By Richard Newell
Financial planners have a hard time gaining the trust of
their clients and in this environment of bearish stock markets,
they have an even harder time retaining that trust. There
is a school of thought that suggests that if advisers were
less reliant on commission that they would have a much easier
time justifying their existence. Clients have a natural suspicion
of financial advisers, because the relationship is so heavily
weighted towards the sell side. If advisers were to charge
a fee and refused payments from product suppliers, clients
would be more inclined to trust their adviser. Or would they?
The issue of how adviser firms derive their income has just
become the hot issue for planners in Australia where a report
by consumer magazine Choice, carried out in association with
the Government’s investment commission ASIC, has attacked
the commission culture. Out of 124 financial plans studied,
over half were deemed ‘borderline’ or ‘very
poor’, with advisers shown to have ignored client needs,
recommended higher fee investments, regardless of their suitability,
and to have padded client reports with generic information.
Commissions were judged to have been an influence on the
advice given and the report noted that the quality of advice
was significantly worse if the planner was paid only by commission.
The report concluded that many financial planners were more
like salespeople for the fund managers rather than impartial
guides. Not surprisingly, the report has caused a huge rumpus
in the Australia financial planning industry.
In New Zealand, broker commissions were at the heart of investment
adviser Gareth Morgan’s recent criticisms of the adviser
industry. Morgan’s view is that advisers should be
in the employ solely of the investor, with the only source
of their remuneration being the fees that investor pays for
their advice. His shoot-from-the-hip style may not win him
many friends in the adviser community, but he has nonetheless
highlighted the potential conflict of interest which undermines
the reputation of even top quality financial advisers.
The situation that Morgan describes has come about because
of the structure of the market. In New Zealand and even more
so in Australia, the adviser market is largely owned and
controlled by the institutions whose products they are selling.
Finding a truly independent adviser is not easy. Advisers
are not encouraged to think outside the box. Some argue that
it is hard to buck the trend of adviser firms subscribing
to wrap programs that offer them access to a not only investment
expertise but reporting and back office services. The product
providers are saying to the adviser ‘what can we do
as a company to get you to sell more of our product’?
In this environment, it is only natural to ask who the adviser
is working for. Where an adviser’s relationship with
the product provider is so well-entrenched, isn’t it
bound to result in the adviser recommending products that
are not the most suitable, but which fit within a familiar
financial plan and therefore require little or no variation
from a plain vanilla offering?
The cynic would suggest, and the Australian survey seems
to confirm, that commission-based advisers are not motivated
by a desire to do the best for the client, but to do the
best for themselves. There are many FPIA members who would
strongly disagree with this, of course, because they work
hard for their clients and the commission they earn is simply
a by-product of that.
FPIA chief executive Philip Matthews says: “The simple
answer is that it doesn’t matter how an adviser is
remunerated, as long as it is a fair amount for the work
and that the nature of the remuneration is fully disclosed
to the client. Whether it is a fee-only adviser who rebates
all commissions, a commission-based adviser or a combination
of the two, the client needs to know how they are being paid.”
New Zealand’s Consumer magazine published its most
recent survey of financial advisers in November last year.
The magazine found that five of the fifteen advisers surveyed
failed to provide requested disclosure documents, despite
the fact that they are legally obliged to do this. The current
Investment Advisers Act (1996) requires only that the adviser
disclose commissions if the client asks for the information.
New proposals being considered by the Government will make
it compulsory for disclosure to be made at the outset.
Head of the Securities Commission, Jane Diplock, believes
that the issue of fees and commissions is central to the
debate on adviser regulation. As well as backing the tightening
of disclosure rules for financial advisers, Diplock has also
persuaded the government to consider following the Australian
model for licensing of advisers. It is by no means certain
that this will happen, given the different scale of the New
Zealand market, but it is clear that the Commission wants
to raise the overall quality of advice and to empower consumers
with greater knowledge.
Phillip Matthews agrees with the disclosure proposals but
questions whether it is necessary to get tough with advisers: “Are
there so many bad advisers that we need to regulate the industry
further? And is licensing the solution to eradicate bad advice?
If licensing is the route the government wants to follow,
we want to ensure that it is practicable. What tends to happen
in these situations is that you get a regime that involves
so much compliance that it makes it very difficult for advisers
to operate.”
Blair Dyer, a financial adviser with the Takapuna-based Integrate
Financial Services, does not believe that to focus purely
on fees is really that important: “Simply declaring
your fees and commissions isn’t going to do it. I am
working for my clients’ financial well-being and so
there are quite a few occasions where the work I am doing
is not accounted for in my remuneration.”
