Financial planners win concessions in Government reform package but fear fees will rise

There’s been a mixed response to the Federal Government’s financial planning package, with planners worried the changes could drive up costs for consumers, accountants supportive of bans on commissions and consumer groups worried the Government’s reforms have been watered down.

This morning, Assistant Treasurer and Financial Services Minister Bill Shorten unveiled further details of the Government’s financial planning reforms, which include requiring financial advisers to act in the best interests of their clients and to ask their clients to opt-in for advice every two years rather than let the service click over year after year.

The Government will also seek to ban volume-based payments to planners from financial institutions from July next year.

Commission payments to planners on life insurance policies provided through super funds and soft-dollar gifts of $300 or more are also banned under the package.

Shorten says the changes are designed to boost consumer confidence in the sector, following the high-profile collapse of financial service providers Storm Financial, Trio and Westpoint, as well as provide certainty to the financial services sector.

“The vast majority of financial advisers are dedicated professionals who give good advice to the best of their ability,” Shorten said in a statement.

“But that doesn’t change the fact that many consumers lack trust in the profession and there is a perception that advice is under-regulated and open to abuse.”

But while the Government is portraying the changes as a win for consumers, many commentators have noted the regulations have been watered down, with the Government originally planning for advisers to ask clients to opt-in every year, rather than every second year.

Alex Dunnin, of financial services information company Rainmaker Group, told SmartCompany the real keys to the package are the fiduciary duty to clients, opt-ins and banning volume payments.

“The result for the wealth industry is obviously that it will continue and indeed will now fast track moves to full fee-for-service,” Dunnin says.

“The Shorten package is balanced because it implements the commission ban that almost all adviser groups have endorsed.”

“But an even bigger issue is that while sectors of the advice can fight over some of the details, the risk is this might be a fight not too many people outside the industry actually care too much about.”

“Indeed, the rise and rise of the self-directed internet-powered investor means that there are very huge consumer forces already in play and that these reforms are just catching up with those trends.”

The joint accounting bodies – CPA Australia, Institute of Chartered Accountants in Australia and the National Institute of Accountants – have described the process as a “significant and positive next step forward in the provision and delivery of high-quality financial advisory services.”

“The removal of conflicted remuneration structures including commissions and volume-based payments is a vital step towards eradicating conflicts of interest within the industry, and will strengthen consumers’ confidence in the financial advice they receive,” the bodies say.

CPA Australia head Paul Drum says the package is “probably the biggest shake-up of the financial services sector for the past 30 years.”

Stressing there’s a long way to go, Drum argues the package will ultimately deliver more affordable advice, rather than more expensive, but the industry will need to adapt.

But the Financial Services Council – which represents retail and wholesale funds management businesses, super funds, life insurance and financial advisory networks – says while the package is better than it expected, it could nonetheless drive up costs.

“While financial advice will be of a higher quality, the reforms will force up the overall cost of advice to consumers,” FSC chief John Brogden said in a statement.

The FSC also questions the merit of allowing commissions on directly advised life insurance outside super, while banning them on the product inside super.

Tim Mackay, director of Sydney-based Quantum Financial, is also disappointed the ban on life insurance commissions is not uniform.

“This ban recognises that commissions can impact on the quality of advice provided to consumers and can drive premium prices up, exacerbating the underinsurance problem,” Mackay says.

“We believe consumers who choose to hold their life insurance policies outside of super deserve the same level of protection against the broken and conflicted commission model.”

Fellow Quantum director Claire Mackay says the new two-year opt-in requirement will “ensure consumers are more actively engaged in their finances” and “help drive the professional shift from transaction-based financial planning to relationship financial planning.”

“Advisers who are actively engaged with their clients and who already show they are providing value adding advice will not find this reform changes their business processes in any material way,” she adds.

Mackay also cast doubt on the reach of the volume commissions ban, saying the devil will be in the detail.

“Our concern is that the exclusions will be big enough for the big dealer groups and platforms to drive a truck through and so they will be able to carry on paying and receiving the conflicted volume kickbacks in much the same way as they do now,” Mackay says.

The Association of Financial Advisers, a professional financial adviser organisation, has slammed the package, saying consumers have a bigger problem with paying fees upfront than trailing commissions and are wary of frenetic tinkering of the system.

AFA chief Richard Klipin says the package could result in the percentage of Australians seeking advice fall from the current level of 20%.

Klipin accuses the Government of favouring industry over consumers. “While it might be a victory for large superannuation funds and the superannuation lobby cheer squad, it is a dark day indeed for ordinary Australians and their ability to access affordable advice,” he says in a statement.

Nonetheless, Klipin describes the two-year opt-in period as a “minor victory for commonsense.”