Trustworthy Financial Planners Hard to Find: Commission vs Fee For Service

In Australia “we have this misnomer called financial planning, which is actually commission selling, most people get herded into the more expensive funds, which are often not the best funds” said Garry Weaven (non-executive chair of Industry Fund Services) in the Sydney Morning Herald recently.

Bribes & Kickbacks AKA “Soft Dollar Commissions”

Garry isn’t happy because in Australia financial planners and accountants “almost never” recommend not-for-profit industry funds, instead often pressuring their clients into investments which pay financial planners a significant amount of money in kickbacks and ‘soft dollar’ benefits “including overseas trips, share options and cash bonuses for selling particular financial products” (ASIC 2004).

Official reviews in the financial services industry have repetitively found that sales perks can bias the product advice investors received” (Business Spectator).

Let’s not beat around the bush as to what these payments and arrangements are for. They are bribes paid on top of the standard fees and commissions earnt by financial planners. They are designed to build business for the fund manager by providing lucrative incentives for financial planners to recommend particular products” (PDF – Australian Consumers’ Association)

Navigating Maze of Financial Products & Services

The problem is that these days financial products and services are so numerous and complex that people need professional advice to navigate the maze of options to find the best solution for their particular requirements.


navigating financial maze
Navigating Financial Maze photo credit: svilen001

If you go to a Ford car dealer, you know they’ll try and sell you a Ford … If you go to a Holden car dealer, you know they’ll try and sell you a Holden … but that’s OK because when you go there to buy a car you know they’ll try and sell a specific brand to you.

However most people are unaware that a financial planner who gets paid by commission for advice is very similar to a car dealer because they’re probably going to sell you the product/service their parent company sells or products/services from the Finance/Investment company which gives them the most commission.

Respected financial industry journalist Alan Kohler says the Westpoint property group collapse highlights a fundamental conflict of interest in the industry.

If somebody’s getting a sales commission for selling you a product, and you’re going to them for advice, you’re not getting disinterested advice, you’re going to get a sale, you’re going to be sold something. It’s an entirely different proposition to the one which most people expect

“If an unsophisticated person who lives in a modest house is thinking about taking out a mortgage against their house to invest in an unsecured investment, such as Westpoint, the responsibility of their adviser is to advise them not to do that”

“Yes, the people are greedy, yes they want to get you know, they want to get a maximum return, but if they are going to a financial adviser who has a fiduciary duty to them as their client, then what that adviser should do is advise them not to do it, and in fact what they’re getting is exploitation” (Alan Kohler in ABC News story “Westpoint collapse shows exploitation by financial planners”).

ASIC “Shadow shopping exercises have shown that advisers tend to offer products associated with their institutions, even when those products are not appropriate. ‘Approved product’ lists and commissions are at the heart of ASIC’s concerns” (The Age)

An interesting fact to emerge from recent research by Investment Trends was that those planners with over half their revenue derived from pure fee-for-service were likely to spend more time discussing planning for financial and lifestyle goals and less time discussing insurance needs.

“These planners are likely to advise their client base on self-managed super funds, direct shares and listed investment companies,” said Investment Trends principal Mark Johnston. “They also have more autonomy than other types of planners in selection of platforms and planning software.”

How to Find an Honest Planner Without Conflicts of Interest

You can’t beat a good independent financial adviser to help you through the money maze, reduce costs and find competitive products.

However, finding one who is independent and trustworthy may not be easy. Ask a friend, family member or work colleague for a recommendation, and whichever planner you choose:

I would suggest that you choose a planner who charges a fee-for-service rather being paid by commission so you can get advice that’s 100% objective and focused on improving your financial situation, not selling products.

Kate McCallum, Owner of Multiforte Financial Services and member of the Financial Planning Association’s Strategic Marketing Committee has provided the following tips to help you choose a fee-for-service financial planner:

“First, clients need to clarify what ‘fee for service’ means – some planners charge a fee and still receive commissions on some products, the main one being insurance policies. So another question to ask is if their remuneration is fully fee based.”

