Why financial planners are smiling even as regulators hover

Think about it. Who in their right mind would stump up $11 billion to snaffle up a rival right when the Government was about to propose sweeping changes to your industry, changes that most people reckon could wreck your business?

That's what the AMP boss did this week. Actually, his part of the transaction is a mere $4 billion. Just in case you were hiding under a rock, AMP this week offered to buy out its old rival Axa Asia Pacific (National Mutual to anyone with a sense of history) and then flick the Asian operations to Axa's French parent for more than $7 billion.

Dunn may be youthful but he's certainly not stupid. And even though financial planners are hugely on the nose right now, accused of gouging investors through exorbitant fees and commissions, the industry is still enormously profitable. Dunn clearly believes that whatever changes are foisted upon the industry, it will remain enormously profitable.

Our superannuation industry is plumped up to the tune of more than $1 trillion worth of savings, with vast amounts flowing in each week courtesy of the 9 per cent compulsory contribution from every employee's pay packet.

While our scheme is in many regards the envy of the developed world, it has created a bloated industry that feeds off itself and is in desperate need of overhaul.

Within the next few weeks, Bernie Ripoll  the pollie who chairs the joint parliamentary committee on financial services and advisers  will bring down his report, the first of several inquiries into superannuation.

After the collapse of Storm Financial, the demise of "property investment groups" like Westpoint, Fincorp and Bridgecorp, the implosion of tax-driven schemes like Timbercorp and Great Southern, there is every reason to expect that Ripoll will put a rocket up the industry.

As you can expect, financial planners have found themselves in the midst of the greatest upheaval in the industry's history with myriad examples and accusations that the vast bulk of them are not financial experts at all, but merely salesmen, acting in their own best interests and not that of their clients.

In each of those failed companies, the tragedy was that it was financial planners who directed tens of thousands of ordinary people into those investments. Why? Because they were paid commissions  in some cases as much as 10 per cent. On top of that, often they received what was known as "rebates" but which could more accurately be described as kickbacks.

The advisers were directing clients into the products that paid the biggest hidden commissions.

On the surface, AMP is squarely in the firing line of the Ripoll inquiry. It has around 1620 financial advisors. And it is hoping to buy out Axa, which has a further 1315 advisers.

This should not come as a surprise, but AMP's team of "financial advisers" for years have been overwhelmingly directing their clients' cash into AMP products, a fact that has not escaped the Ripoll inquiry.

Could it be that they all believe AMP's investment products were superior to all the others out there in the market? That's certainly a possibility.

AMP is not alone. Westpac's advisers are more likely to tip clients into BT products, Commonwealth advisers would be favouring Colonial products; the list goes on.

A recent survey by Roy Morgan found that in the case of AMP and Axa, up to 82 per cent of sales by their "financial advisers" went into house-created products. How's that for independence?

With revelations like this and in this kind of environment, ordinarily you would expect the industry to be running scared. Given this week's events, with a takeover bid of that magnitude, clearly that is not the case.

The financial planning industry has been fighting a very clever battle which, given the amount of cash at stake and at its disposal, also shouldn't come as a shock.

Suddenly, the entire financial planning industry has had a revelation on the road to Damascus, advocating an end to the insidious practice of charging hidden fees and commissions.

The Financial Planners Association recently decided planners should have a fiduciary duty towards their clients. In legal terms, that means they should act in the best interests of clients and exclusively in their clients' best interest, which you would think they should have been doing all along.

But their words have a hollow ring. Many claim that as long as the client knows about the commissions, everything should be hunky dory. But disclosure and fiduciary duty are totally different concepts, in practice and in law, and they really are just hijacking the language to make it sound all above board.

Both AMP and Axa have declared that commissions are evil. Funny about that, after all these years. They will, however, countenance what is known as an asset fee. And here's where it gets interesting.

So instead of a financial adviser being paid a 5 per cent trailing commission forever for sticking your money into a particular fund, he or she now will be paid a 5 per cent commission on the whole of your investment regardless of whichever product they direct it towards.

It is slightly better than a commission, because it eliminates the bribery angle, but it is an ongoing fee nonetheless, a fee for doing no work and providing no advice.

And from now on, most AMP and Axa advisers will have the option of calling themselves salesmen  which is precisely what they are. Those who opt to maintain the title of financial adviser will be subject to a great deal more rigour and possibly much less in the way of fee income.

Want some free financial advice? Offer to pay your financial adviser up front, say 5 per cent of the total you want to invest. Otherwise you will pay 5 per cent every year for the next 10 years or more. You do the maths. Craig Dunn already has.