tag:theconversation.com,2011:/uk/topics/fofa-2331/articlesFOFA – The Conversation2014-12-10T19:39:54Ztag:theconversation.com,2011:article/352512014-12-10T19:39:54Z2014-12-10T19:39:54ZMurray pinpoints inconsistency on financial advice and super trustees<figure><img src="https://images.theconversation.com/files/66800/original/image-20141210-13368-mme5tk.jpg?ixlib=rb-1.1.0&rect=54%2C182%2C4421%2C3053&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Big nest egg or small: shouldn't super fund trustees meet the same professional standards as individual financial planners?</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Finally, <a href="http://fsi.gov.au/publications/final-report/executive-summary/">Financial System Inquiry</a> chairman, David Murray, has brought some consistency into two hot debates running in finance.</p>
<p>Parliament, financial media commentators and a whole range of vested interests have argued at length over the last year about who can give financial advice, how they should be remunerated, how they should be trained and what qualifications they should have. </p>
<p>At the same time there has been an <a href="http://www.mercer.com.au/newsroom/2014-superannuation-governance-survey.html">ongoing debate</a> in the media, through speeches and submissions, about who is appropriately qualified to be trustees of large superannuation funds.</p>
<p>The same groups have made the opposite arguments in the two cases. </p>
<p>One group of institutions, mainly the industry super funds, has been arguing that we need to have greater independence of financial planners and advisers. Another group of institutions, mainly the retail super funds, have been arguing that advisers can be aligned but should be more closely controlled. Most importantly, they argue that they should be more professional. The recent political fight around the roll back of Labor’s Future of Financial Advice (FOFA) reforms has essentially been focused on these issues of independence and professionalism. </p>
<p>At the same time the retail super funds have been pushing to ensure that a majority of the directors of superannuation funds should be independent. They are pushing the case for greater professionalism of superannuation trustees. By contrast the industry super funds have been arguing that this is not necessary, and that trustees do not need special knowledge. Most particularly they have argued that trustees coming from particular employers and particular employee groups, without any particular qualification, are appropriate.</p>
<p>Murray has pointed out the inconsistency. If the person advising me on my $200,000 superannuation fund must be professional, then the trustee for a fund managing $2 billion for its members surely deserves the same respect.</p>
<p>Clearly both are important. An adviser who gives me bad advice can ruin my retirement and my life. Notably however, a superannuation fund which makes mistakes can cost thousands of people security in their retirement. There are three reasons to think that the latter is more important.</p>
<p>The 2010 <a href="http://www.supersystemreview.gov.au/content/content.aspx?doc=html/final_report.htm">Cooper report</a> into the superannuation system pointed out that by 2035 the <em>average</em> superannuation fund supervised by the Australian Prudential Regulation Authority (APRA) (that is, excluding the self-managed sector) will be managing $53 billion on behalf of superannuants. This is a very large amount of money, the lifetime savings of thousands of members. Putting to one side the politics and the vested interests, clearly it is extremely important that the directors of superannuation funds be appropriately qualified and highly skilled. </p>
<p>The second reason is that superannuation sector is not simply important to individuals, but to Australia’s economic future. Murray makes clear that the superannuation sector is well on the way to being one of the largest components of the Australian financial system, not far from the size of the banks. Where and how it invests will shape much of Australia’s growth and development. This alone is a key reason to demand a high degree of professionalism in the management of the sector.</p>
<p>The third argument Murray makes for independence of directors, is that since people can choose which fund they join, the superannuation funds will be increasingly de-linked from particular industries. If anyone can join a fund, there is little reason for the trustees of the fund to belong to a particular sector of the workforce (employers or employees). </p>
<p>One would actually hope that APRA would have a say in approving who could be a trustee of a major superannuation fund, and would set very high standards of training and experience.</p>
<p>There are lots of vested interests involved in these debates. Murray has however given us reasons to sit back and ask, what is the best structure for the future? This is important to Australia’s future.</p>
<p>So let’s have some honesty and consistency in the public debate. If professionalism is important at the level of the individual then we should expect high standards of professionalism from the trustees of superannuation funds. Arguably, trustees of major funds should be held to a higher standard.</p><img src="https://counter.theconversation.com/content/35251/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock is affiliated with the Australian Centre for Financial Studies.</span></em></p>Finally, Financial System Inquiry chairman, David Murray, has brought some consistency into two hot debates running in finance. Parliament, financial media commentators and a whole range of vested interests…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/344862014-11-23T19:12:07Z2014-11-23T19:12:07ZFOFA fiasco: no quick fix for the advice industry<figure><img src="https://images.theconversation.com/files/65248/original/image-20141123-1049-1ndzk3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Senator Jacqui Lambie has voted against changes to the Future of Financial Advice reforms.</span> <span class="attribution"><span class="source">Alan Porritt/AAP</span></span></figcaption></figure><p>Last week brought the latest instalment in the continuing Australian financial planning industry saga. Senators Jacqui Lambie and Ricky Muir blocked the Abbott government’s <a href="http://www.comlaw.gov.au/Details/F2014L00891/Explanatory%20Statement/Text">rollback</a> of some of Labor’s Future of Financial Advice (FOFA) reforms.</p>
<p>The proposed changes to FOFA watered down some of its more controversial aspects. They included the provisions establishing a “best interests” duty for financial planners and restrictions on conflicted remuneration. Other rollbacks included changes that required fee disclosure statements and the obligation for clients paying ongoing fees to “opt in” by written consent every two years. </p>
<p>The Abbott government maintained the reforms were merely to streamline regulation, prompted by the need to reduce bureaucracy and red tape. However, the recent and continuing <a href="http://www.smh.com.au/business/timbercorp-victims-set-to-sue-financial-planners-while-liquidator-presses-for-loans-to-be-repaid-20140810-102gco.html">financial planning scandals</a> made such streamlining politically unsustainable.<br>
So we are back to Labor’s original FOFA legislation. But where does this leave the financial planning industry and the thousands of Australians in need of financial advice?</p>
<p>There are claims within the financial planning industry the blocking of the regulation will cause further <a href="http://www.theage.com.au/business/banking-and-finance/fofa-reforms-senate-shock-spurs-financial-adviser-scramble-20141119-11q2te.html">instability</a>. This is as firms scramble to meet the FOFA requirements, particularly those relating to fee disclosure and opt in obligations.</p>
<p>Yet FOFA has been law since 1 July 2013, so it is difficult at first glance to understand why the blocked rollback would significantly impact the industry. </p>
<p>It seems that large sections of the industry have been operating on the basis the coalition’s FOFA rollback changes would become law. </p>
<p>It is a view reflected by the Australian Securities and Investments Commission. It <a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2013-releases/13-355mr-asic-update-on-fofa/">said</a> in December 2013 it would take a “facilitative” approach to FOFA enforcement in light of the proposed changes and would</p>
<blockquote>
<p>“not take enforcement action in relation to the specific FOFA provisions that the government is planning to repeal”.</p>
</blockquote>
<p>After the reforms were disallowed in the Senate, ASIC said this week it would take a “<a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-307mr-disallowance-of-fofa-regulations/">practical and measured approach</a>” to administering FOFA as it now stands. The regulator says it recognises that compliance with FOFA will require systems changes for many Australian financial services licensees. This facilitative approach to FOFA compliance will continue until 1 July 2015. </p>
<p>It seems unlikely there is any need for panic within the industry as there is still some time before ASIC will enforce FOFA compliance. Nonetheless, those licensees who deferred making costly system changes in line with Labor’s legislation may now find themselves having to make those changes rapidly in a highly uncertain regulatory environment. </p>
<p>In the long run, this situation is likely to lead to less affordable financial advice for Australian consumers. </p>
<p>Despite the reform rollback not going ahead, there still isn’t an easy solution for the financial advice industry. The unchanged legislation now retains greater consumer protection. But it does <a href="http://www.theage.com.au/business/comment-and-analysis/fofa-doesnt-clean-up-the-financial-advice-minefield-20141121-11riwk.html">little to address </a>what many regard as the fundamental cause of the poor reputation of the Australian financial planning industry – the need to raise the professional, ethical and educational standards of financial advisers. </p>
<p>While consumers will get some greater level of protection through increased fee disclosure, this comes at a price. This protection also relies on consumers taking the time to read and understand the disclosures made by their financial planners. Financial planners can continue to give poor quality advice. What will change is increased upfront fees and greater disclosure around these fees resulting in higher costs. There will be less scope for scaled advice which was part of the Abbott government reforms. </p>
<p>FOFA still fails to set educational or professional standards for financial planners. Until industry entry standards are lifted, FOFA will not deliver accessible financial advice for the Australians who need it.</p>