“Second, if a fee is charged as a percentage of assets, clients need to be aware that they pay this percentage on every new investment they make, and that their fees in dollar terms will increase (decrease) when the market rises (falls). Some planners cap this percentage of assets fee to resolve this”

21 thoughts on “Trustworthy Financial Planners Hard to Find: Commission vs Fee For Service”

  1. Good Solid Post Neerav, Finding an Honest Planner Without Conflicts of Interest, can be a very hard thing to do in this time poor day and age we live in. Maybe all the Upfront Fee guys should do some marketing, as a way to differentiate them selves from the other lot.

  2. After working for years at a major brokerage (System Administrator) it has become increasingly clear that the only person who should be managing your money is you. Most financial advisers are just thinly disguised brokerage salesmen, and couldn’t plan a route out of a paper bag. In general they couldn’t care less about what’s in your best interest. They care about what will generate commissions. Do your own homework because they sure are not doing it for you.

  3. I know this article is getting long in the tooth now but I couldn’t help but put my two cents worth in when I see using words like, bribes, Kickbacks and people being herded into inappropriate funds.

    Gary Weaven is telling everyone who will listen that advisers are feathering their own nests and the client is only a secondary consideration. Pushing their own barrow so to speak. Isn’t that exactly what Gary is doing for the industry funds? As for Kate Mc Callum, “FPA committee member”, well that is another story.

    I have been a Financial Planner for 23 years and I wish to make it clear right from the outset that & I AM A FEE FOR SERVICE Planner.

    I agree partly with what Gary says and there is room for improvement, and I like the fee for service model. Personally I would like to see commissions abolished in this industry. In the early days it had its place and was useful but now I think it is outdated and should be made redundant.

    However, this article should be seen as what it really is. As the non executive chair of the industry funds services, Gary has his own barrow to push and it seems that others who have contributed to this article are also indulging in a little self betterment.

    I know Gary. He has been involved with industry funds for many years and I suppose a person in his position must be seen to make splash sometime but I think deep down he knows better. These comments are completely biased in favor of industry funds and represent a horse which has well and truly been flogged.

    Eventually commissions will be replaced by a fee for service model and I am wondering what the next scare tactics that Weaven and others will use to try and retain funds under management. It certainly will not be a superior service to the members unless there is a complete turnaround of culture in these funds.

    Whenever I have tried to have a conversation about the virtues of financial planning with an industry fund advocate, all I saw was a lot of head shaking and glazed over eyes. Have a look at the scare campaigns that these funds have been running on television about financial planner’s commissions. They are the most one sided, misleading pieces of work I have ever seen, and I want to know from Kate Mc Callum what the FPA is doing about this rubbish.

    Like most industries, there is room for improvement but I think Gary should also look in his own back yard. There is also plenty of improvement needed with the industry funds if the members are to get proper assistance and advice.

    Gary says that Financial Planners do not recommend nonprofit industry funds. As a fee for service planner, I defy anyone to try to get any worthwhile information from these funds. I remember years ago with the old State Super Fund, there was only a hand full of people who even knew how that fund worked. Admittedly it was a complicated fund with many schemes or structures within the organization, but I can remember when some people who were employed by these funds, even some board members, were not exactly up to date with how the fund operated. It seems to me that not much has changed, either that or the fund staff is being deliberately evasive.

    I was well and truly involved with the retrenchments of the PTC and other Government workers in the 90s and I had an intimate knowledge of the State Superannuation Fund with which I believe Gary was involved. There was only a hand full of people outside the fund including several extremely dedicated Employee Assistance Service members within the PTC who took the time to learn how the State Super worked. If it wasn’t for people like Wes Gordon, Michael Guiney, Kevin Morgan and others, those State Super members who were being retrenched would have been in a lot of strife.

    As a Financial Planner I did a lot of welfare work with these people. At least 40% of the work I did was for free and without which, a lot of people would have been a lot worse off. When push came to shove back then, I didn’t see a lot of expertise or worthwhile help from the industry funds and I don’t think much has changed. I have never heard of an industry fund recommending moving to another fund because it would be more advantageous for the client, and I don’t think I ever will.

