On thefront page ofMoney Management’sDecember 12 edition (“ACA slams industry as ‘structurally corrupt’”), Charles Littrell from theAustralian Prudential Regulation Authority(APRA) is quoted as saying “the investment industry is based on bribery” while Louise Sylvan from the Australian Consumers’ Association (ACA) says it is “characterised by structural corruption”.
But much of the criticism launched at financial planners seems unfair.
Before joining the financial services industry I spent the first 18 years of my adult life working for multinational corporations in non-financial markets. All the manufacturers I worked for paid intermediaries for distributing their products and all of them took distributors and franchisees to exotic places on ‘study tours’. And that’s my point.
We can defend commissions, but the fact is that we seem to want it both ways — we want to be seen as professionals akin to lawyers, solicitors and accountants, but we wish to retain the perks we have become used to.
The easiest option is to defend our position, hope the markets improve and the problem goes away.
But perhaps it’s time we took some active steps to improve the way our industry operates.
This means two things:
• improving the public’s perceptions of financial planners; and
• eradicating the embarrassing elements of our business practices.
We do a lousy job of explaining the process of financial planning — the data collection, the meetings, the analysis, the strategy, the implementation.
Do those who criticise financial planners know that this process can take around 12 hours work extending over several weeks? Do they know how much work is involved to meet educational and professional standards and to become PS 146 compliant?
How much would these critics be prepared to pay for all this skill? Twelve hours of an adviser’s time at $200 per hour is $2,400. I have heard Ms Sylvan mention figures less than half that amount. Could she inform us which steps could be eliminated?
It is possible that a prospect does not have much money to invest. Therefore, is it not reasonable to skip the financial plan, thus saving around four or five hours labour?
Possibly, but the terms of my proper authority dictate that I write a comprehensive plan in all cases where advice is given. My plan is only to be limited to the extent my client decides to limit their objectives.
So how am I going to charge for my work?
Clearly, there are two options — I rebate any upfront fees and send out an invoice, or I get remunerated by the fund manager or platform provider (via the dealer).
In my experience if the prospect has upwards of $250,000 of investable assets, they are seldom shocked when I explain the cost/value equation at the outset. Consequently, no problems with an invoice.
However, if the prospect has $50,000 or less, and nothing else to speak of, it’s a completely different story.
The chances of them forking out over $1,000 for some advice on where to place their investment, is practically zero.
The existence of entry fees neatly sidesteps this issue, and the adviser could receive up to $2,000 via the ‘back door’ for placing this business. This is where the detractors go into overdrive and start talking about ‘structural corruption’.
If we want our industry to be perceived as a profession similar to law and medicine, entry fees come into the category of ‘embarrassing elements’, and should go. This means all fund managers and master fund operators will have to gradually phase out entry fee products. It will also mean that financial planners will have to turn away business from people with few assets who are unwilling to pay fees. This is in our best interests long term, and we should be willing to face up to some short term pain.
Let’s move on to ongoing service. At the very least, a client should receive an annual report, a periodic newsletter, and a couple of phone calls — about four hours work per year, which is roughly equivalent to $800 per annum in time spent.
Let’s say I have a client with $50,000 and I provide the bare minimum service. In exchange for $800 worth of work, I will receive $200 in trail commission. In other words if I rely on trail alone, I am making a $600 ‘loss’ on this client every year, and that doesn’t take into consideration the dealer’s and the taxman’s percentage. Even if the client has $250,000, the trail is hardly a king’s ransom.
Most planners use master funds or wrap accounts, that decouple the relationship between the fund manager and the planner. There is no trail commission on wholesale products on master fund menus so the ‘structured corruption’ and ‘bribery’ does not exist. The charges are more often than not composed of administration fees and adviser fees, which are clearly detailed on the consolidated statements — there’s nothing embarrassing about that.
Trail commissions are paid on retail funds, which are predominantly sold by discount broking groups – they are the ones who should be embarrassed. Is anybody explaining this to the critics?
Voluntarily giving up commissions and free overseas trips will eradicate the embarrassing elements of our industry and could propel us into the professional era we all wish for.
Richard Cosier is an authorised representative of Charter Financial Planning inSydney.