<p>Absent an urgent rethink by the Abbott government on FOFA, after last week’s events it seems the goal of access to affordable and trustworthy financial advice for Australian consumers is more elusive than ever.</p><img src="https://counter.theconversation.com/content/34486/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker has previously received research funding from the Institute of Chartered Accountants in Australia. She is affiliated with Chartered Accountants Australia New Zealand.</span></em></p>Last week brought the latest instalment in the continuing Australian financial planning industry saga. Senators Jacqui Lambie and Ricky Muir blocked the Abbott government’s rollback of some of Labor’s…Julie Walker, Associate Professor in Accounting , The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/344412014-11-19T12:38:55Z2014-11-19T12:38:55ZAn unexpected win for consumers of financial advice comes out of PUP implosion<figure><img src="https://images.theconversation.com/files/64977/original/image-20141119-31597-1d6ouq5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Senator Jacqui Lambie said she voted down the FoFA regulations to 'fix an injustice' that she helped create.</span> <span class="attribution"><span class="source">AAP/Alan Porritt</span></span></figcaption></figure><p>Australia’s financial services industry has been thrown into turmoil by the spectacular implosion of the Palmer United Party (PUP) and an independent stand by its supposed ally, Motoring Enthusiast Ricky Muir.</p>
<p>Wednesday night’s disallowance, by a 32-30 vote, of the government’s regulations that unwound Labor’s <a href="http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm">Future of Financial Advice</a> measures reinstates a range of protections for consumers.</p>
<p>But it also means many financial advice institutions don’t have systems in place to meet what they will now be supposed to do, and thus could be in breach of the law. They’d been confident these wouldn’t be needed, thanks to the government’s watering down of Labor’s phased-in measures.</p>
<p>So, the Australian Securities and Investments Commission (ASIC) <a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-307mr-disallowance-of-fofa-regulations/">has issued a statement</a> saying it will adopt a “practical and measured approach to administering the law as it now stands” after the Senate’s action.</p>
<p>It will take into account that many financial service licensees “will now need to make systems changes … in particular areas, including fee disclosure statements and remuneration arrangements”. ASIC’s “facilitative approach” will operate until July 1 next year.</p>
<p>To complicate things even further, there could be yet another regime of changes if the government accepts a crossbench offer of discussions for a compromise.</p>
<p>Finance Minister Mathias Cormann had a major victory mid-year when, helped by Malcolm Turnbull, he did a deal with Clive Palmer to head off a Labor move to disallow the regulations. Now Cormann has been dramatically trumped by Labor senator Sam Dastyari and independent Nick Xenophon.</p>
<p>At a Wednesday morning news conference with Dastyari, PUP rebel Jacqui Lambie, Muir, the Greens’ Peter Whish-Wilson and independent John Madigan, Xenophon said they had formed a “coalition of common sense”.</p>
<p>Cormann had been out-manoeuvred. When late Tuesday he heard about the new disallowance move he tried desperately to get to Muir.</p>
<p>But Muir was off the air – at China Plate, a restaurant in the Canberra suburb of Kingston, dining with Dastyari, Xenophon and some staffers. The conversation wasn’t about the regulations – the deal was already in the bag. Cormann was not able to reach Muir until Wednesday morning.</p>
<p>With the numbers in hand, Cormann’s opponents were determined to act as quickly as possible. The sitting days left for disallowance ran out on November 27, but they were not going to allow the opportunity for any slippage.</p>
<p>Lambie’s <a href="http://www.theage.com.au/federal-politics/political-news/clive-palmer-accuses-jacqui-lambie-of-lying-and-plotting-to-set-up-her-own-political-party-20141119-11q0iv.html">row with Palmer</a> and PUP had played to their cause and Muir, who used to work for a sawmill, was influenced by last week’s evidence to a Senate inquiry about how people lost their savings in the Timbercorp managed investment scheme, which involved the ANZ.</p>
<p>For Dastyari, former secretary of the NSW ALP, this is a big coup. Dastyari went to Tasmania to lobby Lambie, who said on Wednesday she was now voting “to fix an injustice that I helped create just a few months ago”. She said she wouldn’t allow the Liberal Party and its supporters “to wind back consumer protection at a time when the financial advice industry has been shown to act in a scandalous manner”.</p>
<p>The government is humiliated but won’t get much sympathy from the public.</p>
<p>In the name of cutting red tape and simplifying the rules for the financial services industry, it reduced consumer protections and delivered in particular to the banks.</p>
<p>The evidence of past bad behaviour by the banks and the victims it claimed has continued to mount, demonstrating the need for people to be protected.</p>
<p>Xenophon said the government’s regulations were “unambiguously bad for consumers”.</p>
<p>Reverting to the Labor law toughens the requirement for financial advisers to work in the client’s best interest; unequivocally bans all forms of conflicted remuneration; requires clients to “opt in” to their advisers every two years; and imposes an obligation on advisers to give clients annual fee-disclosure statements.</p>
<p>Xenophon has called on the government for talks to now work out sensible compromise measures. “The ball’s in the government’s court,” he said after the vote.</p>
<p>The FoFA fiasco is the first blowback for the government of the Lambie-Palmer rift.</p>
<p>Palmer and Lambie appear irreconcilable. He announced on Wednesday morning that PUP had sacked her as deputy PUP leader in the Senate and suspended her from party meetings. She accused him of trying to bully her. He called her a liar in a statement on Wednesday night, confirmed she hadn’t spoken to him for a month and said she was planning to set up an alternate political party.</p>
<p>But he also said that “Senator Lambie obviously believes in the Palmer United Party as she is still a member”, adding provocatively “we hope she gets the appropriate assistance to get back on track”.</p>
<p>The government has had its nightmares trying to deal with Palmer, unable to win PUP support for a number of key measures, including the deregulation of university fees and the Medicare co-payment. But it has also cut some deals with him including on its direct action plan, which was vital to give it a climate change policy after the repeal of the carbon tax.</p>
<p>With Lambie now effectively divorced from Palmer and also declaring she’ll vote against all government legislation because of her stand on military pay, and Muir showing he can go his own way, the Senate becomes even more unpredictable. </p>
<p><strong>Listen to our <a href="http://michellegrattan.podbean.com/e/victorian-election-special/">Victorian election podcast, here</a>.</strong></p>
<iframe id="audio_iframe" src="https://www.podbean.com/media/player/audio/postId/5378364?url=http%3A%2F%2Fmichellegrattan.podbean.com%2Fe%2Fvictorian-election-special%2F" data-link="http://www.podbean.com/media/player/audio/postId/5378364?url=http%3A%2F%2Fmichellegrattan.podbean.com%2Fe%2Fvictorian-election-special%2F" height="100" width="100%" frameborder="0" scrolling="no" data-name="pb-iframe-player"></iframe><img src="https://counter.theconversation.com/content/34441/count.gif" alt="The Conversation" width="1" height="1" />
Australia’s financial services industry has been thrown into turmoil by the spectacular implosion of the Palmer United Party (PUP) and an independent stand by its supposed ally, Motoring Enthusiast Ricky…Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/306552014-10-01T04:33:42Z2014-10-01T04:33:42ZWhat behavioural economics tells us about financial adviser greed<figure><img src="https://images.theconversation.com/files/60159/original/7yy9p7wt-1411713111.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some financial advisers are greedy, but others simply have a bias problem.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There’s no doubt incentives matter for financial advisers. If an employer pays a higher commission to an adviser for selling one product instead of another, it’s likely the commission-linked product will be sold more often. </p>
<p>This basic reasoning was behind the previous government’s future of financial advice (FoFA) reforms. The question is, why is this so – out of pure greed, or do financial advisers just not know better?</p>
<p>I <a href="http://eprints.qut.edu.au/75882/1/75882(pub).pdf">studied</a> the question of pure greed in experiments in 2011, in a study where an expert/adviser knew better than his or her client what was best for the client, and the expert earned different amounts of money based on the client’s decision. </p>
<p>About one third of the participants in our experiment were consistently driven by their own private benefit, that is they always chose the option that generated the highest profit for them. Roughly another third showed behaviour that can best be described as trying to do the best thing for the client, with the remaining third either behaving inconsistently or being driven by some sort of mixed preference, allowing for distributional concerns. </p>
<p>But is this the whole story? The setup of our experiment was such that the expert would know exactly what was best for his or her client. In the case of financial advice in the real world, this may not always be so.</p>
<h2>The bias in complex financial decisions</h2>
<p>Financial advice is an expert service. A customer asks an adviser for assistance with making a better decision, expecting that the expert adviser is more knowledgeable and – maybe more objective - than he or she is. </p>
<p>While there’s plenty of <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1651312">literature</a> documenting that household financial decision making is far from perfect, the standard assumption about economic advisers is that they do not make such mistakes. </p>
<p>Given that financial advisers are human beings, this is at least a questionable assumption. Financial products are, almost by definition, complex products. It is often hard to understand which aspect matter and, to make things worse, feedback about whether a decision was correct is slow and rare. This makes it hard for any decision maker to overcome a <a href="http://en.wikipedia.org/wiki/Thinking,_Fast_and_Slow">cognitive bias</a>. </p>
<p>It is likely that even the most experienced financial advisers will be subject to biases in their decisions and the advice they provides to a client, even if they have only the best interests of a client at heart.</p>
<p><a href="http://www.nytimes.com/2011/11/27/books/review/thinking-fast-and-slow-by-daniel-kahneman-book-review.html?pagewanted=all&_r=0">Thinking, Fast and Slow</a> author Daniel Kahneman provides an answer to the question of how a financial adviser may react when facing complex decisions: he or she may substitute the hard question with an easier one. </p>
<p>For example, if the real question a client has is “should I invest in a hybrid security” or not, the adviser may substitute this question with the question, “how popular are hybrid securities among this customer group”? This is a different question, but as Kahneman documents, such substitutions usually go unnoticed. </p>
