Demystifying financial advice

The proposed new “best interest duty” for financial advisers is long overdue.
 
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02.Our take on the reforms

CHOICE believes the government’s “best interest” proposals are a step in the right direction but don’t go far enough.

What the government proposes

Best Interest Duty, Version 1: “To act in the best interests of the client and, if there is a conflict between the client’s interest and the interest of the person providing personal advice or the providing entity, to give priority to the client’s interest.”

Version 2: “To have proper regard to, and act in accordance with, the interests of the client and place the interests of the client above their own interests and the interests of the providing entity.”

The two versions may sound remarkably similar, but Financial Services Council (FSC) chief John Brogden has explained that version one is “outcomes-based” while version two is “process-based”. He argues that in the first version, determining the best interests of the client is subjective, while the second version offers protection for both the client and the adviser.

The FSC and FPA prefer version two, which doesn’t specifically mention conflict of interest.

What CHOICE wants

  • Consumers should not be left to trust the adviser’s judgment on whether a conflict of interest exists. Advisers should have a specific duty to demonstrate whether a conflict does or doesn’t exist and identify how they will put the client’s interests first when it does.
  • Advisors should have an overarching duty to ensure the entire scope of the advice – not just individual recommendations – is in the client’s best interest.
  • The providing entity (that is, the product-maker or fund manager that holds the financial services licence) should have a separate duty to ensure that personal advice provided by authorised representatives is in the client’s best interests and that those interests come before those of the provider.

More wins for consumers

Ending conflicts of interests in the form of commissions and other secret payment s is critical to making the reforms work, but CHOICE has also pushed for other important changes, set to take effect from July 2012.

  • An end to commissions and volume payments from product-makers to advisers.
  • A ban on commissions from advice about life insurance sold inside superannuation accounts (but unfortunately not for life
    insurance in general) from July 2013.
  • A partial ban on asset fees to specifically target the business model behind the Storm Financial debacle. Asset fees bias advice towards an asset from which a fee can be deducted.
    A recent study found consumers who pay asset-based fees pay 17 times more over the long term than those who pay hourly rates or lump sums.
  • Opt-in: Advisors who charge ongoing fees will need to obtain a client’s permission every two years to continue the advice relationship. This will put an end to passive income received by advisors and cases in which they draw fees off accounts with little or no transparency for the client. Opting in means only those who want and approve ongoing advice will pay for it.
  • An advisory panel has been established to look into new professional and ethics standards and education and training rules for advisers.
  • Last resort compensation scheme: It’s been proposed that fund managers be required to retain enough accessible capital to compensate consumers if their money is lost through poor management or conflicted financial advice.
 

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