Speaking at the AIOFP conference in the Gold Coast yesterday, ASIC senior executive leader, financial advisers, Joanna Bird said her team has been taking a closer look at the Section 923A of the Corporations Act, which protects the terms ‘independent’, ‘impartial’ and ‘unbiased’.
Advisers are prohibited from using these words unless they reject commissions and gifts from product providers and operate without any conflicts of interest.
ASIC, however, is considering adding asset-based fees into that mix.
“We haven’t treated asset-based fees as the same as commissions. That is one particular issue in addition that we are getting external legal advice on,” Ms Bird said.
“We’re getting legal advice on what exactly the [923a] provision means so that we can provide clear and comprehensive guidance to the industry on what they can and can’t do.”
However, not everyone agrees that asset-based fees are potentially conflicted.
AIOFP executive director Peter Johnston said while this remuneration model is not suitable for all clients, it can help align the interests of clients and advisers.
“If you have a very conservative client who has a very conservative portfolio, then it’s not appropriate. But if you have someone who wants a more actively-managed portfolio, then it’s great,” he told ifa.
“We cannot see where the conflict is.
“I think there is just general confusion in the marketplace between commissions and charging clients a percentage. Commissions we see as a conflict, but when it comes to working on a percentage, we think that aligns the interest between the adviser and the client.”
ifa reported recently that ASIC is also seeking external legal advice to determine whether it should prohibit advice firms from calling themselves ‘independently-owned’, unless they meet the Corporations Act definition of independence.
Ms Bird said yesterday she hopes to obtain the advice before the end of the year, but cannot guarantee.
Client walks into a financial planning firm wondering if they should pay down home loan or invest money instead. Adviser recommends investing, adviser charges a % fee of the funds under management. Client still wondering if they should pay down home loan or invest as advice is conflicted, back to square one. OR
Client walks into a financial planning firm wondering if they should pay down home loan or invest money instead. Adviser and client agree on fee upfront for advice (has to represent value to both parties), adviser recommends either investing or reducing debt, adviser charges previously agreed upon fee. Client happy, no conflict.
This is the same ASIC that is saying they need more funding and that we, the FP’s of Australia, need to pay them for the privilege of being regulated?? Well get F’ed. What an incredibly bureaucratic pullathon this latest waste of money is by the morons who live in their ivory tower twiddling their navel cavity hairs. Regardless of the theoretical rhetoric on REM, independent or unbiased is seeded in the advice provided. How about [i]getting off your cellulite ridden dimpled butts and actually taking cross samples of advice [/i]from different firms that believe they fit the independent bill, and coming up with a practical workable definition based on the intent and spirit of the advice provided – I mean after all, as advisers, we have to not only adhere to the rules but also the intent and spirit behind those regulations as well. Why doesn’t it work both ways? Oh yes how silly of me, because we are dealing with public servants who have never had any real life experience of being in business, or dealing with clients, or actually making a living in the [i]real world.[/i]
Even David Whitley pays asset based fees, what what his stance will be.
Surely the overpaid people at ASIC must have something better to do . The argument for flat fees versus asset base fees is up to the consumer to determine .
“Dear client, we as advisers aren’t allowed to charge you money in exchange for financial services, please make payment via cigarettes or beer to avoid any conflict”
I would agree that asset based fees are a conflict. Truly independent advice should have a very high requirement BUT it needs to have compliance concessions as well to really move the industry forward and lower the cost of advice. There is no benefit to being independent as defined by Corps 2001 in fact, at the moment there are several major disadvantages for both the adviser and the client.
An asset-based fee requires a platform that allows the adviser to collect an asset-based fee and in most circumstances, this means for the sake of business efficiency that planners use 1 or 2 platforms in their business. There is then an incentive to find a way to recommend a particular platform even though the benefit to the client may be marginal at best.
I personally don’t like asset-based fees and prefer to charge a fixed fee but then I’m also happy with insurance commissions because the conflict is met by the clients budgeting limits (less so with super owned cover and this is creating it’s own issues). Ultimately, that makes me a sinner as well, but I sleep at night as do the vast majority of advisers who do the best they can with the tools and framework they operate in.
For all those saying asset based fees are the same as commissions, they are not. Commissions were paid by the product provider generally without the client’s informed consent.
In these days where upfront and ongoing service fees are agreed to and paid for by the client, they should at the very least have a choice of asset-based, fixed $ or hourly rates.
Very, very interesting. Super very.
Of course asset-based fees are conflicted payments, from a certain point of view. So are commissions, hourly rates and flat dollar fees. You can make an argument for and against every type of payment. The only pure, non-conflicted arrangement is Pro Bono. Frankly, I am sick of ASICs behaviour over the last few years. They are doing nothing to improve our profession and protect our clients. All we see is ideological nonsense and they expect us to pay for it!