<p>And in this situation, the role of commissions to financial advisers becomes even more important. </p>
<p>For one reason, the adviser may simply substitute the question “what is best for the client” with “what is best for me” – which is definitely an easier question as the commission structure is easy to identify. Furthermore, this answer allows the adviser, should something go wrong, to blame his or her employer because the decision was simply reflecting the incentives he or she got from the employer.</p>
<h2>Why education is flawed</h2>
<p>Can education help in this case? Yes it can, but given that financial products are complex by nature and learning is slow given that there is no quick feedback, “technical” education is not the answer. </p>
<p>Instead, education should raise awareness to biases and provide advisers with strategies to overcome them. Technical solutions can help but do not solve all problems, as people are likely to overweight information confirming their predispositions and underweight information that conflicts with this predisposition. </p>
<p>This is where organisations employing advisers can play a critical role. As Kahneman points out, organisations have the potential to establish quicker feedback loops, as it’s much easier to see the mistake a colleague makes than to see your own mistake. This channel to avoid weak financial advice is one that tends to be overlooked in the current debate.</p><img src="https://counter.theconversation.com/content/30655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Uwe Dulleck received funding from the Australian Research Council (ARC) and the Australian Securities and Investments Commission (ASIC). The ASIC funding was independent of the research discussed in this article.</span></em></p>There’s no doubt incentives matter for financial advisers. If an employer pays a higher commission to an adviser for selling one product instead of another, it’s likely the commission-linked product will…Uwe Dulleck, Professor of Applied Economics, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/292222014-07-20T20:27:21Z2014-07-20T20:27:21ZExplainer: the new future of financial advice<figure><img src="https://images.theconversation.com/files/54078/original/y4ww86sx-1405569928.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hollow answers: waiting for legislative reform to improve financial advice is likely to prove futile.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>It is not difficult to establish the case for the importance of financial advice. </p>
<p>With an ageing population, increasing longevity, higher expectations of post retirement living standards, the complexity of financial products and services, more scams and spruikers, financial illiteracy and money stress… getting quality financial advice has never been more important. Indeed, wealth management is seen as a key area of future growth for the economy.</p>
<p>Given this, one has to wonder how financial planning in Australia finds itself mired in regulatory uncertainty and persistent distrust by the community. This is fuelled by high profile failures such as Storm Financial, Commonwealth Financial Planning and Opes Prime. </p>
<p>These failures led (under the previous Labor government) to the Future of Financial Advice (FoFA) reforms which aim to improve the trust and confidence in financial advice while improving availability, accessibility and affordability. </p>
<p><a href="https://theconversation.com/resist-efforts-to-water-down-fofa-to-protect-all-australians-26822">Central elements of this</a> included the banning of conflicted remuneration, a duty for advisers to act in the best interests of clients, an obligation to renew ongoing fee agreements with clients, and further powers to the regulator (ASIC).</p>
<h2>A long path to change</h2>
<p>The Abbott government has since moved on pre-election views that the laws were too restrictive and would unreasonably increase the cost (and therefore limit access to) advice. </p>
<p>After <a href="https://theconversation.com/sinodinos-stands-aside-during-corruption-inquiry-24571">the replacement</a> of the relevant minister, Arthur Sinodinos, a <a href="https://theconversation.com/call-for-commonwealth-bank-asic-to-face-royal-commission-28509">Senate inquiry</a>, <a href="https://theconversation.com/the-governments-financial-advice-regulations-are-in-the-senates-firing-line-29116">a move to regulate rather than legislate</a>, Labor’s disallowance motion and finally a <a href="https://theconversation.com/fofa-deal-encourages-government-to-humour-palmer-29237">government deal with the minor parties</a> in the Senate to vote down said motion, this is still not finalised. </p>
<p>The government now has a further 90 days to produce the revised regulations. And do not forget the ongoing <a href="https://theconversation.com/infographic-the-financial-system-inquiry-at-a-glance-29210">Financial System Inquiry (FSI)</a> and the newly established Parliamentary Joint Committee <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Financial_Adviser_Qualifications">Inquiry into proposals to lift professional, ethical and education standards</a> in the financial services industry. </p>
<p>It appears however that the best interest duty, the ban on conflicted remuneration (including on general advice) and increased transparency will also be maintained. And a register of financial advisers will be created. </p>
<p>So, what does all this mean? Will the amended FoFA deliver on the stated aims? </p>
<p>First, it must be noted that there are many planners in Australia that have been and will continue to provide outstanding service to assist all manner of clients in all manner of situations. This is often lost in this debate and we would be well served to learn from how they operate.</p>
<p>Second, the inherent conflict in FoFA must also be acknowledged. The difficulty of achieving both an increase in quality and an increase in access/affordability is almost impossible through a political process. FoFA was always going to be a difficult balancing act.</p>
<h2>FoFA will not fix the trust problem</h2>
<p>Third, the limited scope of FoFA means it will not in and of itself deliver quality advice and consumer trust. Critical issues not dealt with include the financial capability of consumers, the training requirements (both entry level and ongoing) for financial planners and remedies for aggrieved clients. </p>
<p>The management of vertically integrated business models, the different forms of advice (product advice vs personal advice), codes of professional/ethical conduct for advisers, and the role of the regulator are also not addressed. </p>
<p>Finally, when considering these issues the fragmented nature of the industry becomes apparent. </p>
<p>On one hand a financial planner may sign up to an enforceable code of conduct, have tertiary and professional qualifications in financial planning, undertake ongoing professional education, have professional indemnity insurance and experience gained within a professional practice environment. Another planner may meet ASIC requirements to give advice with only a few weeks of training, no adherence to a code of conduct and no related experience. FoFA does not deal with these issues. </p>
<p>So who wins and losses from the Senate deal? No one that matters - FoFA is a step in the right direction but the details of the regulations have not been produced. The key elements of FoFA appear to remain, yet it still ignores key issues, and the regulatory uncertainty remains. </p>
<p>Ironically, some sections of the industry have enhanced professional standards by addressing many of these issues without the long running political and regulatory intervention. This is a lesson for all.</p>
<p>The government might consider an alternative approach that partners with the industry to develop and foster professional behaviour, culture and standards. A more facilitative approach would pick up where FoFA fails to deliver and build upon the great work done in some sections of the industry already. If the revised FoFA, the new PJC Inquiry and the FSI start to support and cooperate in this regard, the future for Australians may be brighter.</p><img src="https://counter.theconversation.com/content/29222/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Brimble receives funding from the Financial Planning Education Council research grants scheme. He is Chair of the Financial Planning Education Council, Co-Chair of the Financial Planning Academics Forum and a member of CPA Australia, FINSIA and FPA Australia.</span></em></p>It is not difficult to establish the case for the importance of financial advice. With an ageing population, increasing longevity, higher expectations of post retirement living standards, the complexity…Mark Brimble, Discipline Head of Finance and Financial Planning, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/282522014-06-20T03:23:59Z2014-06-20T03:23:59ZFinancial advice reforms rollback to proceed: experts react<p>The Federal Government has <a href="https://theconversation.com/grattan-on-friday-cormann-sallies-forth-for-fresh-bout-on-financial-advice-legislation-28216">confirmed</a> it will push ahead with controversial moves to water down the Future of Financial Advice (FoFA) law reforms, on the grounds the current legislation reduces the affordability and accessibility of financial advice. </p>
<p>Finance Minister Mathias Cormann said the plan was never to bring back commissions for financial advisers, however the regulation would be changed to allow “incentive payments which do not conflict advice” to be permitted.</p>
<p>The government said it would make legislative amendments if required to deal with unintended consequences arising as a result of the changes, to further protect consumer interests, but said it did not believe this would be necessary.</p>
<p>The government will also remove the “opt-in” requirement for financial advice customers to re-sign contracts with advisers on a regular basis, and remove the catch-all provision of the best interest duty requiring advisers to have “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.</p>
<p>The changes have been announced ahead of the July 15 release of an interim report from the Financial System Inquiry, headed by David Murray. </p>
<p>A panel of experts respond below.</p>
<hr>
<p><strong>Deborah Ralston, Professor of Finance and Director of the Australian Centre for Financial Studies</strong></p>
<p>It’s really disappointing to see the government come out with a change to financial sector operations when they have said there would be a moratorium on that during the course of the financial system inquiry. It would have been good to see them defer this and put it into the mix.</p>
<p>The move to water down FoFA is really disappointing.</p>
<p>When you’re in a vertically integrated wealth management organisation you can refer individuals out from personal advice to general advice within the same organisation, and that will really undermine the whole spirit and intent of FoFA.</p>
<p>The fact they’re allowing commissions on some really quite complex products, which probably would be much better dealt with in terms of personal advice not just over the counter sales, is a matter of real concern – it’s a retrograde step.</p>
