Watching the events of the Royal Commission unfold over the past few weeks has been very troubling and frankly saddening.
Having joined the industry in 2000 I have witnessed prolific change in the way that financial advice is delivered in this country and have been a strong supporter of most of it.
The outcomes of change have been both needed and positive for consumers of financial advice. Until a few weeks ago, I thought we were on the right track, but what this enquiry has clearly exposed is that change has not gone far enough.
To try and summarise the events of the Royal Commission up until now, into just a few points, simply does not do it justice.
But for the purpose of this communication, I’ve aimed to highlight some of the key issues that relate specifically to Financial Planning.
- Institutions giving “false and misleading statements” to ASIC. A criminal offence.
- Charging fees, but delivering no advice.
- Charging fees to deceased people.
- Advice that led to exit fees of 25% of an investment balance.
- Adviser breaches that were not disclosed or not dealt with in a timely manner.
The list goes on…
To provide some context of how the industry finds itself in this position, it is important to note that much of the regulation to date has been focused at the adviser level only.
On July 1st 2013 a raft of new legislation was introduced called ‘The Future of Financial Advice’ reform (FOFA). This was a Labour driven initiative that most significantly resulted in the abolition of investment commission as well as a legislated imperative that advisers must put their client interest before their own, known as the ‘Best Interest Duty’.
It led to the main industry body, the Financial Planning Association (FPA) self-imposing minimum education standards for its members and now legislative change is imminent including requirement for degree qualifications as well as minimum time frame for working in the industry, before being able to provide financial advice without supervision.
FOFA was a major change and very positive for financial advice in Australia, however fast forward to the here and now and the Royal Commission is exposing more gaps that stem from vested interest at the institutional level.
What the enquiry has been able to do is reach the big financial institutions executives to answer the question of ‘why’ the issues uncovered have occurred. This has laid bare the structural issues that still exist, that can lead the institution or adviser to put their own interests before the client’s.
Changing Business Models
In my opinion, at the heart of the issue is the fact that many Australian institutions operate a ‘vertically integrated’ business. What this means is that the financial institution owns and controls their own interest through:
- Distribution (the adviser)
- The platform (like the super fund structure for example)
- Funds management (the end investment that investors put their savings into)
As a result of this enquiry, it is hard to imagine how this model will survive now.
New measures that have already been introduced or put forward by the government include:
- Removal of all exit fees on superannuation. This will solve the issue of money that is currently trapped with institutions in old legacy and often poor performing investments, to allow them to be rolled over at will.
- Opt-in insurance for super members under 25 years of age. Part of the government’s 2018 budget and is intended to avoid young members who may not see or have the need for insurance in their super fund
- Lost super powers will be broadened to try and match old funds to the primary fund being used, to help people have a better handle on their retirement funds and a more focused investment strategy also.
These are all excellent outcomes that will make a meaningful difference to everyday Australian’s. It will also be interesting to see how it affects some of the major institutions, currently reliant on much of the legacy income.
With all of the above said, the ramifications from this enquiry are going to impact everyone in financial advice and so for a financial planning practice like ours, we need to reflect and adapt to the new compliance regime that will undoubtedly be implemented.
Fortunately Yield FP is already well ahead of the curve and is committed to putting our clients first. Ingrained in our culture is a pursuit of always working in our clients best interests.
A prime example of this is that we could see that investment commission was a major issue well in advance of the introduction of FOFA and since our inception in 2006 we either refused to take or rebated all investment commission back to our clients, until it became mandatory in 2013.
This made us one of the first practices in Australia to do so.
Recognising how intangible advice can be, we have made it a priority to break down our service proposition into bite size chunks that our clients can then choose from, in line with the advice they see value in.
This helps keep the advice relationship transparent and clear from the outset and we then have strong measures to keep us accountable to our clients, including an annual statement of the service we promised and the service we delivered.
I want to express a deep and heart felt thank you to all our clients who have gone out of their way to tell us they feel very safe and secure in the advice we provide. It honestly does mean a lot and we’ve worked hard to try and ensure you feel this way.
There is understandably a great deal of uncertainty regarding the financial services industry at present.
What questions do you have about the Royal Commission and what it means for your retirement?
Email me your question today and I'll give you an honest answer.