In its submission to the ‘scrutiny of financial advice’ report, Choice said efforts to ensure “independent and thorough” responses to institutional misconduct are welcome, but also took issue with the communications strategy of the Commonwealth Bank’s Open Advice Review (OAR).
“Gaps in communications remain,” the submission contends. “It is unclear how or if CBA will be proactively contacting customers who received financial advice through Financial Wisdom who are also eligible for review.
“In addition, Choice has concerns about efforts being made to contact people who are no longer customers of CBA but are still eligible for the review.”
However, a submission offered by law firm Maurice Blackburn – which is involved in the OAR process – has praised the bank’s remediation efforts.
More broadly the submission argues that “financial sector response” to misconduct has been “inadequate”, arguing that industry responses came only after heated parliamentary and media scrutiny.
“Choice encourages the committee to investigate further cases of misconduct through the inquiry, particularly any possible misconduct from major financial institutions,” the submission argues.
It also calls for research to be conducted into forms of conflicted remuneration not covered by FOFA, singling out asset-based fees as posing a “high” risk to consumers in terms of their ability to influence advice given.
“The committee should consider recommending an extension of the ban on conflicted remuneration to asset-based fees,” the submission states.
“Asset-based fees are ongoing fees calculated as a percentage of the total funds under advice.
“They have many of the same market distorting features created by commissions, which have already been recognised as inappropriate for advisers.”
Sean – “asset based fees” that is what Tim T and Patrick were referring to, and is what I was referencing. I’m aware of being able to charge flat dollar fees
PATRICK, I agree completely. But sadly, under the law, just by explaining those 2 options to the client, even if they ended up doing neither and just paying out the home loan, that is technically advice and the law would like to see a SOA on file! Crap isn’t it. VERY difficult to keep such an initial discussion to the definition of ‘general advice’ though… However, I’m sure the majority of decent planners have that ‘general’ (yet tailored) discussion and ‘guide’ the client towards doing what is right, yet only doing an SOA and charging a fee when we are actually implementing something for them. Thank go us planners have more common sense than those powers that be in Canberra and ‘Choice’.
I prefer FLAT $ fees, because then my advice is never actually or PERCEIVED to be biased. However, I have no convcerns with those charging disclosed, reasonable asset based fees, though I personally don’t agree, each to their own, I understand there are many great operators who do things different to me.
I cannot however understand the idea of charging a % based fee based on positive or relative performance only. Fair enough if you are a broker or solely an investment adviser, but I’m sure most will agree that true financial planning expands far beyond investment advice and thus I dont see how charging in this manner would be suitable for a genuine, holistic advice giving planner.
AJ you certainly can charge on borrowed funds, you just can’t charge a percentage based fee that would be seen to incentivise increased borrowings to increase fees rather than to suit client outcomes. Nothing stopping you from nominating a flat dollar fee based on the increased FUM.
Patrick, only problem with scenario 2 in relation to asset based fees that Tim T is referring to, is that you can’t charge them on borrowed funds.
Good strategy though
Tim T, the appropriate strategy would depend upon the clients circumstances and objectives and bearing this in mind what would be in their best interests. If a client came to me with $500k to invest and still had a home loan but expressed a clear desire to start investing to accumulate wealth I would recommend: (a) clear mortgage debt and start an instalment investment plan at same monthly amount as former repayments; OR (b) clear mortgage debt then redraw a lump sum to invest so that interest became a deductible expense. Once alerted to the option to clear debt, if the client decided to do nothing else, I would say: “Well you do not need advice as you are no longer investing”. End of discussion, no SOA and no fees. If you do this properly, he will come back in time and so will his relatives and friends.
I cannot see how a fully disclosed fee for service which is not hidden in a bundled product fee and is the same rate irrespective of which products are recommended by the adviser can influence the advice and therefore be “conflicted remuneration”. Whether a $ fee or a % of AUM is immaterial.
Tim t, what a load of absolute garbage. That wouldn’t satisfy best interests duty and is a future FOS claim (payout) waiting to happen. You’d have to be braindead to end your career for 5k revenue.
Well, asset based % fees are biased. If a client comes to you with a $500,000 inheritance, will you tell them to (a) pay it off their home mortgage, or (b) invest it into your model portfolio.
ahh i thought so. Even if they are risk averse you will recommend they invest it in your model portfolio so you can pick up the $5,000 p.a. service fee.
CHOICE recommended – pay Choice to be able to use the CHOICE recommended logo on a product if it’s rated favorably. gee…sounds like a lot of other similar pay for ratings schemes. Membership subscriptions not what they used to be eh Choice?
Ah choice!! No credibility what so ever. Populist mouthpiece of the bleeding hearts. They still wouldn’t be happy if we did what we do for free. It isn’t going to happen. Check the funding of choice in depth someone! I think we would find some very interesting relationships. The argument is outdated and boring. Clients know what they pay and why and it’s no ones business other than those that have the contractural arrangement.
Allyson can you explain how your fees work in a bit more detail, I’m intrigued.
If a client has $1,000,000 and there is only $9,000 of growth and you’ve charged $10,000, then they’re $1,000 worse off – full refund?
Do you include dividends/distributions in the “growth” figure?
Interesting this comes up only when investors are not get enough return, FOFA is going to far,it will see the destruction of an industry that is very much needed but we don’t have enough insight to see what’s in the future until its to late. To many people with a interest have had to much to say. David Murray cant be independent, Ripoll also not independent, a review committee such as this should not only have 100% independence (NOT HAVE ANY INDUSTRY EXPOSURE) but be looking from the outside in.
Interesting, how is commission distorting? MY clients love the fact that I get paid 1% of funds under management why? the more it performs the more we both grow. When I introduced this concept my clients loved it. if no growth the fee is refunded to the client at the end of the financial year. Now I believe that the banks and fund managers should do the same no win no fee, no gain no pain so to speak. What’s wrong with the performance base fee? its disclosed and it just that a return for a return.
It never stops does it? I still have a gripe about Asset-Based Fees, and management fees, if the consumer is making money no one makes a noise about these things. So Fund manager fees and asset-based fees should only be charged in the event the investor gets a return.
Let me tell you that this is not a conflicted remuneration its performance based. Just like the Bank CEO bonus.
This is old and dead let it be.
Oh here we go…happy new year Choice. Moaning about how advisers charge yet your group takes a commission clip from the Big Switch. Your argument is now very dated and tired if you took a moment to see what advisers are required to do to satisfy best interests duty and what ethical advisers were doing already.
Can we please move ahead or at least keep up with the times.