<p>I think it’s disingenuous for the government to say it will make these exemptions with regards to commissions and then come back and say “We will make changes to regulation later if we need”. It is very poor policy.</p>
<p>Two thirds of financial advice clients are completely passive and may not know they’re paying trailing commissions - they should be advised. How hard is it to write to them every two years and advise them what their position is?</p>
<p>A disclosure statement would be something we’d expect to see in any professional services firm, so to exempt the financial planning industry from this just does not make sense at all. From a business point of view it’s always good practice to have a trigger to make contact with clients on a regular basis – it’s often a chance to up-sell, and quite apart form ethical considerations it makes good business sense.</p>
<p>There are a proportion of financial planning practices who do the right thing and this is what’s so disappointing. It was a real opportunity for the financial planning industry to clearly state it worked with ethical standards and in the best interest of clients. It’s very important for people to have confidence in the sector, and the changes undermines what was a great step forward in my view.</p>
<hr>
<p><strong>Warren McKeown, Teaching Fellow, Financial Advice, University of Melbourne</strong></p>
<p>In finance minister Mathias Cormann’s <a href="http://www.financeminister.gov.au/media/2014/0620-the-way-forward-on-financial-advice-laws.html">press release</a> he uses opposition leader Bill Shorten’s words that remuneration is not conflicted (and is not banned) when remuneration is paid which could not be expected to influence the choice of financial product. He uses such statement to justify that under balanced scorecard arrangements certain incentive payments related to the provision of general advice are not conflicted remuneration. </p>
<p>So, if direct commissions or a referral fee (based on commission percentages) are banned then there is no ban on some form of other incentive or reward system payment. It appears that under this system, people will still walk into a bank and be asked by the teller if there’s anything they can do for them, including insurance and investment products, or a discussion of what to do with a lump sum of money. </p>
<p>There may not be a direct referral fee to the teller, but some notation will be made in favour of that employee and they will receive some form of bonus… without it being directly related to the provision of the product. It seems that there will be ways in which the big players, the banks, will be able to get around the banning of commissions. Commissions (rewards) by another name?</p>
<p>On the issue of the Best Interest Duty, it does seem that it was over-kill to catch every possibility and subject to legal challenge but, the steps still required of a financial adviser cover off the “best interests duty” that should continue to provide a high-degree of protection for clients. Other changes assist in the objective of reducing red-tape without impacting on the quality of advice to clients.</p>
<hr>
<p><strong>Paul Latimer, Associate Professor of Business Law and Taxation, Monash University</strong></p>
<p>Why wouldn’t we expect a financial planner to be like a doctor - to look for the best “cure” from all options? I would hope a doctor might go beyond the “checklist” if necessary and consider other solutions like acupuncture, chiro, Chinese medicine etc. </p>
<p>Repealing the open ended section 961B(2)(g) means that financial planners are no longer expected to be able to “take any other step in the best interests of their client” - their recommendations are now limited to financial products and not any other investments including real estate.</p><img src="https://counter.theconversation.com/content/28252/count.gif" alt="The Conversation" width="1" height="1" />
The Federal Government has confirmed it will push ahead with controversial moves to water down the Future of Financial Advice (FoFA) law reforms, on the grounds the current legislation reduces the affordability…Charis Palmer, Deputy Editor/Chief of StaffLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/282162014-06-19T21:01:41Z2014-06-19T21:01:41ZGrattan on Friday: Cormann sallies forth for fresh bout on financial advice legislation<figure><img src="https://images.theconversation.com/files/51646/original/y4bdycp9-1403162089.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Finance Minister Mathias Cormann has announced the government's proposed changes to FoFA legislation. </span> <span class="attribution"><span class="source">AAP/Alan Porritt</span></span></figcaption></figure><p>As if it doesn’t have enough trouble with its budget, the government is now bracing for another attempt at selling its plans to water down Labor’s Future of Financial Advice (FoFA) law.</p>
<p>Finance Minister Mathias Cormann - <a href="https://theconversation.com/cormann-presses-pause-on-fofa-changes-after-public-pushback-24730">who “paused” the Coalition’s</a> proposed changes for further consultations after Arthur Sinodinos was forced to stand aside as Assistant Treasurer - has this morning released a limited compromise.</p>
<p>The one area where the government has moved to reassure consumers is in relation to commissions and “conflicted remuneration”.</p>
<p>The government insists that it never meant to lift the ban on commissions to those – notably bank employees – giving general advice. (These employees would be able to get bonuses and incentive payments that were not considered “conflicted remuneration”).</p>
<p>Rather amusingly, given its general attitude to the public broadcaster, Cormann invokes an <a href="http://www.abc.net.au/news/2014-06-02/chris-bowen-scaremongering-on-financial-advice-reforms/5430672">ABC “fact check”</a> to reinforce the government’s credentials on being against commissions.</p>
<p>But a Senate inquiry into its legislation, which reported this week, found it was not clear enough - Coalition senators recommended redrafting.</p>
<p>Cormann now says the government will move to put the position “absolutely beyond doubt by prescribing that any payment related to the provision of general advice cannot be an upfront or trailing commission”.</p>
<p>There will be an explicit prohibition on “any payment made solely because a financial product of a class in relation to which the general advice was given has been issued or sold to the client”. Also expressly prohibited will be “any recurring payment made because the person has given the general advice”.</p>
<p>To try to convince people that it is fair dinkum, Cormann says there will be power for the government to intervene by regulation if a situation makes it necessary (which he doesn’t think will arise).</p>
<p>“If – contrary to our clear expectation and our intention not to bring back conflicted remuneration – developments in the market warrant our intervention, we could and would address the issue very quickly through regulations.”</p>
<p>Cormann argues that these guarantees against commissions go further than the Senate inquiry’s recommendations.</p>
<p>But on its proposed change to the FoFA provisions to ensure an adviser acts in the client’s “best interest”, the government is standing firm.</p>
<p>The Labor law lays out various steps for advisers to show they have satisfied this duty, including a catch-all one saying that an adviser should also take any other reasonable steps.</p>
<p>The government insists this is too open-ended, creating uncertainty, and plans to scrap it.</p>
<p>But the Senate majority said it should look at “whether any further strengthening is required to ensure a provider cannot circumvent these best interests obligations”.</p>
<p>Cormann says the government has been open to suggestions on what other specific requirements might improve the test. “However, when asked, even the most vocal critics of the government’s proposed change to the best interest duty test have not been able to point to one.” So nothing will be added to the scaled-back test.</p>
<p>The best interest test has been a sensitive point, and the decision not to enhance it is very likely to be provocative.</p>
<p>The government intends to bring in some of its changes by regulations so they can operate between July 1 and the end of the year by when, it hopes, the legislation would be through.</p>
<p>These regulation would include removing the “opt in” provision under which investors have to renew regularly their relationship with advisers; abolishing the catch-all provision for the best interest test, and scrapping the requirement for fee-disclosure statements to be sent to pre-July 1 2013 clients. The tighter provisions to ensure that commissions cannot be reintroduced will also come in by regulation.</p>
<p>These regulations can be disallowed by the Senate.</p>
<p>While the government argues that Labor’s law involves too much cost and red tape, it has been considerably motivated by its concern that the industry super funds are advantaged. Sinodinos in particular was sympathetic to the banks’ push to tilt things more their way.</p>
<p>But the timing could not be worse for the government.</p>
<p>Today’s decision has been rushed out ahead of another Senate report, tabled next week, which will be very critical of how the Commonwealth Bank handled compensation for people who fell victim of financial advisers associated with it.</p>
<p>If the reassurance offered in its compromise does not satisfy in particular senior groups worried about older people being ripped off, as well as other consumer advocates, the government will have another damaging stoush on its hands – and could lose the measures in the Senate anyway.</p>
<p>Anything to do with people’s savings and retirement income touches not just their hip pocket nerve but also stirs some of their deepest fears. Financial crashes leading to families losing their life savings, with heart-rending footage on television, are embedded in the public mind.</p>
<p>With its budget measures the government is stripping back benefits and increasing the price of services; with the changes to FoFA, the issue is what will happen to the protections for the increasing number of small investors seeking to make best use of their retirement or other funds.</p>
<p>On both fronts, the government has found itself in a bad place politically because it has made ordinary people feel more vulnerable.</p>
<p><strong>Listen to Mathias Cormann talk in depth about the FoFA changes on the Politics with Michelle Grattan podcast <a href="http://michellegrattan.podbean.com/e/mathias-cormann/">here</a>.</strong></p>
