Prominent industry figure Anthony Starkins dropped a bombshell on the financial planning industry earlier this month when he called on the Government to outlaw commissions.Stuart Engelasked the First Samuel managing director why he made the startling submission to the Senate.
The fees versus commission debate is not new to Australia. Ever since the first financial planners emerged from the life agents industry, there has been lively debate surrounding the issue. Some have trumpeted the virtues of a commission-free financial planning practice, while others have argued that the client need not know anything about how a financial planner is paid. The most common view is that it does not matter how an adviser is paid as long as the consumer knows how much he or she is paying and what they are getting for their dollar.
Never before has anyone called for the banning of commissions. But that is just what First Samuel managing director Anthony Starkins did earlier this month when he presented a submission to the Senate Select Committee on Superannuation and Financial Services.
If he is successful, advisers who receive commissions and fund managers who pay commissions would face the bite of the investment watchdog if they are caught in the act.
In the First Samuel submission to the Senate Select Committee, Starkins argues that advisers who receive commissions are breaching the fiduciary duty an adviser owes her client. The fiduciary duty is for the adviser to act for the sole benefit of their clients.
He says that even if a financial planner disclosed all the benefits received by investing in certain funds, the fiduciary duty is still breached.
“There is an inherent conflict of interest in the situation,” Starkins says.
“Until such practices are banned and appropriate legislation recognises the existence of a fiduciary relationship, investors cannot be confident of receiving independent and impartial investment advice.”
“Disclosure,” he says “does not go far enough. It is not informed consent and more often than not, the client does not understand the disclosure”.
A code of ethics banning commissions does not go far enough either. Starkins is insistent that only “black letter law” will get the message through to advisers that commissions breach their fiduciary duty to clients.
“You can not rely on advisers to adopt ethical behaviour based on a code of ethics. People need to be explicitly clear on the boundaries of acceptable behaviour.”
Stark uses the example of insider trading to illustrate why only “black letter law” will effectively get rid of commissions. He says that before 1971, insider trading was not illegal but was considered ethically dubious.
“Before it was made illegal, insider trading was commonplace. It was considered unethical but flourished,” he says.
“Once it was made illegal, it became explicitly clear that it was unacceptable behaviour and became far less common.”
So what drives a financial adviser to take such a strong stand against commissions?
Starkins says he has no commercial agenda to promote. In fact, he says First Samuel has “nothing to gain” from this debate.
He also insists he is not a flag waving campaigner for consumer rights.
Starkins says it is primarily a question of ethics.
According to Starkins the industry has a vested interest in the issue but if it fails to move to outlaw commissions, Parliament will seek to protect retail investors through law.
He says lack of action on this issue would leave the industry with unlawful and immoral practices which were disadvantageous for investors.
Starkins was also critical of the efforts of financial institutions in gearing employee remuneration on products depending on whether those products are in-house or externally provided. He says there are also cases where products from competitors are excluded, even if they are superior and best suit the needs of clients.
Starkins says these practices are not well known but represent the most unethical of all commission type practices and all that was wrong with retail financial services.
