The financial advice industry is going through some major reforms following numerous post GFC reviews and the Government’s “Future of Financial Advice” (FOFA) proposals. The intention is to create a profession of advice providers that is separate from the financial product providers. This requires breaking the (commission based) nexus that currently exists between the two.
While most advisers accept that this is the right path to take, there has been significant resistance to the proposed banning of financial product commissions. Understandably, the proposals require some significant reforms to the practices of the majority of advisers. In future, they will be required to seek payment directly from the consumer, rather than via commissions from the financial products they recommend.
Most consumers of financial advice are in favour of the changes. It will remove the possibility for conflicted remuneration but will it help to improve the independence of advice? Sadly, the responses to FOFA to date are not encouraging.
The separation of financial advice provider from financial product provider
The FOFA reforms have been debated for a couple of years and have recently been tabled in Parliament. The final legislation has yet to be passed and the reforms are due to commence from July 2012.
What behaviours are the proposed reforms creating?
We’ve witnessed three main outcomes over the past year:
- A consolidation within the industry driven by the larger financial products providers buying up advice practices (thereby increasing the link between advice and product providers);
- Advice practices delving into the financial product manufacturing space (thereby no longer specialising in advice); and
- The fall in value and profitability of advice practices and the departure of advisers from the industry. This is driven in part by the difficult investment markets but also by the inability/unwillingness of many to adjust to the proposed reforms.
With the pending abolition of commissions, the financial product providers get a sudden (and not insubstantial) windfall. But they will lose their power to influence (and incentivise) advisers and so have embarked on a strategy of purchasing their own adviser force.
Other advisers, in fear of losing their share of the profitability built into financial products, have decided to become financial product manufacturers themselves (even though they may not be any good at it).
Unfortunately, rather than witness the development of a true advice profession, we appear to be going back to a structure in which the majority of “advice providers” will be employed by the manufacturers of financial products. They will effectively act as the sales force for the financial product providers, but will masquerade as providers of advice.
Many justify this situation as acceptable. After all, they claim, if you walk into a Ford showroom, you expect to be sold a Ford.
I’m sure most advisers have an honorable intent towards their clients but how will they behave when they’re not meeting the standards expected under their employer’s performance review.
There’s no doubt that these advisers will be in an unenviable position of who to serve as master. How will they be able to meet their obligation to act in their client’s best interests when doing so conflicts with the demands of their employer?
Toward a financial advice profession
So, who is left to objectively serve those seeking truly independent advice?
In general, it will be left to the smaller (self owned) practices that have built themselves around the foundation of a non-commission based remuneration system. These practices have forgone the commission gravy train because of their desire to shift financial advice from an industry to a profession.
The trouble is that the average consumer of advice is unaware of the difference between the truly independent professional and the adviser/salesman. You need a good understanding of the industry and the motivations of its players to make this assessment.
We are a big advocate of the separation of advice provider from financial product provider and it’s disappointing that the reforms are resulting in the exact opposite of their intent. We believe that most people value objective and unbiased advice and will support those who have taken the stance to create this sort of service.
We recommend that ASIC issue a separate “independence” licence to those that meet the intended standards of independence. Consumers will then clearly be able to identify between the two types of advisers and help drive behaviour back towards the development of a profession that serves only one master – you, the client.