<iframe id="audio_iframe" src="https://www.podbean.com/media/player/audio/postId/5195605?url=http%3A%2F%2Fmichellegrattan.podbean.com%2Fe%2Fmathias-cormann%2F" data-link="http://www.podbean.com/media/player/audio/postId/5195605?url=http%3A%2F%2Fmichellegrattan.podbean.com%2Fe%2Fmathias-cormann%2F" height="100" width="100%" frameborder="0" scrolling="no" data-name="pb-iframe-player"></iframe><img src="https://counter.theconversation.com/content/28216/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As if it doesn’t have enough trouble with its budget, the government is now bracing for another attempt at selling its plans to water down Labor’s Future of Financial Advice (FoFA) law. Finance Minister…Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/270682014-05-26T20:09:20Z2014-05-26T20:09:20ZWe regularly review our insurance, why not our investments?<figure><img src="https://images.theconversation.com/files/49443/original/xw6cj269-1401084468.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The government is considering whether to roll back a requirement for bi-annual financial planning reviews.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Following last week’s public hearing, the Senate Economics Legislation Committee is preparing to report on its <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/FOFA">inquiry</a> into a government bill that would significantly water down the Future of Financial Advice (FOFA) legislation.</p>
<p>The legislation banned “conflicted remuneration” - commissions provided to advisers and financial planners by the producers of financial investment products such as banks and wealth management firms. FOFA also required biennial renewal of any ongoing fee agreements between investors and their planners on an “opt in” basis, and made it the duty of financial services providers to advise and act in the “best interests” of their clients. </p>
<p>The government argues the “streamlining” of FOFA will help to “cut red tape” and reduce costs to consumer investors. Unfortunately, while there is always room for fine-tuning new legislation to “streamline” it, the government’s proposals do far more. They seriously undermine the consumer protections in the FOFA legislation and, in some ways, take investors back to the pre-FOFA position.</p>
<h2>Banks win under a ‘streamlined’ FOFA</h2>
<p>While not attempting to reinstate product-based commissions for personal advice, the government’s bill does propose to allow them for “general advice”.</p>
<p>Bankers, planners and lawyers may understand the difference between “personal advice” and “general advice”, but the subtleties of this distinction may be lost on consumers in real-life situations. A bank employee may say to a consumer, “This product is very good for people (in general) of your age with your income/asset position,” without considering the consumer’s particular needs, objectives and financial situation. This is “general advice” only but under the current legislation, the employee still may not receive a commission if the consumer invests in the product as this would be “conflicted remuneration”.</p>
<p>The government proposes to exempt such “general advice” from the ban on commissions. Further, there will be almost no restrictions on commissions when the result of the conversation between the bank employee and the customer results in a basic banking product, general insurance or life insurance. Not surprisingly, this is one area where consumer groups agree with the Financial Planning Association of Australia (FPA) as the latter is concerned at the decline of properly remunerated personal advice and the total domination of a “sales culture” built on commission-driven “general advice”.</p>
<p>Where the consumer groups and the FPA part ways, however, is on the issue of bi-annual renewals. Currently, under FOFA, a planner or adviser who is receiving ongoing commissions, either from product issuers for old pre-FOFA investments, or directly from the client, must notify the client every two years and allow them 30 days to “opt in” and renew the ongoing fee arrangement.</p>
<h2>Best practice for all</h2>
<p>The government proposes removing this requirement and returning to the old pre-FOFA “opt out” situation. This is despite strong evidence, from many sources including ASIC itself, that large numbers of consumer investors are “inactive” and that many planners and advisers receiving commissions from these consumers or their investments don’t bother regularly contacting them to review them. Of course, “best practice” in the financial planning industry is to conduct such reviews, annually or once every two years. FPA members who abide by its Code of Practice would do so. </p>
<p>It is surprising, therefore, for the FPA to oppose this requirement and to support the government’s attempt to “streamline” it away. Other financial services products, like house and car insurance, are renewed annually and consumers are given notice and opportunity to consider the product and shop around. Why not investments? Informed and updated consumers regularly considering their investment performance and their fee arrangements with their planners and advisers makes for a better-performing investment industry and confident consumers. </p>
<p>FOFA also repealed the requirement for advisers to have a “reasonable basis” for their advice and replaced it with the obligation to act and advise in the “best interests” of the client. This duty, however, can be satisfied if the adviser can prove they complied with a “checklist” of quite specific obligations followed by the general requirement to consider “any other step” that was in the client’s best interest. This last requirement is the only item in the relevant sub-section that actually mentions “best interest”. The government is proposing to remove this last “catch all” provision, saying it is too open-ended and “creates uncertainty”.</p>
<p>Most professionals have open-ended obligations which require the exercise of professional judgement. While their insurers produce checklists to help manage risks, these are no defence to a claim of professional negligence. Indeed, the principles of the law of negligence itself, which apply to everybody, not just professionals, are expressed in general terms such as “reasonable foreseeability”. </p>
<p>If financial planners and advisers want to be seen as a profession and to charge accordingly, they need to accept that not all their obligations can be neatly spelt out for them in a legislative checklist. </p><img src="https://counter.theconversation.com/content/27068/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul O'Shea was commissioned to write an analysis for National Seniors Australia on the potential consumer detriments of the Commonwealth Government's proposals to "streamline" the Future of Financial Advice reforms. He is affiliated with Queensland Consumers and is a "Friend" (Honorary Life Member) of the Financial Counselling Association of Queensland. He is a member of the Investment, Life Insurance and Stockbroking Panel of the Financial Ombudsman's Service. His private legal practice advises both consumers and financial services providers. </span></em></p>Following last week’s public hearing, the Senate Economics Legislation Committee is preparing to report on its inquiry into a government bill that would significantly water down the Future of Financial…Paul O'Shea, Senior Lecturer, TC Beirne School of Law, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/268222014-05-19T20:23:22Z2014-05-19T20:23:22ZResist efforts to water down FOFA, to protect all Australians<p>As public hearings into the <a href="http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm">Future of Financial Advice’s</a> Senate inquiry begin on Thursday, it’s probably not overstating the case to say the financial planning industry is at a crossroads. </p>
<p>With the F0FA regime currently in place, the opportunity presents itself for a new generation of financial planners committed to serving the best interests of consumers, without the conflicting incentive of commissions.</p>
<p>Unfortunately the old generation of financial planners appears intent on rejecting this opportunity. It’s probably not surprising given that, according to 2011 figures from the Mortgage and Finance Association of Australia (MFAA), only 11% of planners are aged under 30, and around 80% of planners are either owned or affiliated with the major banks. Hence the sales culture of the older planners and their vertically integrated organisations, wishing to cross-sell as much product as possible, is well entrenched.</p>
<p>As a consequence we are seeing an ongoing campaign (<a href="http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm">notably by some of the big banks</a>) to water down the FOFA legislation, which has only been in place since July 2013.</p>
<p>The proposed reforms to FOFA include removing the “opt-in” requirement where clients of financial advisers must indicate annually that they wish to continue the service, removing the need for an annual fee disclosure for clients engaging before July 1, 2013, and a watering down of the “best interest” duty and provisions directed at removing conflicted remuneration; that is the payment of commissions, on general advice.</p>
<p>The process was postponed in March when assistant treasurer Arthur Sinodinos stepped aside and finance minister Mathias Cormann referred the legislative package to the Senate Economics Legislation Committee, but <a href="http://www.smh.com.au/business/fofa-reforms-sell-retirees-short-20140512-385tm.html">media reports</a> suggest the government may soon unveil its plans.</p>
<p>The banking industry claims much has changed since the impact of the global financial crisis revealed the extent of shameful practices in the advice industry. </p>
<p>The financial advice collapses in Australia between 2006 and 2010 - involving <a href="http://www.themonthly.com.au/issue/2011/february/1299634145/paul-barry/eye-storm">Storm Financial</a>, <a href="http://www.asic.gov.au/asic/asic.nsf/byheadline/Opes+Prime?openDocument">Opes Prime</a>, <a href="http://www.theglobalmail.org/feature/inside-the-offshore-fraud-the-villains-and-victims-of-australias-biggest-pension-scam/789/">Trio Capital</a> and <a href="http://www.smh.com.au/news/business/westpoint-could-have-been-wound-up-years-ago/2006/07/05/1151779013363.html?from=rss">Westpoint Property Group</a> - resulted in more than A$6 billion in losses and involved more than 120,000 people.</p>
<p>All involved conflicted remuneration structures and high commissions as fundamental issues.</p>
<p>But more recent cases involving Commonwealth Financial Planning have been brought to light <a href="http://www.smh.com.au/business/banking-and-finance/cba-told-to-reopen-compensation-for-advice-victims-20140516-38fd7.html">by reporting from Fairfax’s Adele Ferguson</a> and <a href="http://www.abc.net.au/4corners/stories/2014/05/05/3995954.htm">the ABC’s Four Corners</a>.</p>
<p>Advisers in these cases exploited their clients by offering advice that prioritised their own best interest over that of their clients.</p>
<p>It is difficult to understand the extent of this exploitation without reference to specifics. In one of the key cases surrounding the Storm Financial collapse, ASIC pursued Macquarie Bank and Bank of Queensland on behalf of two investors aged in their sixties, <a href="https://storm.asic.gov.au/storm/storm.nsf/byheadline/Doyle%20proceedings?opendocument">Barry and Deanna Doyle</a>. </p>
<p>Despite the fact that the Doyles had indicated to their advisers that they had a low risk appetite, they were “double-geared” into the stock market by borrowing against their home and using the cash to raise yet more money to invest. </p>
<p>With only part-time income of less than $20,000, some Centrelink payments, and assets which consisted of a house worth $450,000 and $640,000 in superannuation savings, the Doyles ended up owning a share portfolio costing $2.26 million, on which annual interest payments eventually rose to $191,800.</p>