    As a non member, try to get information from the fund about investment strategy or even the fee structure and see how far you get. Garry is very aware that if a planner is to recommend a fund, any fund, he or she must first know pretty much all there is to know about that fund and its structure. To recommend a fund we must show a basis for our recommendations. Most of these funds are closed shops and they are not readily forthcoming or at least make it difficult to find out any pertinent information despite the fact that ASIC has specifically directed them to do so.

    Their reporting is extremely vague to say the least and trying to get any worthwhile research from them is impossible.
    I have tried, and I can tell you that after waiting for ever on the phone and eventually managing to get past the automated telephone system to talk to a human, I found that if you are not a member, service centre people are evasive and in some cases will not even speak to you. I wrote to a fund last year requesting information on the structure of the fund and I didn’t even get a reply.

    In relation to so call kickbacks and soft dollar benefits. If a financial planner has received any of these kind of benefits, he or she has must disclose it in every financial report that they produce. Now I know many in the industry fund employees that go away quite regularly on all expense paid discovery trips, conferences, workshops and team building events that I never see mentioned on the members statements or reports. It may be about time that this happened.

    As for the credibility of this article; firstly there is a link of a report from ASIC from 2004 and an AGE article from 2006. It was mid 2008 when this article was published; let’s get up to date hey.
    Also, it has been recommended that one should check to see if an adviser is a member of the FPA as if this is some sure fire way of making sure that he or she is honest. The FPA is not the only Association out there. I have been a member of the FPA for as long as it has been around and I think there a huge amount of room for improvement in that organization particularly in the area of service to members.

    As for Kate Mc Callum a “Member of the Strategic Marketing Committee” I would like to know where you stand on these slanderous subjective advertisements by the industry funds? How about you as a member of the “Marketing Committee” actually putting forward the benefits of having a financial planner and the assistance we give day in and day out , some for free, instead of offering two very shallow comments on how to find an “honest planner” and then provide a link to your own web site. very tacky

    It is only my opinion,. but I think the whole article is a cynical exercise in self indulgence and has not addressed the real issues of unbiased, honest and competent advice whether it comes from planners or industry funds.

  4. excerpt from http://www.voxeu.org/index.php?q=node/4014:

    “Do financial advisors aid their clients in making wise investments? This column shows that investors who delegate their portfolio management achieve better results. But that’s due to the fact that advisors tend to be matched with richer, older investors. In fact, financial advisors tend to lower returns and raise risk relative to clients who manage their own investment.”

  5. Finding independent financial advice is crucial if you actually want advice that is free of all conflicts of interest.

    Brett Walker’s site http://www.independent-advice.com.au is a good start. It identifies advisers that are fees based (still may receive some commission), 100% fee for service and 100% independent as per ASIC’s definition.

    You may be surprised that as at 1 November 2009, there are reportedly only 15 financial advisers that can call themselves independent**. That means you’d have to see 1200 financial planners before you found one that is not biased and is not chasing your funds under advice either.

    A note about fee for service – Any ‘adviser’ who charges by way of funds under advice is simply choosing their own commission payment. This adviser will not recommend you pay off debt or invest in property – why would they? They would also rollover your super and investments and look for any ‘reasonable basis’ to do this. These adviser’s have a business model that is designed to make money by selling product, not advice.

    Advice is not about products. It’s about engaging a client, listening to their needs, framing the issues, creating strategies and gaining commitment to implement. An adviser that can do this, will always provide advice in your best interest and you will always value their advice.

    ** These 15 adviser’s are broken down by state as follows:

    ACT – 2 independent advisers
    NSW – 4 independent advisers
    NT – none
    QLD – 5 independent advisers
    SA – none
    TAS – none
    VIC – 3 independent advisers
    WA – 1 independent advisers

  6. Agree with Max’s comments about industry super funds; low admin fees are great, but try and find out what fund managers they are using in their portfolios, how much those fund managers are charging, who decides what the asset allocation is for their ‘balanced’ fund and what their investment strategy is – they won’t provide it. How can advisers be expected to recommend someone go to an industry super fund when one can’t open up the hood and look inside?

