Reserve Bank addresses fees conundrum

Financial advice and the manner in which consumers pay for it has made its way onto the radar of the Reserve Bank, with the deputy governor Ric Battellino acknowledging that retail investors are reluctant to pay for financial advice on a fee-for-service basis.

He also raised the cost of advice and the reality that, at its current level, the superannuation guarantee alone was not sufficient to ensure “an adequate replacement income in retirement”.

Battellino told a Finance and Banking Conference that there had been a preference for commission-based advice, despite the conflict of interest that could arise from such arrangements.

“This reluctance to pay for advice upfront appears to be a form of money illusion, whereby investors may feel that they are somehow paying less for financial advice if the cost is buried in reduced earnings in the future,” he said.

Battellino said the regulatory environment in Australia had tried to deal with potential conflicts in commission-based advice by making it a requirement for advisers to provide their clients with a written statement of advice that sets out, among other things, the basis on which the advice is given, any potential conflicts of interest, and the dollar value of commissions they receive.

However, he said the question remained as to whether full disclosure was enough to deal with the potential conflicts of interest associated with commission-based fees, or whether there was merit in the industry moving further in the direction of offering advice on a fee-for service basis.