<p>Following the fall in asset prices the Doyles’ highly leveraged share portfolio was sold, consuming all of their superannuation savings. They were left with a debt of $456,000 on their previously unencumbered home, with insufficient income to make the repayments. In return for this disastrous investment advice, which saw them increase their borrowings or exposure to the stock market no fewer than 11 times in 25 months, the Doyles paid Storm $152,000 in fees.</p>
<p>Not surprising then that at the heart of the FOFA legislation are two key “gatekeeper” requirements to address conflicted remuneration. First, planners must prioritise their clients interests over their own, and second, the advice must be appropriate to the client’s own situation.</p>
<p>It is important to note here that there are advisers who do routinely act in their client’s best interest. This is reflected in the Financial Planning Association of Australia’s <a href="http://fpa.asn.au/financial-system-inquiry-submission-recommends-consideration-fairness-co-regulation/">submission to the Financial System Inquiry</a>, which argues that rather than water down the FOFA legislation, there is a good case to extend this “gatekeeper standard” to other areas of financial services to protect the interests of investors more broadly.</p>
<p>As we have been reminded only too often over recent weeks, we have an ageing population, increasing demands on the welfare system, and a very real need to maximise our retirement savings to ensure greater self-reliance in retirement. Given the generally poor level of financial literacy in this country, this is most unlikely to happen unless individuals can access low cost and scalable advice to assist in their retirement planning. The opportunities for the financial advice industry, and the investment community more generally, is therefore enormous.</p>
<p>The willingness with which individuals seek such advice, however, will depend on their confidence in the financial planning industry. Research from Rice Warner indicates that as a result of collapses such as those listed above, consumers hold a low view of financial advisers, with only 25% regarding them as ethical and honest. This mistrust results in Australians not seeking financial advice when it could be beneficial for them to do so.</p>
<p>The FOFA legislation presents a great opportunity for the financial advice industry collectively to adopt a more ethical client focused approach, re-instilling confidence in the industry. Without that confidence, individuals will not seek the advice they need, retirement savings will not be maximised, and there is likely to be an even greater need to rely on the age pension.</p><img src="https://counter.theconversation.com/content/26822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deborah Ralston is affiliated with Mortgage Choice Financial Planning and provided expert advice to ASIC on the Storm Financial case.</span></em></p>As public hearings into the Future of Financial Advice’s Senate inquiry begin on Thursday, it’s probably not overstating the case to say the financial planning industry is at a crossroads. With the F0FA…Deborah Ralston, Professor of Finance and Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/247802014-04-01T03:38:38Z2014-04-01T03:38:38ZThe future of financial advice needs educated advisers<figure><img src="https://images.theconversation.com/files/45116/original/s4z542h5-1396235138.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Consumers generally trust their financial adviser, even when the level of advice is poor.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com">Shutterstock</a></span></figcaption></figure><p>Finance Minister Mathias Cormann’s decision to back away from plans to repeal sections of the Future of Financial Advice (FOFA) reforms is not surprising. Recent comments suggest this may indeed be a complete turnaround in the government’s position, more likely now that Assistant Treasurer Arthur Sinodinos is no longer at the helm.</p>
<p>It’s been a long fought battle to achieve a new standard in financial planning, but more, not less reform is required to ensure financial advisers evolve beyond commission-driven salespeople.</p>
<p>Under the guise of reducing compliance costs, the proposed reforms to FOFA include removing the “opt-in” requirement, where clients of financial advisers must indicate annually that they wish to continue the service. Also up for removal is the need for an annual fee disclosure for clients engaging before 1st July 2013, and a watering down of the “best interest” duty and provisions directed at removing conflicted remuneration, that is the payment of commissions, on general advice.</p>
<p>While these reforms may well reduce compliance costs, they also wind back some of the important consumer protection benefits of FOFA, which has been a real win for investors. </p>
<p>Potential conflicts of interest are ever present in the financial planning industry where the average consumer struggles with the complexity of financial advice, and advisers can recommend options that maximise their own revenue stream. The consequent information asymmetry between clients and advisers warrants regulatory intervention, as cases such as the failure of Storm Financial have clearly demonstrated.</p>
<h2>From salespeople to educated advisors</h2>
<p>It would appear the pushback on restricting commissions for financial advice is coming from vertically integrated financial conglomerates such as banks, that wish their staff to be “incentivised” to sell a wider range of products to wealth management clients. They would also argue that additional costs of compliance may price financial advice out of the reach of those who need it most. </p>
<p>While the motivation of these organisations is understandable, removing the current restrictions on commissions under FOFA would be a retrograde step, both for consumers and the advice industry as a whole. While admittedly there are a few issues to be tidied up in the legislation, such as a better definition of personal and general advice, a little more time is really required to bed the current processes down.</p>
<p>If further reform is needed in the financial advice industry, surely it needs to be focused on lifting the bar on the minimum educational standard for licensees. </p>
<p>At present one can satisfy ASIC’s minimum educational requirements for a financial services licence by completing a course listed on its website – stated to be “at or beyond the standard required for a Diploma”, that is one year of full-time study or the equivalent to 1/3 of a three year bachelor’s degree. </p>
<p>While this standard is widely acknowledged by finance professionals as being woefully inadequate in itself, in practice some courses that are listed as satisfying this criteria can be completed in just a few weeks of study. It is hard to see how the complex matter of financial advice might be adequately addressed in such a short time frame, no matter how intensive the course.</p>
<h2>A gaping knowledge gap</h2>
<p>The particular difficulty of information asymmetry in financial advice was well demonstrated by ASIC’s shadow shopping study of financial advice in 2012. In this study, ASIC examined 64 financial plans for retirement age individuals. Only 3% of the financial plans examined were found to provide good quality financial advice, while at the same time 86% of participants felt they had received good quality advice and 81% said they trusted the advice they received from their adviser “a lot”.</p>
<p>Hence the dilemma - consumers are often the worst at making an objective assessment of the quality of financial advice they receive.</p>
<p>At a time when we are seeing a rising wave of potential retirees seeking advice to maximise their well-being in retirement, there has never been a greater need for transparent, affordable and scaleable financial advice. Not just for the wealthy, but even more importantly for those with more limited financial means.</p>
<p>The FOFA reforms have been a huge step forward for the financial advice industry to adopt a more professional and ethical standing, focused on providing quality financial advice, as opposed to selling financial products for commission. For many financial planners, however, the FOFA legislation has simply been a codification of existing good practice. The concept of fee for service and advice in the client’s best interest is well established in better practices.</p>
<p>The FOFA legislation has lifted the professionalism of the financial advice industry. The way forward is not to undo what has been achieved here, but rather to move to the next stage of reform in the industry by reviewing the minimum qualification for advisers.</p><img src="https://counter.theconversation.com/content/24780/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deborah Ralston is affiliated with Mortgage Choice Financial Planning.</span></em></p>Finance Minister Mathias Cormann’s decision to back away from plans to repeal sections of the Future of Financial Advice (FOFA) reforms is not surprising. Recent comments suggest this may indeed be a complete…Deborah Ralston, Professor of Finance and Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/225842014-02-13T19:52:27Z2014-02-13T19:52:27ZCoalition’s FOFA ‘streamlining’ will destroy protections<figure><img src="https://images.theconversation.com/files/41119/original/wk3k4cng-1392002360.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Stronger rules introduced to protect those seeking financial advice by the last government could be rolled back by the Abbott government.</span> <span class="attribution"><span class="source">Tracey Nearmy/AAP</span></span></figcaption></figure><p>Every employed Australian will enter the financial markets through their superannuation, meaning most Australians will need financial advice at some point in their life. </p>
<p>Research shows most people lack financial knowledge and don’t fully understand fees and commissions. Many, overwhelmed, simply trust their financial advisor.</p>
<p>The <a href="http://www.themonthly.com.au/issue/2011/february/1299634145/paul-barry/eye-storm">collapse of financial advice firm Storm Financial in 2009</a> saw thousands lose their superannuation and laid bare some of the problems with managed investment schemes. Following an <a href="http://www.aph.gov.au/binaries/senate/committee/corporations_ctte/fps/report/report.pdf">investigation by the Ripoll Committee</a>, the previous Labor government enacted the <a href="http://www.comlaw.gov.au/Details/C2012A00067">Future of Financial Advice legislation</a> (FOFA).</p>
<p>The Committee found, among other things, that conflicts in how advisors were remunerated often caused poor advice. </p>
<p>Now, the Coalition – with its <a href="http://futureofadvice.treasury.gov.au/content/Content.aspx?doc=consultation/fofa_amendments/default.htm">Streamlining of FOFA Bill 2014</a> – is seeking to roll back some of the most effective aspects of FOFA. </p>
<p>If the streamlining proposals go ahead, most Australians will receive general financial advice driven by commissions and volume bonuses. They will also pay conflicted remuneration on life insurance attached to their super. </p>
