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.
Investing photo credit: Pockaces
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 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:
- Make sure they are licensed by ASIC
- and are members of the Financial Planning Association, preferably CFP® professionals who have more training and qualifications
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”