Financial advice: Is it in your interest?

We want an end to incentives that lead financial advisers to push products on their clients.
 
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  • Updated:1 Jun 2009
 

01 .Introduction

Three people looking at documents

The issue

The recent collapse of Storm Financial has plunged thousands of households into unexpected debt and desperation, with losses expected to exceed $100 million. In 2006, the Westpoint Group collapse lost investors in excess of $300 million.

Common to both collapses were remuneration models that created moral hazards for advisers and led to people being pushed into risky products that weren't necessarily right for them.

We don't think financial advisers should be pushing products simply to serve their own interests and we're calling on the government to ban commission, asset based and other incentive remunerations.

There are more than 16,000 financial advisers across the country, and many are doing the right thing. But seeking personal financial advice shouldn't mean playing Russian roulette with your life savings.

 

Video: Fair financial fees

Financial advisers are often influenced by commissions. It's time for change.

 

Send us your story

Read our case study - Is my adviser working for me or for themselves?

Read our submission

Our submission to the parliamentary inquiry

 

 
 

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What we want

 CHOICE has strong views about the changes needed for the financial advice industry.

Topping our list of demands is an end to the structural conflicts caused by commission, asset-based and other incentive payments.

  • These payment structures bias advice towards product based advice and strategies that involve gearing.
  • They can also affect the quality of advice. For example, an Australian Securities & Investments Commission investigation in 2006 revealed consumers who received commission-based advice were six times more likely to receive bad advice.

For consumers to have access to reliable, high-quality financial advice, a broad reform agenda is needed. First, commissions and other conflicted remunerations must go.

What we're doing

A major parliamentary inquiry is now under way to consider a range of such problems in the financial advice industry. CHOICE is calling on the committee to ban commission-based remuneration and other conflicted remuneration to advisers.

What you can do

CHOICE has made a submission to the Financial Planning Association's consultation on planner remuneration calling for greater reforms in the financial planning industry.

Pushing for these sorts of changes means CHOICE will be going head-to-head with major corporate interests. We need you to take action to support our campaign. 

  • Send us your story  Have you or a friend or family member been burned by a bad commission? Has bad advice left you hurting? We want to include as many stories as possible in our submission to the parliamentary inquiry. 
  • Sign our online petition  We're calling on Prime Minister Kevin Rudd to ban commission-based remuneration in the advice industry. 

Since launching our campaign, we have recieved plenty of emails regarding your experiences with financial planners. Here is what you're saying. Email us your experience at campaigns@choice.com.au

We wanted some advice on how to invest our money and save for a deposit on a house. [The adviser] made a big show of telling us that all his customers were satisfied, and that he had a money back guarantee - he did not disclose his fees up front, nor did he even hint that he might get a commission from selling financial services products. Instead, he was very keen for us to move our superannuation into new funds that he nominated, and to invest in a housing development he had an interest in. He also wanted us both to attend various expensive seminars which we assumed he also got commission on. After we realised that every piece of advice he gave us led to a commission for him we opted to use his 'money-back guarantee' and to leave his practice, very unsatisfied, but luckily no poorer. We later found that he got a big commission from persuading people to shift their super to his nominated funds, and that if he had persuaded us to buy insurance, he would get not just one but several annual payments as we kept up the insurance premiums. We felt lucky that we had woken up before we had made many financial decisions, all to his advantage, not necessarily to ours.
Name withheld


[The financial planner] discussed with me my friends’ broad financial situation and I explained they owned four homes. He responded that he would need assurance they would be prepared to sell one or more of these homes before he was prepared to have discussions with them. (i.e. his motive was to move them out of direct real estate, which is not commissionable to him, into managed funds which are commissionable). I replied that any decision to de-weight in direct property should be the result of a financial analysis, not a precondition of attending an appointment. On hearing this he detected that I understood how the industry worked and declined to see the client. Clearly this planner wasn’t interested in dealing with anyone who was not going to invest in managed funds, the products that paid him commission.
Name withheld


