Why should consumers deal with an advice-focused advisor rather than a salesperson?
An advice-focused advisor (someone who is just paid for giving advice) is going to go out of business, if he/she is not providing good advice. So if you have an advice-focused advisor who has been in business for a long time, this is at least one useful test to confirm that you might have a good advisor.
By contrast, an investment salesperson whose business is subsidised in some way by a product provider, does not need to provide good advice to stay in business. They just need to be good at selling.
Conflicts of interests that may taint financial planning advice.
Some sources of conflicts of interest.Is there a relationship between the advisor and a product provider? If so, this relationship may bias the advice towards the product provider when providing advice. A product provider receives a benefit when the advisor recommends a product providers product or platform (eg Wrap or Mastertrust) - and there are a whole range of ways that product providers seek to influence advice. Some of these include:
a) where advisor is employee of product provider subsidiary which has a very different name. ( Who owns who? ) Most consumers do not recognise that connection between these subsidiaries and the product provider as Roy Morgan Research found when surveying clients of financial planning subsidiaries of product providers. Below are some articles relating to this lack of awareness of ownership relationship between product provider and AFS Licencees. Corporations Law clearly states that all factors which may influence advice need to be disclosed to the client in a range of different ways - including in the advisers Statement of Advice (SoA). That consumers are not aware of this factor which might influence the advice suggests that either there has been a failure to disclose this important relationship or that the disclosure is very poor. It clearly suggests the possibility of misleading and deceptive conduct on the part of some. Corporations Law say that advice needs to be CLEAR, CONCISE and EFFECTIVE. If the client does not understand important relationship between the advisor and the product provider then clearly the disclosure is not effective - indicating that the Statements of Advice are defective - so why is ASIC not investigating this and taking action to remedy this?
b) where advisor is employee of corporate authorised representative of product provider. Again there may superficially seeem like not connection between product provider and the advisor.
c) where advisor is authorised representative of product provider but runs their own business. Again there may superficially seeem like not connection between product provider and the advisor.
a)Product providers have a shareholding in the advisors employer.
b)There can be many direct and indirect financial benefits that may influence the advisor:
i) Product sales commission can influence advice. eg if one product pays no commission, one pays 4% commission and another pays 10% commission, then some advisors may be influenced by the higher commissions.
ii) Volume over-rides. This is where the product provider pays the AFS licencee an extra amount for a certain level of product sales. Currently (18/1/09) this additional commission is often not diclosed even though there is a clear legal requirement for disclosure. At least one large AFS licencee earns an amount of volume over-ride equivalent to about 100% of their profit (and this AFS licencee puts in place financial incentives to its advisors to maximise the volume over-rides - so clearly, given the magnitude of these payments, volume over-rides are a factor which might influence the advice and therefore should be disclosed. ) In these situations, the advice may be tainted by influence of the product provider through the AFS licencee.
iii) third party payments. This is where the product provider pays the volume over-rides to a seemingly unconnected third party, which provides shares or dividends or other financial benefit to the AFS licencee.
iv) shelf-space fees. This is where an AFS Licencee will not recommend a product unless the product provider pays this fee. Clearly this can result in many good (and possibly more appropriate products) not being recommended.
v) education fees. This is a bit like shelf-space fees. The AFS licencee (AFSL) charges a fee to the the product provider, for the AFSL training their advisors about the product. Again same potential to influence as shelf-space fees.
vi) marketing support. This is where the product provider is paying the AFS licencee to promote their product. This operates like yet another level of commission.
Financial product sales need to be separated from advice.
The UK Financial Services Authority calls for regulatory change “to ensure consumers can distinguish between independent investment advice and financial product sales.”.
Extracts of key passages from UK Financial Services Authority calls for regulatory change “to ensure consumers can distinguish between independent investment advice and financial product sales.”.
Puzzle Financial Advice submission to Parliamentary Joint Committee Inquiry into Financial Services 6/4/2009 - reviewing UK FSA proposal, calling for separation of sales from advice.
Puzzle Financial Advice first Supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. 10/05/2009 - seeking to define the dividing line between Financial Product Sales people and Advisors.
Peter Bobbin (lawyer) argumes that the law already disallows sales people from calling themselves advisors. 27/4/2009
Puzzle Financial Advice second supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. 19/05/2009 - Refocusing Financial Services Reform away from FORM and towards SUBSTANCE. This supplementary submission also responds to Peter Bobbin's argument that the law already disallows sales people from calling themselves advisors.
