Demystifying financial advice

The proposed new “best interest duty” for financial advisers is long overdue.
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01 .Self-serving adviser speak


Financial advisers like using terms such as “white label payments”, “cross-subsidisation”, “vertical integration” and “volume payments”. You likely won’t know what they’re talking about unless you’re an adviser yourself. It’s even harder to know whether the financial products they recommend are good for you or good for them.

CHOICE runs through just some of the many examples where financial advisers have not had their clients' interests at heart, and why the reforms are so desperately needed.

For more information on Financial advice, see Investing.


What advisers are talking about when they use these terms is how they get paid. In the case of volume payments, advisers are encouraged to sell as many financial products to as many people as possible, regardless of whether the product is suitable for the client. They get a cut from the originator of the product or investment scheme (usually an insurance company, bank or fund manager) based on the total volume of sales.

It’s not unlike how salespeople receive commissions to sell cars, except what’s on offer can have a permanent impact on your financial wellbeing. CHOICE chair Jenni Mack, who also chairs the Australian Securities and Investments Commission’s (ASIC) Consumer Advisory Panel, calls volume payments “the most odious of commissions because they are very large, very secret and almost impossible to disclose”.

Conflicted financial advice has damaged consumers in many ways and the victims have rarely recouped more than cents on the dollar, if anything at all.

Cases in point

In recent corporate collapses such as Westpoint Corporation, some advisers persuaded consumers to lend money to property developers without warning that the investments were highly speculative and the developers were, in effect, gambling with their money. Others talked clients into complex and high-risk structured investments that offered no way out when the global downturn began to spread. Worst of all, some investors were advised to take out margin loans, sell shares or investment properties and even borrow against their homes. As markets were pushed downward and the margin calls came in, many lost their homes along with the initial investments.

Thankfully, the way advisers make their money is set to change – and it can’t come soon enough.

The status quo

The Parliamentary Joint Committee on Corporations and Financial Services appointed late last year interprets the so-called “suitability rule” in The Corporations Act as saying an adviser “must know their client, know the product and/or strategy they are recommending, and ensure that the product and/or strategy is appropriate to the clients’ particular needs”. Yet according to the committee, ASIC, which enforces the act, admits the legislation “does not include ASIC vetting licensees’ business models or preventing the availability of complex or high risk financial products to unsophisticated investors”. ASIC also acknowledges the regulation of financial services providers “has been designed to maximise market efficiency, with minimal regulatory intervention to protect investors”.

Currently, ASIC does not address the risk to consumers arising from the financial relationships between advisers and the companies whose products they sell – a relationship that potentially biases the advice given by more than 80% of advisers. It’s no surprise, then, that a key goal of the FOFA reforms is for advisers to put a client’s interests first in cases where the adviser might benefit from recommending a financial product that is not in the best interest of the client.

The industry's takeFollowing_the_money_trail_bubles

Mark Rantall, CEO of the Financial Planning Association (FPA), maintains most advisers are already acting in the clients’ best interest.
“The integrated model [in which advisers recommend products from the companies that pay them] doesn’t mean you’re getting bad advice,” he told CHOICE. “If you’re seeing an adviser who’s working for or representing a certain financial institution, you know
they’re going to recommend its products. But the adviser is legally bound to determine whether the product is right for you and send
you elsewhere if it isn’t.”

However, shadow shopping by both CHOICE and ASIC has found that advice received through the integrated model is unlikely to be in the best interest of the client. Rantall also points out that advisers are often unfairly blamed for the failure of products they did not create. “Large-scale collapses may not have been in control of the adviser. The licensee [product creator] has to be held to the same standards. We need joint accountability.”


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