<p>The proposals would remove the prohibition on conflicted remuneration for general advice: far and away the kind of advice most frequently offered to Australians. </p>
<p>It would also remove part of the “best interests” duty on advisors, which requires the exercise of personal judgement outside a checklist.</p>
<p>Rolling back the prohibition in areas with greatest application to ordinary financial citizens seems indefensible. </p>
<h2>Conflicted remuneration</h2>
<p>The FOFA reforms ban advisors from accepting benefits that could influence the advice they give clients. The new proposals limit the ban to “personal advice”, when most Australians receive general advice. Personal advice is based on a review of a client’s circumstances, general advice does not match the product to the client and provides information only about the product and its general appropriateness.</p>
<p>The FOFA reforms did not ban bank sales staff from conflicted remuneration when selling “basic banking products”. Insurers too were able to earn commission on general insurance products and life insurance sales outside superannuation. </p>
<p>This was permitted because basic banking products and those insurances are familiar to most people. The ban did not allow conflicted remuneration on life insurance attached to super. </p>
<p>The streamlining proposals will allow commissions and bonuses to return to life insurance inside super.</p>
<p>The likely results of these changes are unhelpful and unfair. Advisors will have an incentive to offer general advice (paid by commission from the bank or insurer) and not more detailed personal advice, for which the client pays directly a management fee or hourly rate fee. </p>
<p>And it’s not always clear whether advice is general or personal. An electronic flyer sent to 200 clients may be worded as general advice in legal terms while appearing as directed to the recipient’s personal circumstances. </p>
<p>Third, the streamlining proposals also promote scaled advice. Here the scope of personal advice can be narrowly focused. But if that has the effect of denying commissions advisors may not bother to scale. They may simply sell a product with general advice and earn commission.</p>
<p>The proposals are unfair because they polarise the quality of advice between the small (and wealthier) population (less than 25%) which obtains personal advice, and the vast majority of Australians who will now pay commissions to receive general advice. </p>
<p>While an upfront personal advice fee may seem a hurdle, the combination of initial and trailing commissions certainly does not mean that commissions are aways cheaper. The UK tried a polarisation remuneration policy for a decade: they have abandoned it over the last 5 years. </p>
<p>The proposals are also unfair because they ignore the concentrated and related structure of the Australian financial sector. About 70% of financial advisors are owned or related to the four big banks and AMP. Australian Securities and Investments Commission research shows that over half of investment recommendations are concentrated in a small band of less than 10 products. </p>
<p>The Ripoll Committee identified conflicted remuneration as the leading cause of poor financial advice: the streamlining proposals reverse much of that Committee’s work.</p>
<h2>Best interests obligations</h2>
<p>The “best interests” duty, which applies only to personal advice, requires the advisor to tick-off a list of investigations and then “take any other step … in the best interests of the client” that would be reasonable in the client’s situation. </p>
<p>The duty requires the advisor to exercise professional advisory judgement, especially if the client’s circumstances are unusual. This is why personal advice is sought and paid for. </p>
<p>The streamlining proposals would remove this so-called “catch-all” provision, which will reduce the “best interests” duty to a check-list: the only remaining standard is that the recommendation given to the client be “appropriate”. There is a big gap between requiring an advisor to act in a client’s “best interests” and that the advice be merely “appropriate”.</p>
<p>This reverse is compounded by another aspect of the proposals – allowing “scaled” advice. </p>
<p>Scaled advice is limited personal advice – it may consider only one or two aspects of a client’s entire financial circumstances. The idea of scaling is to permit a small scale service for those not wanting to pay for a comprehensive financial strategy. The FOFA reforms allowed scaled advice, mostly through the policy work of ASIC. ASIC’s scaling requirements made an advisor’s agreement to give scaled advice subject to all the requirements of any personal advice – including that the scaled advice be in the client’s “best interests”.</p>
<p>The streamlining proposals will reduce the obligations of the advisor providing scaled advice. There is no overarching protection which explicitly protects the client from advisors who deliberately recommend scaling when comprehensive advice is required. </p>
<p>A client who seeks advice about a small inheritance could be given scaled advice to invest in a managed investment scheme (earning fees for the advisor) when a wider review may have revealed that the client would be better off paying down their credit card or home mortgage.</p>
<h2>Ongoing fee arrangement</h2>
<p>A central element of FOFA was the “opt-in” requirement. Where a client had an “ongoing fee arrangement” such as a managed account, an advisor every two years had to give their client a notice to “opt in” – that is, to sign up again, to continue the arrangement. </p>
<p>The idea was to give clients a reason to review their financial advisory arrangements and not simply continue to pay fees. The streamlining proposals are to abolish this requirement. The government believes the “opt-in” requirement is too costly. Instead the advisor or client must expressly opt out to end the arrangement.</p>
<h2>Over-reach</h2>
<p>It is true that most economic regulation must find a balance between productivity and protection. There is no productivity gain in allowing citizens’ savings and foregone tax revenue to be lost through no advice or partial advice in a sector where related party and concentrated product recommendations are more common than not. </p>
<p>The proposed standards do not only take us back to pre-Ripoll, they are worse. Before Ripoll there was a requirement for a “reasonable basis for advice” – that advice be suitable or at least not negligent. This was abolished because the higher standard of “best interests” was introduced. If the streamlining proposals succeed, they should at least restore the suitability standard. Tick-a-box “appropriateness” simply further weakens the position of the financial consumer.</p>
<p>The streamlining proposals over-reach: they threaten to destroy the most important protection of the FOFA reforms, the abolition of conflicted remuneration in relation to general advice. </p>
<p>They also undermine quality of advice standards: the US has had a requirement of suitability or reasonable basis of advice since the 1930s. The lame proposal that advice be “appropriate” is not worthy of a country which compels its citizens to invest, and should be more vigilant than ever in their protection.</p><img src="https://counter.theconversation.com/content/22584/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimity Kingsford Smith acts as the chair of the Financial Planning Association's professional disciplinary panel. She is member of the code committee within the Financial Markets Authority of New Zealand.
The views in this are the views of Professor Kingsford Smith in her personal professional capacity, but not in her capacity as independent Chair of the Conduct Review Commission of the Financial Planning Association nor in her role as a member of the New Zealand Financial Markets Authority Code Committee.</span></em></p><p class="fine-print"><em><span>Viroshan Poologasundram does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Every employed Australian will enter the financial markets through their superannuation, meaning most Australians will need financial advice at some point in their life. Research shows most people lack…Dimity Kingsford Smith, Professor of Law, UNSW SydneyViroshan Poologasundram, Research Clerk at Baker & McKenzie, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/225742014-01-31T03:02:12Z2014-01-31T03:02:12ZSPC Ardmona decision is fiscal policy disguised as industry policy<figure><img src="https://images.theconversation.com/files/40265/original/dm2g9k3s-1391132143.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Prime Minister Tony Abbott and Industry Minister Ian Macfarlane have drawn a line in the sand on industry assistance...or have they?</span> <span class="attribution"><span class="source">Alan Porritt/AAP</span></span></figcaption></figure><p>Announcing the decision to refuse assistance to SPC Ardmona, Industry Minister Ian Macfarlane <a href="http://www.smh.com.au/federal-politics/political-news/spc-ardmona-pm-rejects-request-for-help-20140130-31pqn.html">said:</a> </p>
<blockquote>
<p>“I think it is a clear delineation of where this government believes we need to go with industry policy”. </p>
</blockquote>
<p>Coming so soon after the government’s decision not to extend assistance to Holden, it’s clear we now have a government seriously committed to a free market ideology, and which is taking a tough line on requests for industry assistance.</p>
<p>That simple interpretation, however, is belied by the prime minister’s <a href="http://news.smh.com.au/breaking-news-national/abbott-pledges-millions-for-cadbury-201308%2028-2sph9.html">promise</a> of a grant of A$16 million for the Cadbury factory in Hobart. Perhaps that can be written off as an election promise made on the run. Tony Abbott and Kevin Rudd were both making rash promises during the election campaign.</p>
<p>But beyond that, the Abbott government has deliberately made two costly concessions to industry requests for assistance. </p>
<h2>Picking winners</h2>
<p>One was its promise to retain a concession in fringe benefits tax arrangements, allowing an employer-provided car to be assessed at a very low rate for tax purposes, even if it is not used for work. The concession dates to 1986 when around 80% of cars sold in Australia were Australian-made. It was a form of assistance to the car industry. </p>
<p>Now almost 80% of cars sold in Australia are imports: most of the assistance therefore would be going to the Japanese and German car industries. The main Australian beneficiary of the concession, costing around A$450 million a year in forgone tax revenue, is the salary packaging industry, which having learnt that the previous government intended to scrap it, lobbied hard for its retention.</p>
<p>Another government concession to industry lobbying is its plan to <a href="http://www.propertyobserver.com.au/industry-news/coalition-water-down-burdensome-fofa-reforms/2014013067444?utm_source=po&utm_medium=aida&utm_campaign=latestnews">reverse</a> reforms to the financial advice industry, legislated by the previous government, which require financial advisers to disclose ongoing commissions and to act always in the best interests of clients. </p>
