CHOICE applauds the government’s long-awaited move today to put an end to longstanding conflicts of interest in the financial advice industry. The proposed reforms target practices that CHOICE has campaigned strenuously against and that have cost consumers billions of dollars – often without their knowing it.
The industry overhaul put forward today by Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten takes aim at what has amounted to an ongoing rort. Specifically, the Government’s most recent Future of Financial Advice recommendations would require financial advisers to ask clients to ‘opt-in’ every two years if they wish to continue to receive ongoing advice; would ban all commissions on risk insurance inside superannuation; and would impose a broad ban on volume-based payments.
CHOICE has spent more than 20 years investigating and warning about conflicts of interest in the financial advice industry. New laws to be introduced in July 2012 will help reduce biased advice, but the government's latest proposals will go a long way toward stamping it out altogether.
The perils of bad advice
Recent research by Roy Morgan found that in 2009, the six largest financial planning groups placed an average 73% of their clients’ superannuation money into products offered by by their institutional parent, with AMP the worst offender. It confirmed longheld suspicions that conflict of interest is rife.
The status quo
As it stands, advisors routinely collect fees without accountability or oversight and without any discernable benefit for the client. CHOICE has calculated that in 2009 about $1.3 billion in commissions on superannuation alone flowed from consumers to advisers where no service was provided to the consumer.
“The requirement to gain consumers explicit consent for ongoing fees every two years will significantly address this problem and is particularly welcome,” says CHOICE Chair, Jenny Mack.
Volume payments – which encourage financial advisors to rack up sales regardless of a client’s best interest – are perhaps the most egregious example of how the financial advice industry has put profits ahead of clients’ interests. It’s a practice the industry has clung to tenaciously.
“Volume payments are particularly odious because they are very large, very hidden and impossible to disclose - they were a great big secret payment that were conflicting advice and eroding consumers’ savings,” Ms Mack says.
The Government also proposes to ban all trailing and up-front commissions and similar payments from July 2013 but to allow existing commission arrangements to remain, a concession to industry that Ms Mack called “very generous”. CHOICE believes commission based remuneration always makes the quality of advice questionable.
CHOICE urges industry not to replace commissions with asset based fees, which also puts the quality of advice into question and are not a valid foundation for fair and disinterested advice.
Mr Shorten said draft legislation for the new proposals will be released later this year. The next and most crucial step will be for Parliament to resist pushback from the powerful financial advice industry, prioritise its commitment to consumer rights, and resoundingly approve the reforms.
“We expect the industry will continue to resist these reforms and it is now up to Parliament to follow through and ensure the whole package becomes law,” Ms Mack says.
The ugliest consequences of today's corrupted industry structure have been seen in the collapses and investor losses from such companies as Storm Financial, Westpoint, Fincorp, Timbercorp, Great Southern, Australian Capital Reserve and others. Some victims lost their life savings after following the recommendations of fully licensed advisers.
In this report we:
• Give you tips on how to recognise biased financial advice
• Outline the different types of advisers and what you can expect to pay
• Explain the new regulations and what they will and won't solve