The swinging pendulums of IR and financial advice

There is something very inconsistent about holding a Royal Commission into union corruption while legislating to allow the return of corruption in financial advice.

At the same time as Prime Minister Tony Abbott is promising to shine a light into the “dark corners of Australian unionism”, the Assistant Treasurer Arthur Sinodinos has produced legislation to reintroduce sales commissions for financial advisers, and other dark practices.

Mind you, it was just as inconsistent for the previous Labor Government to crack down on financial advice while abolishing the Australian Building and Construction Commission and removing laws that control union behavior.

Now these two pendulums are whooshing past each other as they swing back the other way. Each party looks after its mates when it gets back in charge.

Financial advisers have been complaining that Labor’s Future of Financial Advice legislation involves too much red tape and complexity because it requires them to invite clients to opt back in to their businesses every two years, produce detailed annual fee statements and to act generally in the best interests of their clients.

Most importantly FoFA also banned volume-based commissions for all financial advice.

Why was this analogous to the new Government’s crack down on union corruption? Because sales commissions for financial advice and the fact that they can be disguised, plus the protection given to advisers serving two masters (bank owner and client) allow a culture of conflict of interest that is tantamount to union corruption.

The Coalition’s amendments will remove the requirement for clients to “opt-in” every two years, amend the “best interest duty” to allow scaled advice, “streamline” the annual fee statement, and exempt general advice from the ban on “conflicted remuneration”. In other words, FoFA would be gutted.

However, according to David Crowe in this morning’s Australian, the Government has hit a snag. It’s trying to change the laws by ministerial edict, so they can’t be blocked by the Senate, but it seems key parts of the reform can be struck down in the Upper House. Shadow Treasurer Chris Bowen says Labor will “pursue all parliamentary mechanisms” to stop the amendments.

For a Government so concerned with integrity in industrial relations to be trying to dismantle legislation designed to improve the integrity of financial advice not only looks inconsistent, but also unseemly and suspicious.          

When you visit most professionals – accountants, lawyers, doctors – you know they work for themselves or their partnership, and don’t act for anyone but you – they are required by fiduciary standards to act only in your best interests, and they send you a bill for their time.

With financial advice, you are usually seeing someone employed by, or licensed to, a bank or other financial institution. Before FoFa banned conflicted remuneration they were often rewarded with bonuses based on the volume of product they sold.

In any case, you don’t get an invoice: you give them your money and they simply take a little tiny bit of it each month and tell you later that they’ve done it. That’s why advisory practices measure themselves by FUA (funds under advice).

Advisers decide, or rather advise, where the money is to go and as long as the advice is “general” in nature, Senator Sinodinos’s legislation will allow them to get money from the recipients as well as from you, and to be “incentivised” with volume bonuses. Under FoFA all conflicted remuneration was banned.

The banks that own financial advisers call them their “distribution’ arms”. Imagine if drug companies referred to doctors as their distribution arms, and paid them commissions based on the volume of drugs they pushed.

It means financial advisers can have a lot more clients than other professions, because they don’t have to spend much time with them each year once a financial plan has been set up and the annual “skim” agreed to. It just goes on, year after year.

This means financial planners can sell their practices for a multiple 3-4 times annual revenue because that revenue can be relied on into the future. Professionals such as accountants and lawyers who send time-based invoices can only sell their businesses for one times annual revenue.

And it means financial planners get to retire richer than other professionals.

I wrote in detail about the Government’s proposed amendments to FoFA in Eureka Report last November and Chris Joye had an excellent article on the subject in Saturday’s Financial Review.