The financial planning industry could be forced into some major changes as a result of the government’s response to the financial crisis and the collapse of financial advice firms such as Opes Prime and Storm Financial. ASIC has recommended that the majority of remuneration practices currently used by the financial planning industry be abolished. This includes a ban on upfront and trailing commissions, volume based bonuses, soft-dollar commissions, and fees based on a percentage of funds under management. ASIC has also proposed that financial planners be given a fiduciary duty of care to act in the best interests of their clients in the same way as superannuation trustees must act. It is estimated that more than 95% of financial planners charge some form of asset based fee. This means that their earnings are in no way linked to the amount of time spent servicing a client needs but rather almost purely on the value of their clients’ funds under management (FUM).
The impact of these proposed changes will be enormous. Clients will discover the true cost of the ‘advice’ they have been receiving and will see just how much money their commission based financial planner has been able to milk out of them through these fees and commissions and how big a handbrake the commissions have been on their investment growth – a double whammy – through the loss of compounding. Naturally, the financial planning industry will go into damage control to try to ensure that these changes are minimised, and that their ‘golden goose’ is allowed to keep laying golden eggs.
The financial planning industry has enjoyed a massive cash cow through FUM fee generation from the accounts of time poor and uneducated investors. Investors have genuinely looked to financial planners for solid advice on how to manage their investments including their superannuation. They have looked for a short cut to manage their financial affairs without understanding the full cost.
The idea of someone being paid not for the work that is undertaken but for how much capital is under management is out of sync with the practices of society. You must remember that the basic investor that has exposure to managed funds is also paying their fund manager to grow their capital. Quite simply, there are too many fingers in the pie.
For years I have been encouraging people to become pro-active in the management of their share investing activities to allow them to move away from these commission based management structures and to educate themselves on the benefits of Active Investment. We are aware of investors who have paid up to $15,000 ($5,000 is a typical fee) for an initial Financial Plan which could almost be classed as a generic document. Other than the name and address, the other information in a Financial Plan document from a particular financial planner or firm is very similar. From the proposed list of managed funds in which to invest to an asset pie chart and the fee structure table the documents are almost identical. I have personally viewed multiple financial planning documents to be able to state this. I have no problem with a reasonable fee being charged for services based on time and expertise but there should be no link to the amount of funds under management.
One of the main reasons behind the similarity of Financial Plans is that trail fee based financial planners tend to limit their clients into the same funds that pay the planner a high commission and ongoing trail fee and / or have “jollied” them at exotic places. A conflict of interest undoutedly exists but for whatever reason investors grew to accept this as an industry standard. Until the GFC……
To quote Sally Patten of the Australian Financial Review, “it’s not just the financial planners that these new laws will affect. The major wealth firms, including the investment arms of the banks are poised to lobby the federal government to minimise any new investor-protection laws”. With financial planners filling the coffers of some of Australia’s largest funds and investment institutions their profits and processes will surely be affected if these laws come into effect.
The changes being proposed by ASIC will go a long way towards cleaning up the financial planning industry by allowing the clients to see what they are really being charged. Furthermore, the question begs whether the financial planning industry will be able to survive in its current form and, if so, whether many financial planners could be bothered putting up with revised compliance processes for far less income that is severely restricted to a time based fee that is nowhere near as scalable as they have enjoyed for many years. In short, the rivers of money that have been flowing from these asset based commissions will dry up if these proposed changes take effect and the really good financial planners will be able to differentiate themselves through how good their financial planning expertise is not by how good they are are at selling and networking.
It is ironic that in the 1980’s and 1990’s the government, through ASIC, built up the financial planning industry as a private sector compliance buffer in an attempt to prevent from occurring what has actually happened over the last 18 months with the likes of Storm Financial and many others. ASIC saw the financial planning industry as a middle ground between the investor and institution to protect the investor but the institutions saw the financial planner as a marketer of their funds or distribution arm to attract money under management. Now the government, through ASIC, is looking at pulling apart what they created to prevent a Storm Financial type scenario occurring again. It took the GFC to energise action to be taken despite many people over many years trying to publicise what was really going on. Finally it may be happening. But don’t hold your breathe; with so much at stake, expect a huge fight from the industry. In fact, testimony to how much they stand to lose as an industry will be the size of the fight that they put up.
As always, as another way of overcoming a bad experience, I urge you to become educated and learn the skills required to actively manage your own financial destiny. More and more people are waking up to the fact that they have been taken for a massive ride by the FUM commission based financial planning industry, and are learning that they can actively and positively manage their own financial destiny through the use of appropriate tools and coaching. The SPA3 system is one such tool.