    Two other brief contributions:

    I’ve been an FPA member for 13 years, and a Certified Financial Planner (CFP) for 8 years. In my 3 years as a paraplanner and 10 as an adviser I have been asked once if I’m a member of the FPA and never been asked if I’m a CFP. Consumers this is a good thing, because neither should provide any assurance that you’re going to get impartial advice. My clients want an independent adviser which is how they find me through google.

    But there is another website to check out: http://www.independent-advice.com.au ; search on advisers, but state and then by 100% independent to find the 14 or so independent financial advisers in Australia that satisfy ASIC’s definition of independent. Many advisers call themselves ‘independently owned’ but as a consumer, demand more.

  7. OMG such an enlightening article!
    Also, RoskowNS’s comment,
    “You may be surprised that as at 1 November 2009, there are reportedly only 15 financial advisers that can call themselves independent**”
    THIS SURPRISES ME TO THE CORE! GOODNESS!

    I cannot explain to you people who disappointment I am as a recent finance graduate who has started working into the financial planning industry.

    I worked under a few financial planners and for a few companies and am totally disheartened by the ugly reality of the way in which the business is carried out there.

    I have finished my Masters in Business and Commerce (Finance) and then DFS (Fin planning) – now after entering the Fin Planning industry I am pondering to QUIT it totally for my conscience doesn’t allow me to do the dodgey stuff that everyone is doing; people can justify and play the game by saying that, “this is reality and we have to do it” and all that BS*** but not me!
    IT IS LIKE A DOCTOR GIVING WRONG ADVICE TO ITS CLIENT JUST FOR HIS COMMISSIONS FROM THE PHARMACEUTICAL COMPANY – FINANCIAL PLANNER IS BUT A DOCTOR FOR THE FINANCIAL HEALTH OF A CLIENT – WHERE IS THE BLOODY FIDUCIARY DUTY GONE HERE????

    After being disheartened I looked up jobs in the truly independent financial planning firms but none of them seem to be hiring because of the GFC I guess…Then I looked up jobs and graduate programs at APRA but couldn’t find any – the tragedy is such that I am not thinking of quitting my job and working with my friend installing ‘insulation batts’ in houses (O yes, my father will be so proud of me with the professional life I am enjoying!)

    Any suggestions welcome??

  8. Hang around Rob, by 2012 things will be very different and hopefully (!) only the fittest will have survived. What city/town are you in? I know of a firm in Melbourne that is looking for quality candidates.

    Other alternatives – start your own business, that was the only option for me. If this hadn’t have worked out, I probably would have tried to get a job at ASIC so I could help police the change against advisers who make me sick to my stomach.

  9. Hi RoskowMR!

    Thank you for replying back.

    I am actually in Sydney at the moment. Just 25 years old so it is really difficult for me to play the dirty commissions game under any Financial Planner – it is like indirectly participating in a crime (which is considered legal at the moment) – not for me.

    I am rethinking about this whole career in Financial Planning you know (too bad I realised all of this after I invested so much of time and money for my studies etc).

    God bless,
    Rob

  10. Anyways guys, you maybe interested in also checking this article
    http://www.onlineopinion.com.au/view.asp?article=1659&page=0

    “The bottom line: the chances of a consumer getting a financial plan that is just okay or better are not quite 50 – 50. And it gets worse. The chances of getting a plan that the industry’s own experts would rate as “Very Good” were less than 50 to 1; only 2 of the 124 plans assessed by the team of industry experts rated in the Very Good category. Only 24 plans were rated as Good. The rest could only make a grade of okay (29 per cent), borderline (24 per cent) – which meant some serious deficiencies were present, poor (17 per cent) – which meant that the overall score was a fail or that there were critical errors, or very poor (10 per cent) – seriously bad plans.”

    “Banks currently own between 40 – 50 per cent of financial planners (not one of the consumers who were sent to the big banks in the shopping survey got a plan classed better than just okay),”

    Can you believe that? Lol

  11. I’m in the same boat Rob. I finish in early march. Previously I worked in a marketing and sales job but ended up hating it. I was fine when I was working with a product I believed in. But the problems arose when I was given a product that was inferior but more expensive and told to market it to people. Basically we were told to lie and I couldn’t do that. So I jumped off that ship and went back to uni and decided to do Bachelor of Business in Financial Planning at RMIT.

