's not as if hidden commissions will disappear anyway. One of the biggest lurks is the fee-infested platforms sold by fund managers and banks - glorified computer programs that make it easier for advisers to flog financial stuff.
Commissions paid by platforms to advisers will be banned but not providers to platforms.
To get in this lucrative little business, advisers need to produce their own platforms. In FOFA-land they have to get big or get out.
No wonder so many are shutting shop or selling out to banks, as in the Commonwealth's bid for Count.
I can't see how having just about every adviser work for a bank or a big institution will foster better advice.
Advisers must put their clients' interests first, which is supposed to stop them pushing the bank's own product.
Sure. I've never heard of somebody going into a Westpac branch and coming out with an ANZ loan and commissions don't come into it.
But the true tragedy of FOFA is the missed opportunity. The black hole of the system is that anybody who puts up a half reasonable front can rent a financial licence.
As Storm and Trio showed, safeguards are never policed until it's too late.
And don't get me started on the way retirement advice is skewed towards allocated pensions instead of fixed-income annuities, throwing retirees to the mercy of the market.
Frequently Asked Questions about this Article…
What are the FOFA reforms and how will banning commissions affect everyday investors?
FOFA (Future of Financial Advice) is a package of reforms that includes banning commissions paid to financial planners. For everyday investors this means advisers who were paid by product providers will likely charge clients directly instead, so the invisible trailing fees you never saw may become visible upfront — changing how people access and pay for financial advice.
Will banning commissions make financial advice cheaper or more expensive for retail investors?
The article argues banning commissions will probably raise the cost of advice for many people. Instead of small trailing commissions embedded in investments, advisers may charge upfront fees or a percentage of assets under advice — both of which can be more obvious and may deter people who can’t afford a big up-front bill.
How might financial planners change their fees after commissions are banned?
Planners who lose commission income are likely to move to direct billing models: fixed upfront fees, large charges for a financial plan, or ongoing fees calculated as a percentage of assets under management. In short, the cost shifts from hidden trailing commissions to visible fees that clients pay directly.
Does FOFA remove hidden fees on investment platforms and funds?
Not entirely. While commissions paid directly by platforms to advisers would be banned, platform providers and fund managers can still charge fees. The article warns platform products remain 'fee-infested', so hidden or indirect costs can persist even after the commission ban.
Could FOFA lead to fewer independent advisers and more banks controlling advice services?
Yes. The article notes many advisers may close, consolidate or sell out to banks and big institutions. That consolidation could leave more advisers working for large institutions, which raises concerns about independence and product bias despite rules requiring advisers to prioritise clients' interests.
Will FOFA stop conflicts of interest and poor advice incentives?
The reforms aim to reduce conflicts, but the article argues they won’t solve the core incentive problems. For example, advisers could still be rewarded for selling products rather than recommending simple steps like paying down debt, and percentage-based fees still reward larger investments.
Does FOFA improve licensing and regulatory policing of advisers?
According to the article, FOFA misses an important opportunity on licensing and enforcement. It highlights a 'black hole' where anyone with a decent front can rent a financial licence, and past cases (like Storm and Trio) show safeguards often aren’t policed until after harm occurs.
How might FOFA affect retirement advice and choices for retirees?
The article suggests FOFA may perpetuate a bias in retirement advice toward allocated pensions instead of fixed-income annuities. That shift can leave retirees more exposed to market risk rather than guaranteed income from annuities, which is a key concern for everyday investors planning retirement.
Call 1300 880 160
Start a chat
Schedule a call
