Monday, July 1st 2013 was a landmark date for the financial planning industry.
Most conflicted remunerations are now abolished, and the biggest consumer retail risk factor has been removed.
The financial incentive to sell out clients for massive commissions has disappeared. Hopefully this will manifest in better behavior from, and increased social respect for, financial planners.
Client’s best interests are now more likely to come first.
But the industry has a long way to go before all its members can call themselves professionals; its structural legacies and entrenched behaviors are just too strong, and force virtually everyone in the industry into docile submission where FUM rules and clients still come a poor second.
Why the incredible emphasis on financial products? Since when was financial planning only about product placement? There is a whole galaxy of critical issues facing clients. But product placement is as far as it goes for most financial planners. What about career development and re-training? Buying creating, growing or even selling a business? Investing in the home? Investing in debt reduction? Investing in property? Investing in direct shares? What about estate planning including strategies for helping children? What about cash budgeting, retirement counseling, business succession planning and even taxation planning?
I see more SOAs than most and sadly these critical issues rarely get a mention. They are just not there. I don’t count, “we note you do not have a will and we recommend you see a solicitor” as effective estate planning advice. I do count it as a sad neglect of a real client need and a lost business opportunity for the adviser.
Let’s face it; most AFSLs don’t want their authorised representatives to really help their clients. They don’t want them to really become involved with their clients’ long term financial plans. They just want their authorised representatives to place products – ideally this quarter.
Most AFSLs get the majority of their income from product issuers, usually related parties. Within these cosy and closed ecosystems, product concentration is a huge issue. Most AFSLs have hundreds of products on their APL, but they don’t use them. ASIC research says there “is a clear tendency for product recommendations to be concentrated into a few key products within each class”, with many AFSLs having 80% or more of their FUM in just three products per asset class (Report 362 July 2013 Review of financial advice industry practice: Phase 2 at paragraphs 35 and 50).
Most AFSLs are primarily owned by product issuers and are by definition, in a conflict of interest with their clients. White label products are particularly conflicted (Report 362 July 2013 Review of financial advice industry practice: Phase 2 at paragraphs 47 and 49).
How does this sit with the best interests duty? How can a financial planner say their recommendations are reasonably expected to lead to a better financial outcome for the client, to quote ASIC in RG 175, if they can really only recommend two or three financial products?
How does this sit with the safe harbor provisions? How can a financial planner say they have conducted reasonable investigations into the recommended financial products if, ultimately, across their AFSL 80% of FUM end up in just a handful of financial products, all connected to the product issuer owner?
So yes, FOFA is a welcome development. Banning most conflicted remunerations, introducing a statutory best interests duty and improving client cost communications are great innovations that were well over due. But the financial planning industry has a long way to go before it can call itself a profession, where the clients’ interests truly come first.
Terry is the founder of the McMaster and Dover group. Terry has degrees in law and in commerce from Melbourne University and practices as a solicitor, an accountant and a financial planner.