So determining the quality of advice is a bit more fundamental
than just focusing on commission. Dyer believes there needs
to be more awareness by the public of what a financial adviser
does: “Unfortunately, they are not sophisticated enough
to appreciate that many of us are professionals. A financial
planner should be qualified to advise on
debt, risk and cash management and the good ones will actually
carry out these tasks. So people need to seek a financial
professional who will organise their affairs, and not just
invest their money. Investing is 10% of what I do for my
clients. The other 90% is what makes me a good financial
adviser.”
New Plymouth adviser Peter Hensley has moved more towards
fee-based advice. He says he had been operating on an arrangement
where his clients would pay a ‘small membership fee’ to
him and he would then be paid a trail from the investment
platform he was using. When he decided to move away from
this platform, he looked at a number of options and decided
on a fee as a percentage of assets under management. The
reason he chose the asset based method was because he believes
it’s simple to understand: “The client knows
what they’re in for and there is nothing hidden.”
Hensley agrees with the FPIA view that it doesn’t matter
how the adviser is remunerated, as long as the client is
informed: “You can’t link commissions and fees
to bad advice. There is a separate issue that the industry
has to deal with, and that is identifying the sub-standard
advisers.”
Another factor which favours the adviser/product provider
relationship more than the adviser/client is trail commission.
Trail commissions are an attractive way for an adviser to
secure a recurring income on the back of assets invested
with a particular firm. The problem for the client is that
the trail commission is an inducement for the adviser, encouraging
their ‘loyalty’ to leave the money invested in
a particular fund or wrap program, even when the product
may no longer be appropriate for the client.
So does fee-based advice result in the adviser working more
for the client? One adviser who believes in the fees-only
approach is Robert Oddy of International Financial Planners
in Auckland. Oddy moved to become a fees-only adviser in
1998. He says the move was driven by a realisation that receiving
commission didn’t allow him to be seen as truly independent.
He also realised that operating on a fees only basis allowed
him access to a wider variety of facilities and products
that would benefit his clients.
He admits he was roundly criticised for this move and that
fellow advisers were openly hostile, because they saw his
move as a threat to their continued receipt of commissions.
Oddy sees himself as a financial planner, with a holistic
approach to advice: “We are not in the business of
investment. In fact, because we are driven by the trusted
adviser approach, clients are free to go elsewhere to implement
their investments if they wish, and we will refer them on
to trust planning or property investment specialists if that
is their desire.”
He says it was difficult at first to get clients to understand
that paying a fee was a good thing, but it is getting easier.
Having taken such a firm stance and, for example, not doing
business with suppliers who refuse to not pay trail commission,
Oddy feels strongly that the industry needs to move more
in his direction: “It has been hi-jacked by the institutions
and geared towards investment. It angers me that institutions
are dictating the way people structure their financial affairs.”
Oddy is happy to declare that he is a director of a sharebroking
firm that does take commission on sales, but he sees no problem
with this, since the businesses are quite distinct from one
another. He would not go as far as to say that fees-only
advice is the only solution for advisers, but he says advisers
would have a much better reputation if they were seen to
be more independent: “Advisers need to make it clear
who they are acting for.”
The government has defined its objectives for the future
regulation of advisers. Now, the industry itself needs to
recognise the concerns of the public and act to create an
environment where trust can be established. And it seems
this can happen best in an environment where advisers are
seen to be acting independently of the product suppliers.
One conclusion we can probably make is that advisers have
a role to play in this education process. Everyone seems
to agree that transparency of charges is desirable. The Consumer
magazine survey highlighted the current situation where fees
can vary across a wide range, from several hundred dollars
to several thousand, and while some firms illustrate their
fees in straightforward terms, others bury them in the small
print. This highlights the need for a better of understanding
of what you are likely to get for your money and the need
for stronger disclosure rules.
The financial planning process can be complex and time-consuming.
Advisers have to be willing to invest that time at an early
stage, but in order to be fully reimbursed for this investment
of time, they should also attempt to educate their clients
and prospective clients by demonstrating in simple terms
the value that they are trying to add, over and above simply
investing clients’ money. Once the client understands
this, they will understand the nature of the commission paid
to the adviser and will be less likely to question the fact
that the adviser makes money even at times like these, when
the client is possibly not making any. By emphasising the
elements of financial planning that are not directly related
to investment, it will also be easier for advisers to develop
their businesses in an environment where fees from investment
based products are coming under pressure.
Published in ASSET Magazine, September 2003
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