<p>Before these reforms were implemented <a href="http://www.ricewarner.com/images/newsroom/1374717972_Rpt%20The%20financial%20advice%20industry%20post%20FoFA%202013.pdf">actuaries</a> calculated that loose regulation of the industry was allowing consumers to be overcharged an average of A$900 each. Reversal of this reform will restore an easy income flow to the industry. </p>
<p>Both reforms are to be scrapped by the Abbott government, without any explanation why accountants helping clients to avoid tax or financial advisers living off commissions on sales are more worthy of assistance than people making cars or packaging fruit.</p>
<p>The A$25 million once-off assistance sought by SPC Ardmona is trivial compared with the ongoing cost of industry assistance, estimated by the <a href="http://www.pc.gov.au/annual-reports/trade-assistance/2011-12">Productivity Commission</a> to have cost A$10 billion in 2011-12. That’s around A$1000 a household.</p>
<p>This A$10 billion splits three ways: $5 billion in direct budgetary outlays, $4 billion in tax concessions (i.e. revenue forgone), and $1 billion in the cost of tariff protection. (This cost of tariff protection is a net cost. In round figures tariffs grant $8 billion in assistance to manufacturing, while costing $7 million to other industries).</p>
<p>In fact, the Productivity Commission in its regular assessments of the cost of industry assistance is conservative. It does not count budgetary and other support for the private health insurance industry. Nor does it count support for superannuation in the form of tax concessions and compulsory levies. </p>
<p>There are measurement problems in estimating how much of this support for health insurance and superannuation counts as industry subsidies and how much is personal benefit, but it’s clear that like all other industry subsidies they come at a cost and help direct our expenditure towards certain industries, the finance industry in the case of health insurance and superannuation, and away from other areas.</p>
<h2>Budget jitters</h2>
<p>Ardmona and Holden suffer the misfortune that their assistance was to be in the form of budgetary outlays, which, in the current fiscal environment, is where most attention is directed. Had Ardmona’s assistance been in the form of a tariff it would have been an unnoticeable A$5 or so on our household’s annual supermarket bill, and we would never have noticed it if it was in the form of a tax concession.</p>
<p>The notion that the Coalition government is holding out against industry assistance does not hold up. Its concerns seem to be more about reducing reported public expenditure than about winding back industry assistance. This expenditure emphasis puts manufacturing and related industries under the spotlight, but allows other industries, particularly those in the finance sector, to go on enjoying very generous and distorting subsidies. This is in spite of warnings from the <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2117753">Bank of International Settlements</a> that an over-sized finance sector can stifle economic growth.</p>
<p>When economists warn about the costs of “picking winners” in industry policy, they are reminding us that benefits for certain industries come at a cost to other industries and consumers. Perhaps if we weren’t so generous to the finance sector firms like Ardmona SPC wouldn’t have to beg for assistance.</p><img src="https://counter.theconversation.com/content/22574/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian McAuley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Announcing the decision to refuse assistance to SPC Ardmona, Industry Minister Ian Macfarlane said: “I think it is a clear delineation of where this government believes we need to go with industry policy…Ian McAuley, Lecturer, Public Sector Finance , University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/52992012-02-21T19:39:37Z2012-02-21T19:39:37ZFinancial advice reform: have we learned enough from Storm?<figure><img src="https://images.theconversation.com/files/7789/original/jfq47ghx-1329451844.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Founder of Storm Financial, Emmanuel Cassimatis, speaks before a parliamentary inquiry.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>When <a href="http://news.theage.com.au/breaking-news-business/storm-financial-collapse-plan-outlined-20090810-ef9y.html">financial planning firm Storm Financial</a> collapsed with $3 billion in investment losses, many of its investors were left destitute.
A parliamentary joint committee inquiry into the company’s demise was conducted in response and, in 2010, then Financial Services Minister Chris Bowen announced a series of sweeping reforms aimed at giving greater protection to retail investors.</p>
<p>The Future of Financial Advice (FOFA) reforms are due to come into force on July 1, 2012. The proposals are intended to minimise conflicts of interest and restore confidence in the financial advisory sector. The proposals include: a ban on commissions and rebates on a prospective basis; a requirement for clients to opt in for advice every two years; a duty for financial advisers to act in their client’s best interests; a ban on percentage-based fees on geared products and portfolios; allowing superannuation funds to provide simple intra-fund advice at minimal or no cost to members; and further powers for the Australian Securities and Investments Commission (ASIC) to act against unscrupulous advisers. </p>
<p>The fundamental purpose of the proposals is to prevent consumers from suffering investment loss arising from inappropriate advice. The most devastating example is attributed to Storm, where about 4000 clients suffered losses estimated to be $3 billion. The advice was based around “double gearing” - by borrowing against the client’s house and then using margin lending to invest heavily in the sharemarket. The undoing of this strategy was the global financial crisis when share values fell heavily and the lenders called in loans – both against the shares and against the client’s house. Yet Storm had complied with procedural requirements of the law at the time. The model used by Storm could exist in the future for some clients, except for a modification to the remuneration method. </p>
<p>Where Storm’s advice model came unstuck was when they applied a similar strategy to a large number of clients, where it was argued that the advice was not appropriate in many sets of circumstances. The proposed “best interests” provision is a change from the current law as the adviser will be required to put the client’s interests first and above the adviser’s own interests. This is a laudable and ethical move, but can this be enforced? Under the best interest duty, an adviser is required to only give advice that is appropriate for the client. This will replace the current rule, which states that an adviser must provide a “reasonable basis for the advice”. In describing the best interest provision, the term “reasonable” is used a number of times, which indicates that subjectivity of what is reasonable will be the order of the day.</p>
<p>The current rules would have ruled out the Storm advice for a number of clients as the advice would have been deemed not to have been reasonable given the circumstances of each client. This matter is currently before the court under existing legislation. However, it may have been appropriate for some clients and under the new rules the same strategy could be appropriate for some particular clients as well. The Storm disaster is seen as the reason behind the changes to the laws governing investment advice. </p>
<p>Under the proposals, a financial adviser that charges fees for ongoing advice will be required to send a notice to the client requesting the client to agree to renewal of the service contract, otherwise the adviser must cease invoicing the client. Such a proposal adds costs to the operations of a financial planning practice, yet is designed to ensure that clients do not pay for any services that they do not receive. It is a worthy addition to the objective of consumer protection. </p>
<p>However, the FOFA reforms reinforce an inconsistency in the intent of the proposals. The proposal to allow intra-fund advice by institutions and superannuation funds reflects a conflict of interest, as the advice can hardly be seen as independent. When a member of a fund seeks advice from the fund in which they are a member, it is extremely unlikely that the member will be advised to invest elsewhere, other than in the same fund. With intra-fund advice encouraged by the proposals, this is likely to result in limited advice provided to consumers, which is not focused on the whole of the client’s needs but solely on their superannuation fund interest pertinent to that particular superannuation fund. This proposal is likely to push consumers more towards limited and conflict-ridden advice than that which existed before. </p>
<p>Furthermore, the advice offered by intra-fund means is generally paid for by the fund out of charges levied for the administration of the fund. Yet the banning of an alternate form of remuneration for advice in the form of commission is also seen as inconsistent. The allocation of payment for advice offered by superannuation funds is not declaredm yet the commission paid by retail investors is declared to the consumer. So, on the one hand, the proposals are aimed at seeking independence and objectivity; on the other, the institutions – banks and industry superannuation funds - control much of the product manufacture, distribution and the associated advice offered to consumers. </p>
<p>The enhancement of ASIC’s powers will capture all financial advisers (including those who are salaried employees), whereas at present, only those who are known as “authorised representatives” are known to ASIC. This will enable ASIC to ban employed advisers who can move from employer to employer under the current arrangements. </p>
<p>It might be said that the government has missed an opportunity to break the nexus between the manufacturers, distributors and advisers, but instead has provided a means of reinforcing the integration of product and advice and conflict of interest. It may be argued that this reinforcement of a conflict of interest scenario is a trade-off with the breaking of the up-front and trail commission element of the current situation, eliminating many independent advisers under the argument that a reduction of costs to retail consumers will benefit their superannuation balances in the long run. Overall, it is seen as a win for the institutions and the industry superannuation funds.</p><img src="https://counter.theconversation.com/content/5299/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren McKeown is a Certified Financial Planner who advises clients on investment and superannuation matters. The licensee is not associated with any bank or industry superannuation fund.</span></em></p>When financial planning firm Storm Financial collapsed with $3 billion in investment losses, many of its investors were left destitute. A parliamentary joint committee inquiry into the company’s demise…Warren McKeown, Teaching fellow , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.