Guys I couldnt agree more. After planning my retirement for a number of years I had to wade through a waist deep pond of parasites all with their hands out. I managed to make a decision in spite of some unwarranted pressure to put 50% into properties, 40% into my own managed investment fund and the balance into the hands of my bank “financial adviser” ( the concept was to create diversity to protect against my lack of skill & experience)
It did take me some time to study and learn about the market and resources available to those who want to go it alone and as the market collapsed I did loose significant dollars BUT heres the difference, Through taking opportunities as they came along and shedding poor performers and buying others on the move I have been able to recover my losses and more in just a few months. Sadly the investments that the Bank are managing for me are still in a black hole with no obvious hope of recovery because they are not managing them!!! and for this they are charging me some rather hefty fees. I do believe in spreading my risk but would strongly encourage others to tap into some good advisors like sharefinder etc they will do all the hard work for you. Give the parasites the flick.
Hi Gary,
Very interesting to read your comments regarding the proposed changes in the financial planning and fund management industry.
I agree with you. It is about time these changes are being discussed and planned. I just hope the government has the courage to follow through with it all. As you said, the industry will fight back. Commission based fees are their life blood, and they are fighting for their lives!
Being educated about money, the way it works, and understanding one’s own relationship, attitudes and beliefs around money are vital parts of financial education.
I am a financial coach and teach people about money management, investing, and help them understand how they make their financial and investment decisions. My clients learn how to manage their own money and investments and become very competent, but it takes time and effort. I think this is where financial planners found their niche – those who don’t wish to, or can’t, take that time and effort (they are busy with their work, families etc) have chosen to utilise the financial planner. Unfortunately, the client thought they were getting much more than they actually were.
Should these changes happen (and I’m not sure they will) the government needs to recognise that the population needs assistance to learn how to manage their own money and how to use advisers – not just hand everything over and expect (or hope) it will all work out in the end!
As you have said, education is the key!
I know a few excellent financial planners and I know many, if not most, just sell as much product as possible. Like you, I recognise that we all need to make money, it’s just the way it is being made (FUM commissions, trailers, bonuses) that is not OK.
You do a great job with your investor education as well as offer systems and I acknowledge your dedication Gary. I enjoy reading your ‘investor behaviour’ articles. I always learn something and they help me with my investing too!
I look forward to reading your future articles.
Regards,
Louise.
Gary, you have not quite hit the nail on the head but in the main you’re right. However, there are already at least about 20% of financial planners who charge only fees and rebate commissions. There is a smaller percentage who do not use managed funds or investment platforms at all.
I am one such person. I’m a Certified Financial Planner and I use only the ASX top 200 + cash management account for my clients. I believe diversification in the various asset sectors is for wimps. I use Praemium and a low cost internet broker who charges only $15.00 or 0.03% brokerage. I do not get a split of commissions.
I show my clients how they can beat the average manager through trend following or market timing – (another no no as a financial planner!)However, most do not want to do it and delegate the task to me. I am also a specialist in SMSFs and I don’t believe the average investor or accountant can cope with all the changes in the SIS Act.
Although I’ve been doing this for more than 10 years, I have not been able to interest any other financial planners in joining me. You see, the average financial planner gets invited to breakfast or lunch presentations where they get to hear the opinions of “investment gurus” while tucking in a nice meal. They get to interface with other people in the industry while getting “Continuing Professional Development” – CPD – points for free. I don’t, and any training that I need, I would have to pay from my own pocket. I don’t get invited to these functions because I don’t put my clients into managed funds. It’s a lonely business when your peers think you’re either an eccentric or a crackpot.
This is not a subtle attempt at advertising myself. I can’t handle any new clients at the moment.
One problem not being addressed is the way ASIC licenses financial planners. Most planners have to stick to theit licensees’ Approved Product List or asset allocation strategies. While I can get my own licence, the ongoing requirements are simply too onerous for a sole practitioner. Therefore I need to join a licensee who could do all the compliance stuff and collect fees from my clients. My clients cannot pay me directly. If financial planners are licensed in the same way as accountants, there may be more diversity in the way they are paid.
It is important to note that the average super fund balance is about $40,000. Most investors in this category are unwilling to pay $1,000 for a financial plan, $400 a year for reviews and we, financial planners and investors alike, tend to take the path of least resistance – use the commission and trail system.
Commissions may be banned totally in the future but given the technical difficulties and the ignorance of the average adult, it is unlikely to spell the end of the financial planning industry.