As a subscriber and a Certified Financial Planner who is a fee based business, I find this article very one sided and feel that you are tarring us with the same brush as the some bad operators out there. Some of us have a free initial consultation, and a fee for service advice charge with no commissions. Please don't ruin it for all of us!
Leigh Hodgetts - QLD


I agree with what Choice is doing in its campaign to have the financial advice industry reformed. Commissions and other incentives create a conflict of interest as does the employment of advisers by product issuers. Even employment by merchant banks, stockbrokers and others who don't issue products can possibly lead to unacceptable bias because of the general corporate culture within which the adviser is working thus making it more difficult to see the point of view of the individual small investor.I think financial advisers should be required to be independent consultants or work in group practices like other professionals such as architects and doctors. Such professionals have to be well trained to start and have continuing professional education requirements throughout their careers. They also carry professional indemnity insurance to cover themselves against their mistakes. Advisers need to be trained to recognise risky investments such as Westpoint Group and not recommend them
Piers Bannatyne - NSW


We have a company which has mortgage advisers and financial planners. I know that all advisers in the office use comparison software to help choose the best products based on the clients Statement of Advice. Considering the extensive amount of time required to produce a Statement of Advice as well as the employment of staff to manage this process brought about by regulation of the industry. How is it you expect clients to pay the sort of fees that will be required for Financial Advisers to be compliant with industry regulation upfront. They are already required to complete a level of education every year as well as maintain their professional body membership. Financial Planners are already required to be part of AFSL holders or dealer groups. These groups are the ones that do the research and put financial products on their approved list. They are the ones that allow or disallow access to products such as Westpoint. Why dont ALL companies disclose their profit margins at point of sale.
Dean - NSW


I don't believe fees would necessarily prevent me from investing in risky ventures. I don't see 100% of solicitors being trustworthy or any other professional for that matter. Fees / commissions are only part of the story. Will Choice also address all sides of the argument?
Anonymous


Doctors can charge $90 for 15mins after you wait for an hour. Not a great benchmark. Accountants & Solicitors charging by the hour. This rewards you for taking longer. Are time sheets always accurate? Should they charge only based on the time recorded or can they write it up. How do you feel about that? Do you really understand this or are you taking us down a road that will be an issue in years to come when you do understand. Plenty of Accountants and Solicitors recommended Great Southern % Timbercorp. How do you feel about that? Again far from an ideal example. Financial Planners have plenty of bad apples as with all industries. Storm was a disgrace. Why didn't ASIC and yourselves act on this one earlier?
Anonymous


The question of 'perverse remuneration' does not apply only to financial advisors. It applies to every person or organisation that carries out work, arrives at a conclusion, makes the conclusion known to the second party and/or the public but is paid for its services by a third party. Examples are auditors (paid by the client but results used by general public), valuers (again paid by client but results used by person other than the payer), stock and fund appraisers and writers (think of the 5 star ratings awarded to sub-prime loans. Service paid for by one party but used by other parties), magazines such as
Patrick Kissane - NT


I can`t believe you people. Does anyone ask you to disclose how much you earn each week.? I`ve been working in this industry since 1994 and have always held my clients interests first.We have been working under a Full Disclosure regime since 2001 and prior to that under the Life Insurance code of Practise. We are more regulated than perhaps anyother industry in Australia. I fear for the welfare of the average Mum & Dads outthere(most of my clients) as to how they could pay from their own pockets for our basic services. Who is going to protect them from Life`s unfortunate incidents.? Where was Asic & Choice when all those Companies went to the wall.? What you are proposing could possibly have serious financial repercussions on thousand`s of honest,ethical Professional Advisers who over many years have only ever looked after the best interests of their clients. Wake up we are not the problem.!!
Chris Whatley(Dip F.S.) - NSW


Why not ask all of those who invested in Storm, Basis Capital, Timbercorp, Great Southern, Bridgecorp, what value they would have paid not to? The survey is one sided.
Anonymous