    One semester to go and I am really starting to worry about my decision. I don’t want to bend my morals for the sake of a few extra bux. As I understand it, financial planners should be able to make quite a good living for themselves while being moral and doing the best for the client. But even if I take the high moral ground, the company I work for would most likely not think the same as me and i’d either be pressured into changing my thinking, or face the sack as they could employ someone who WOULD be able to “sell” the right products.

    RoskowMR, starting my own business as a graduate would not be a viable option as a graduate. I simply wouldn’t have the skills to really help people. Well not the skills that i’d feel comfortable with them putting their livelihoods at risk through following my advice. Am I gullible in thinking that the right move would be to work for a small niche firm and try to learn as much as I can from the best 2 or 3 people there, or is what they have to offer simply going to be the same old bullcrap that I heard in the marketing/sales industry?

  12. Ryan, I understand your position; referring back to Rob’s comment before yours about the chances of getting good advice – consumers are probably going to be in a better position getting advice from you because your heart is in the right place!

    Working for a small boutique for a few years to get your confidence and knowledge up to a level that is right for you is the best way forward – but you need to do a lot of research and interview them, forget going in with nerves about “do they want me”; you need to find out “are these guys and gals the right firm for me?”.

    My tip, read Jim Stackpool’s book What Price Advice that is being launched in the next few weeks; then find a firm in your city that embraces his philosophies. Jim is a mentor of mine (I pay fees for this honor) in the time I’ve worked with him I’ve rubbed shoulders with some fantastic advisers around Australia whose hearts are in the right place.

  13. Hi guys,

    RoskowMS, thank you for the link – I am going to soon buy the book you’ve recommended of Jim Stackpool.

    RoskowNS, I just checked the link and can’t believe that there are only 15 of them out there – Do you know their names????

    I found some really interesting articles online –
    http://www.smh.com.au/business/conflicts-of-interest-are-human-nature-20091126-jupr.html
    (mainly says how just making disclosure requirements mandatory for the advisors is not sufficient)
    http://www.actuaries.asn.au/IAA/upload/public/FSF08_7d_Paper_Mulcare_The%20Personal%20CFO.pdf
    (proposes an alternative model of advice)

  14. Ha! I can’t stop laughing. So Rob left the financial planning industry because it’s dirty and he felt like he was committing a crime. So instead he went to the pure and completely innocent industry of…..wait for it………installing insulation! Now that’s a really honest job. Have you bothered to read the news lately Rob? There is no more fraudlent job going at the moment than these insulation people. All they’re doing is pressuring people into taking up the Government insulation program. Doing a shongy job and pocketing the full gov’t rebate for often a 10 minute job.
    When the insulation career path doesn’t work out for you Rob, try politics. Not sure how much longer Peter Garrett will have his job, so there might be an opening there for you….politics is a really honest profession.

    Sorry Rob, but don’t throw stones from glass houses.
    Every profession has it’s good and bad people.
    So like the posts above say. When looking for a financial planner. Do your homework.

  15. Hey Damo,

    Maybe ure pro-commission Or work for commissions!

    Anyway, I am not surprised that you can’t stop laughing coz it is indeed a joke for me too….joke is also what it should be for all those dodgey commission based planners for what they’ve made out of the industry!

    Insulation job is what I was PONDERING/THINKING (selective reading is no good) of, but I soon researched about the insulation people and found it to be more dodgey so I never joined it – now im just working in the Financial Services industry.

    R.

  16. Being a memeber of the FPA means no more than being a member of the AIOFP or AFA, it is giving clients a false sense of security. So this website that names only 15 independant planners, they actually interviewed over 10,000 planners? I don’t think so, there are a lot more than 15 they just do not feel the need to join some Association or put their name on a website.

  17. I’ve read alot of comments on this site, and I think it is important to note that if you do recomend a product to your client you need to disclose the commission amount paid in the SOA.