Someone else in full agreement – I’ve been running my SMSF since 1995 and gave my advisor the flick about 5 years ago as I wasn’t getting value for money. The trouble is, I then got lazy and left much of my capital in managed funds, which hasn’t been a good thing to do over the last couple of years.
I then discovered Sharefinder, where I am hoping that if I follow the rules I can achieve a good return without having to learn too much about individual companies and stock market peculiarities or rely on advice which isn’t related to a consistent proven methodology.
I’ve only just started using the Sharefinder system but I’m expecting to continue to enjoy active investing without worrying too much about the possibility of failure.
As a financial adviser, I guess I am one of the 95% this proposed legislation will affect. So would you consider it appropriate that people like me cannot charge an asset commission?
It is of no interest to me whether an investment pays a trailing commission or not, because the trailing commissions are credited 100% against the fee that is charged for managing the investment portfolio.
My client portfolios are down, on average, 8.5% over the last 12 months to 30 June 2009. The superannuation industry quotes an average return of minus 13% over the same 12 months. That 4.5% outperformance against the industry average is worth around $180,000 to my largest client. I will be paid $140 trailing commission on a Macquarie CMT account. The client receives a credit of $140 for the Macquarie payment and they pay the balance of my annual fee which is $10,900. So under this proposal, even though I have delivered $180,000 of benefit to the client, I cannot say that I am worth a total fee of $10,900 per annum because my fee is based on what the portfolio value is? If next year they make $180,000 profit, my fee will increase by $1,000. Isn’t this a ‘win-win’ situation?
And you would probably realise that because the portfolio values are down, so are my fees. When you couple the withdrawal of living expenses and the downturn in the market, my income is actually down close on to 30% in comparison to previous years. But my expenses for Professional Indemnity insurance have quadrupled in the last 4 years. And I haven’t had a claim and I haven’t even had a complaint!
I worked for an accounting firm that wanted us to complete time sheets everytime we worked on a portfolio. But when the markets are running or there are special offers being made and you have a lot of people to contact, you don’t have the time to complete a time sheet otherwise other clients may miss out. Many accounting firms are doing away with time sheets because they realise these are actually a cost in time and money and it is simply smarter to quote for a job. If your quote is fair, you get the client. Why can’t financial planners quote to do their work and if that quote is based on an asset value, they will either get the client or they won’t.
ASIC doesn’t need to take a sledgehammer to this legislation. If they just ban upfront and trailing commissions they will clean-up so much of this industry. Besides, telling people how to charge for their services in a free enterprise society? I don’t think that is free enterprise any more. So who’s next?
Response to Comment by Wills:
I congratulate you as you are indeed one of the minority that has had the guts to buck the trend. I do know other financial planners in our client base that have swum against the current and are the better for it in so many ways especially, like yourself, in the credibility stakes.
Like you they have taken the time to build their investment skills across fundamental analysis and technical analysis and advise (and even coach) clients truly based on their clients’ individual requirements. If certain managed funds, assessed objectively and transparantly without conflict of interest, suit their clients’ needs and objectives then so be it. And always charging for their expertise based on a fee for service and time.
This, in my humble opinion, is how all financial planners should operate. It is no surprise that you have plenty of clients.
Way to go Wills and thank you for letting our Blog readers know that, although in the minority at the moment, there are those out there that do it properly!
Regards
Gary
Unfortunately the likes of Storm etc have given the industry such a bad rep and even though planners at the moment don’t legally have to operate in the best interest of their clients (fiduciary duty of care) THEY SHOULD have always been! That’s why Storm emerged.
I’m not worried about the end of commissions. Our practise anyway is fee for service and only charge one off fees to set everything up. Ongoing fees are very minimal and it’s been good for us in the down turn as the business had not relied on this revenue. For my business, it won’t stop me adding significant value for my clients anyway. Instead of our current commission saga, I will just charge one off advice fees which the clients pay in instalments or in a lump sum if they can afford. As B J explained his advice is worth a lot to his clients.
The value of advice is still what is important and at the end of the day my experience has shown me that 90% of Australia have zip time to manage their investments (even if they wanted to) and would rather consult a professional for peace of mind, trust and confidence in what is going on. Tap into a professional’s knowledge. I actually educate my clients around what I do so they can take a more active role in the financial strategies I put in place. 80% of Aussies don’t seek financial advice and due to this have too much debt, no savings and not enough financial assets to grow and provide income into retirement.
Gary calls the Statement of Advice a generic document. A generic document is a product disclosure statement. A quality statement of advice and I repeat ‘quality’ details the every financial move of a client and empowers them to take control of their finances to have a successful future. The compliance and layout can be similar due to dealer group policy but the content and most importantly ‘strategy’ just like a business strategy, can be bad and very good.