Puzzle Financial Advice third supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. 26/06/2009 - Volume over-rides. Volume Bonus. Profit Share. Platform rebates. If commissions are to be banned – then volume over-rides need to be banned. Volume over-rides are commonly not disclosed – offenders need to be prosecuted.
Puzzle Financial Advice fourth supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. 22/06/2009 - Reducing costs of advice and funds management for consumers. The primary problem is that there is very little price competition. Solution force price competition to occur by: 1) Break down the existing distribution channels for unlisted managed funds 2) ensuring that financial planning AFSLs get paid the same regardless of whether they recommend an unlisted managed fund or a listed security (eg shares, LICs and Exchange Traded Funds) 3) creating a transaction system for unlisted managed funds and superannuation with the same simplicity and same low cost as buying a share through E-trade or CommSec. Note: The conflicts of interest of the financial planning AFSL are far more powerful source of tainted advice, than the conflicts of interests of individual financial planners.
Puzzle Financial Advice fifth supplementary submission to Parliamentary Joint Committee Inquiry into Financial Services. Commissions reward the wrong behaviour for consumers seeking advice & punish good behaviour. Therefore commissions should be banned.
Web link to MP3 audio of 19/6/09 ABC National interview of Bruce Baker. “Decommissioning financial planners.” 19th June 2009
This Rice Warner document is a relevant document relating to the case put by Puzzle Financial Advice’s fifth supplementary submission. Financial planners need to be held to account to the level of a fiduciary. This would include that the financial planner acts in the best interests of their clients.
Parliamentary Joint Committee on Corporations and Financial Services - Inquiry into Financial Products and Services in Australia
Submissions received by Parliamentary Inquiry into Financial Services
Interview on ABC National - National Interest
Web link to introduction of “Decommissioning financial planners.” 19th June 2009
Web link to MP3 audio of interview. “Decommissioning financial planners.” 19th June 2009
Letter to editor of Australian Financial Review.
What is the ideal world?
Ideally up there are no conflicts of interest that may taint the advice you receive from your advisor. Ideally therefore:
* your advisor should be highly experienced and ethical. These are the raw materials that are the starting point.
* your advisor receives no different compensation if he recommends one product over another eg advisor paid the same if he/she recommends a product that pays no commission or one that pays a commission. In fact, the advisor compensation should be the same if there is a recommendation for a product or not to ensure that the advisor does not feel compelled to sell you a product so that he gets paid.
* your advisor has no relationship of any form with any product provider.
* your advisor has the flexibility to recommend a wide selection of alternative investments or products.
* there is no direct or indirect payments (including financial benefits) from a product provider to the AFS licencee or advisor that you (the client) have not explicitly approved.
Relevant links discussing conflicts of interest.
Wikipedia general discussion on conflicts of interest.
Sir Anthony Mason's address to SPAA in 2007 - “clear disclosure of factors which might influence in itself, is not sufficient”
Sir Anthony Mason's address to SPAA in 2009 - "At the SPAA Conference in Sydney in 2007, I stressed the need for professionalism, that is, strict compliance with professional and ethical standards and the pursuit of professional ideals. To-day, I repeat that message with even greater emphasis, an emphasis which is dictated by the catastrophic economic events which unfolded so relentlessly in the last 18 months with devastating consequences for superannuation funds." ---- Sir Anthony Mason “criticises Australian laws for allowing a financial product seller to describe themselves as a financial adviser”.
Choice Magazine article on conflict of interest in financial planning.
Sydney Morning Herald article on Conflicts of Interest - ASIC / Choice Shadow Shop.
ASIC Commissioner discussion of the 2003 shadow shop.
All the ACA can say to the professional and ethical planners is “get your professional association into shape”. We need a new association - the Independent Financial Planners.
Australian Consumer Association believes that conflicts of interest should be eliminated or minimised.
John Hewison: “The quality and breadth of advice is being seriously compromised by a system of bribes, incentives, and conflicts of interest. Logic says that by definition, commission is a sales-oriented payment and must be seen as being biased, whether real or perceived.The notion that the commission system gives access to financial advice to those who can’t afford to pay is just absurd.”
BFPPG discussing different characteristics of advice from small dealers vs the big end of town.
Brett Walker's Independent Advice Web site.
Freedom of conflicts does not guarantee good advice but is a prerequisite to best advice.
"We must simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."