Who do you go to? This whole business stinks - is there such a thing as unbiased? Having seen my super go south like every body else and being charged $20k a yr for the privelige, paying them to loose my money. I can do that myself free of charge! All they could do was send me letters advising me to hang in there till the bitter end. So i contacted a well known top ind fund with independant adviser having parted with $1800 adv fee, result recommending 80% growth, 20 %conserv. As I'm 65 I decided that was not for me, so i invested in cash in a DIY super fund costing me only $1500 accounting fees lot better than $20k. Still with all the tax benefits thats where it can stay till i can see some sanity in this crises.(ps trying to roll over my super is another story - delaying tactics are endless costing me dearly like sending you unsigned cheques etc.They are still holding on to a considerable sum of my money which i have seen very little of! And i only dealt with the top superfunds
a van bockel - NSW


In Oz, many so-called qualified financial advisors are little more qualified that a real estate agent. The amount of so-called education that a financial planner currently has to have in Oz is nothing like the equivalent of a chartered accountant, or a solicitor, let alone a medical doctor. These days every Tom, Dick and Harry in Oz wants to be able to claim that they belong to a 'profession' and that they are a 'professional'. It's not far off the point where waiting on tables or serving behind a bar will be seen as a profession! To claim that one’s calling is a profession one should belong to a professional society which requires its members to have at least an undergraduate degree plus extensive postgraduate training. At the best US universities, students have to complete a three year undergraduate liberal arts degree with a broad focus, before going on to do a masters in law, medicine, business or finance. Australia ought to follow suit.
Richard Mahoney - QLD


I am not a financial planner and find this to be one-sided and narrow minded. If a client wishes to pay for their advice by the way of commission, then they are entitled to make this choice. Some clients cannot afford to pay upfront for advice fees. Financial planning should be assessible to all consumers. Provided the client makes an informed decision and agrees with the price of the advice, how that advice gets paid should not make a difference.
Anonymous


Look at this link for current ratings. After Financial Planner's fees independent non government organization helpful!Industry Funds love of unlisted assets to smooth out investor returns is backfiring1 Australian Equitieshttp://www.selectingsuper.com.au/misc/Jun09_SSPT_AustralianEquities.pdf2 International Equitieshttp://www.selectingsuper.com.au/misc/Jun09_SSPT_Int-Equities.pdf3 Default Optionhttp://www.selectingsuper.com.au/misc/Jun09_SSPT_Default.pdfDr Shane Oliver re super and unlisted assetshttp://www.abc.net.au/7.30/content/2009/s2634843.htm
Craig Chapman - NSW


My wife and I went to see a financial advisor yesterday. We have been very dissatisfied with the support from our usual advisor - hasn't been in touch with us for 12 months, not returned phone calls, but still collecting fees. Even changed office location without letting us know.When we rang recently we found our advisor was on leave so made an appointment with another advisor in the same office. Satisfied with the review and what to do for now, but I was dismayed that he was insistent that the govt deposit security commitment only applied to the 4 big banks. I was sure that was wrong but he was sure he was right. As it wasn't pertinent to what we were discussing I let it go. If a professional in the industry can't even get something as basic as that right I can't help wondering about other advice
Ross Copeland - WA

In February the Parliamentary Joint Committee on Corporations and Financial Services opened an inquiry on the issues associated with recent financial product and services provider collapses, such as Storm Financial, Opes Prime and other similar collapses.

The inquiry will focus on:

  1. The role of financial advisers
  2. Regulation for these products and services
  3. Commissions relating to product sales and advice, including the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers
  4. The role played by marketing and advertising campaigns
  5. The adequacy of licensing arrangements for those who sold the products and services
  6. The appropriateness of information and advice provided to consumers considering investing in those products and services, and how the interests of consumers can best be served
  7. Consumer education and understanding of these financial products and services
  8. The adequacy of professional indemnity insurance arrangements for those who sold the products and services, and the impact on consumers; and
  9. The need for any legislative or regulatory change

CHOICE wrote a submission to the inquiry, discussing the role of financial advisers, the role played by commissions arrangements, consumer education and financial literacy, the adequacy of compensation arrangements, and the need for legislative change. You can read our submission here.

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