There have been many many articles in the Fin Review on all this stuff. At the end of the day, pure fee for service will in most cases make financial advice unattainable to the majority when they need it the most. As long as commission in general is disclosed to the client and they understand and are happy with the fees, then what is the problem? As long as the client’s financial position far exceeds the fees, then the advisor has taken the client to a much better position. Win win.
I have called up 5 of my clients and been able to tell them in the last month that the growth/income on their fund just paid for their advice fee. Very happy clients!
Most people have no idea how time intensive putting together a financial plan is and the support team needed for ongoing service, most commission only covers this time so an FP business can be profitable. Upfront commission to put in place a strategy i see no problem with. Various ongoing commissions I agree should be reviewed such as ongoing contribution fees inside super funds.
Most people need an adviser to help them with an assortment of financial concerns or goals. For people who have a great deal of time, learning about investing is great fun and rewarding and I encourage all my clients to do so and learn more about financial planning.
Hi Gary,
Very interesting reading. I had a finacial adviser for a short period of time who was really just a very good sales person who charged like a wounded bull. With several managed funds mixed with shares, even though I didnt agree to the shares he was suggesting (Timber corp, ABC) “Trust me” he quoted. Not having alot of experienced I agreed even though I felt at the time those shares were at an all time high. My prefered stocks were more in the mining sector. Cut a long story short after reading all the warning signs regarding gobal markets, I pulled the whole lot out. Thankfully I didnt lose any of my capital but the adviser was more concerned in losing his commissions.
I guess the old adage – no one has as much at stake & no one has as much interest in managing your money as you do – still holds true!
Thanks for all your articles Gary!
I’ve finally started to sell some of my shares (I’d been holding tight to my chest for 18 months.
However, with your encouraging & empowering words – I’m now making a nice little profit & buying more shares to boot.
Yay for Buy, Hold, Sell THEN Profit!
Having spent 1962-1985 within the Life and General Insurance Industries and for the most part been locked into ‘vertical’ Agency contracts precluding dealing with other Groups and thus able to offer clients a comprehensive spread, got fed up with the system and walked away.
The client public have been mostly unaware of the commissions and structures as the Industry fought to keep them silent.
The structure encouraged far too many to focus on their income rather than
value for clients and many many have been burnt with swapping Underwriters and Product. The very system encouraged ‘tombstoning’ and the industry deserved all it got.
In their defence the Industry gave them no other alternatives nor encouragement.
The Life Industry got away with raping Clients for over 100 years, having colluded between themselves, horizontally,(LOA Agreement) and now they are having to actually perform…….Dear me!!Give us a break!
It is unfortunate that it has taken the rabid greed of those who created the new instruments in which one can place money and brought the GFC to a head.
At least now the public will be obliged to acknowledge that one professional is just as entitled as another to charge Fee for Service.
It would be a reformation were they obliged to charge by past performance as well as start-up.
The same applies to Fund ‘Managers’.
I, for one would be far happier to pay a Fee at Start along with a Profit ‘incentive’ rather than a Turnover ‘obligation’.
The main point though, as Gary says, is that we ought to be more responsible for our futures and investments via education, OR, pay others to do it.
Hi Gary,
I agree with the control of Financial Planners. My husband and I invest in
Super from our business and our Financial Planner gets a percentage for the money going in and doing nothing. They also get their Financial Planner Fee anyway. We see him 1 or 2 times a year, we know he handles 1400 clients, so think of the profit. We are now more educated about the sharemarket, but find we have to suggest buys and sells, we feel the Financial Planners should be ringing you with this info and working your super for you. I felt when the market was rising and keeping there for so long that we had to have a downturn, why don’t they suggest to put shares back into cash account and then the investors would not have lost so much money,they are supposed to advize.
I feel confident now that we can control our own Super Fund, and will change.
.
Hi Gary,
I have just come across your website/blog as it was introduced to me by a colleague. Like Wills I am a full fee for service financial planner, rebating all commissions to clients (which is an admin nightmare might I tell you). I primarily use SMSF’s for client with direct shares (Top 50 stocks), term deposits and some exposure to international equities through ETF’s. I charge clients a dollar fee based on the amount of time it takes me to administer their SMSF, investment portfolio and plan their goals and objectives each year.
Like Wills I have often felt lonely in this sense and would love the opportunity to talk with like minded advisers. If possible, can you send me through his/her contact details. Or perhaps just publish this blog and he/she may like to get in contact with me.
All the best
Cameron