The Federal Government has announced it will allow incentive payments on “general” financial advice but, after a financial planning scandal at a big Australian bank and as a new advisory giant emerges, one expert warns bonus schemes for bank-employed planners threaten the ability to obtain independent advice.
To avoid the sort of aggressive selling that landed the Commonwealth Bank of Australia and many of its customers in trouble, banks and other financial institutions should not be allowed to employ planners who recommend their products, says Professor Peter Wells, head of Accounting at the University of Technology, Sydney.
“There is a fundamental lack of independence [in the financial planning industry],” says Professor Wells.
“Financial planners need to be independent. They shouldn’t be allowed to be employees of financial institutions, selling that institution’s own products.”
Announcing the changes, Finance Minister Mathias Cormann said a ban on commissions that distort financial advice would be retained but regulations would be changed to allow “incentive payments which do not conflict advice”.
The changes “are consistent with our long stated policy intent not to bring back commissions for financial advisers”, the minister said. But commissions are only half the problem, and incentive payments can be just as problematic, according to Prof Wells.
Earlier this year, an ABC Four Corners program alleged that an “aggressive sales-driven culture” at Commonwealth Bank had led to the financial ruin of many of its customers, who had been sold high-risk financial products. The bank blamed “unacceptable” behaviour by rogue advisers, adding that they were no longer employed by the bank.
The previous federal Labor government tried to address the issue of financial planners’ independence by limiting commissions, says Professor Wells. But the reforms failed because, having lost their ability to influence planners via commissions, banks instituted a deliberate strategy of buying financial advice firms and employing planners.
“As a result, planners now get paid bonuses rather than commissions,” Professor Wells says.
About 80 per cent of Australia’s financial planners come under the umbrella of the AMP or a big bank. Commonwealth Bank and Westpac made the most through financial planning subsidiaries, according to 2013 financial reports, collecting $914 million and $737 million respectively, out of a total $2.6 billion sold last year through banks’ financial planning arms.
In August, another advisory giant will be formed by the $670 million acquisition by financial firm IOOF of Shadforth Financial Group, one of Australia’s largest independent planning groups.
With $46 billion in funds under advice, the entity will be the third-largest financial planning group in Australia, behind Commonwealth Bank and AMP.
Professor Wells says the Coalition government’s plan to wind back the Future of Financial Advice reforms is really about reducing compliance costs for banks and planners.
“The changes just make a poor system cheaper,” he says. “Missing in all the reforms – which are focused on symptoms, not causes – is any consideration of the principles that underpin quality professional service: independence and expertise.”
In the absence of such major reform, what can consumers do?
Professor Wells says they should be asking one simple question: is my financial adviser putting me into a low-fee fund or a high-fee fund? “Costs are the one thing you can control in investment.”