    Its all fine and well and fine to give non independant advisors a hard time, but honestly, to be put into a stereotype of being ripp-offs because clients of Storm Financail advisors were charged stupid commission amounts and ongoing trail fees is just ludicrous.

    first of all, an advisor should not be advising a person to invest in margin loans against their home- what a stupid way of investing. second point, what happened to getting a second opinion? And nobody dare reply with “these guys are so crafty and can sell ice to the eskimos” responses!!!!!!!!!! an advisors role is to gather information and advise based on that. However, you as the consumer need to take responsibility for what you do and do not look to blame anyone around you if your desicion does not work out.

    third point, nothing in life is guaranteed. This point is more relevent now thanever before. who would have thought that Iceland going broke would have caused the world economy to nearly colapse.

    anyway, without getting off the topic too much here all I want to say is that providing finacial advice for a commission based fee is the only way the average Joe is going to be able to get advice. Lets not make the rich the only people who can seek our service. Yes there are sharks out there who will try to make the most of this system, but it makes me so mad how we concentrate on the few and ASIC who are meant to be governing this indusrty together with APRA just sit back and let peoples emotions dictate what happens in this indusrty instead of taking proactive action to catch and fine the few who give bad advice.

  18. From today’s Age newspaper An epoch ends. Financial planners won’t get kickbacks…from 2012

    Financial planners will have to earn their keep openly from their customers as part of sweeping changes that will outlaw kickbacks and commissions and revolutionise superannuation and investment advice from 2012.

    Fiercely resisted by parts of the industry, the changes go further than recommended by the Senate inquiry set up in the wake of the collapse of the Storm financial group that cost thousands of Australians their life savings.

  19. I’m on the other side of the fence completely. I’m one of the thousands of Australian SME’s that are presently extremely cash staved. Since Mr Rudd’s emergency surgury on the Australian banking system, which we all know WAS the right thing to do at the time (no crash for the Australian economy), the banking system has severely tightened up the availability of working capital credit to business.

    I am a SME trying to combat the unbalanced current state of the financial credit system where the banks have the upper hand with regard to government funds guarantee. I am a technical person who’s real strength is producing real and tangible new products and industrial processes. I am not a financial expert. I just want a fair deal to develop and grow my emerging technology company. We want to borrow money to fund the manufacture of our unique (patented) automatic parts washing machines that dramatically increase the workshop productivity of Australian (and hopefully global) businesses. They are rented to End-User clients to clean mechanical parts.

    The problem is that we, and I’m sure every other SME in the country, are having is that the 4 big retail banks in Australia are apparently the only supplier of equipment finance for industrial equipment purchases. Literally! My investigations have born out that all the equipment finance companies are just brokers for the banks. Other sources of capital that I am told existed before the GFC have it appears evaporated.

    I now find out that these same banks own 40 – 50% of the financial planners in Australia! (see Rob November 11 2009 above) … Hello? What? … is going on?

    NOW I understand why I can’t get a Financial Planner to look at my proposition for them to look at my business to create a financial product that suits our capital requirements and that could be a very attractive alternative investment opportunity for some of their clients. The banks own the Financial Planners who are compelled by the system in which they work that they can only “promote” company qualified financial products. Products that make lots of money for the banks and the financial planner companies… that are owned by the banks. Cosy.

    So, what to do about it? Well, what about any one of you… self professed “honest independent fee for service financial planners” getting up off your #$&&’s and showing some good old Australian innovative initiative by contacting me and asking me about how you can add wealth to your clients “balanced” investment portfolio by investing directly into solid, real Australian products that yield a very high fixed ROI that also might just help the economy get back on it’s feet and as a little kicker … stick it up the banks at the same time! Bonus!

    Incidentally, in regard to your advice on what constitutes a balanced portfolio for your clients, how many of you have ANY of you clients funds exposed directly to fixed income producing tangible asset products? None! No!

    Nevermind, it’s not too late.

  20. I have been burnt by so-called financial planners when I started investing. I took some time and did couple of great courses on financial planning. I will really recommend it..worth the time and money!

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