When will ASIC come out and ban hourly rates? Obviously it encourages people to go about their business slowly, as that will increase the amount billed to clients. Why do a job efficiently in 4 hours, when you can take the whole day and bill twice as much? It’s like the accounting partner who gets to the pearly gates and St Peter says “Bill, we’ve got a problem. According to our records you’re only 55, but according to your client billing records you must be at least 73….”
I bet the mortgage brokers will stuck puckering after reading this. They believe the trail commission they receive is for ongoing service. HAHAHAHA
ASIC needs to understand that by creating insurmountable hurdles on rem structures no-one will bother calling themselves ‘independent’ and clients will get no clearer picture on who is and who is not conflicted due to their vertical integration with Product providers. Rather than increasing the layers of complexity they should be simplifying it.
AFA and FPA need to push back hard on this sort of nonsense as ASICs continually looks for headlines to damage the professions reputation. The FPA had to sue their regulator in the US – maybe it is time we took the same path
Hmmm…..here we go again it seems.
Considering markets rise over the long term, it is a bit of a stretch to suggest adviser and client interests are perfectly aligned by charging percentage based fees instead of a flat dollar fee. Many advisers like to charge percentage based fees because the adviser sees the benefit of receiving a rising income stream from that client over the long term.
When educating a client on how investment markets rise over the long term, if at the same time the adviser outlined their fee charging philosophy (a percentage of the clients portfolio) any client with any sense of intelligence would understand a percentage based fee is not in their best interests. If markets rise long term, why would any client want their fees to be aligned to such increases, unless of course they didn’t properly understand this link? Give me the chance to explain this to any client paying a percentage based fee and I would be supremely confident they would quickly realize a percentage based fee may not be so aligned after all.
A common example of where conflict may arise is where an adviser operating on a flat dollar fee for service basis may happily recommend a client hold their fixed interest exposure “off platform” to boost the clients overall net return. Of course, it is unfathomable a percentage of FUM adviser would charge 1.1% pa on a clients fixed interest portfolio – or would they?? The same adviser operating on a percentage of FUM basis may be less likely to recommend this option as it would reduce the pool of funds against which their percentage based fee is charged. A similar conflict could arise where a client wants to gift monies to children or payoff debt funded via a lump sum investment/super withdrawal.
I have seen it too many times to accept that percentage based fees cannot result in conflicted advice.
After 22 years of advising, from where I sit, and all I read, any adviser serious about wanting to be considered a true professional should only consider operating on a flat dollar fee for service basis. That is the surest way to stop the widespread criticism of financial planners once and for all.
Imagine living in that world???
Those pretentious enough to want to dictate to all and sundry how everyone else should be charging for their advice should take a good hard look at themselves and consider if their own narrow opinion by default shows their own bias, and therefore, precludes them from considering alternatives which in turn makes their own advice substandard. We live in a democracy where not only do businesses have the [i][/i]right[i][/i] to determine their own processes (yes, including fee charge methodology), but also where the consumer will ultimately decide with their feet. In over 22 years in advising and running an “independent” license, I am yet to see one ‘fee for service’ adviser who can match us on providing the wide range of advice, the client satisfaction, and importantly the lack of a ‘bottom line’ need to generate new fees when ascertaining which new clients will truly receive value from our services. If fee for service was such a compelling argument, the public aren’t as dumb as you make them out to be JB, they would have en masse converted themselves across to those firms offering only that. Now imagine living in a world where people had freedom of choice on how to run their business, or alternately, who they sought for advice??
Joe, I think you’ve got the wrong fundamental idea, and I believe it is demonstrated in your sentence “..how everyone else should be charging…”.
It is the exact opposite that is happening – ASIC is telling people how [u][/u]not[u][/u]to charge. I think that’s pretty important given that there is a strong nexus between particular types of remuneration and poor advice.
Think of it this way, ASIC is basically saying, “other than x, y and z methods, which we have evidence to demonstrate that it conflicts the advice, you can charge however you want”.
That’s pretty fair I think….
Playing devils advocate, I fail to see why anyone would pay a fee based on asset. Why not be totally transparent and charge a fee for service. You don’t provide a service, you don’t get paid.
One of the biggest complaints is the asset based fee gets charged whether a portfolio increases or decreases in value, and yet the adviser hasn’t been active in the asset management.
If the portfolio is actively managed by the adviser, then they are entitled to be paid for the work done.
A % return is irrelevant to the size of the portfolio eg, 5% on $100K or 5% on $1M
But if no work has been done by the adviser to achieve that result, then why should they get paid?
If however the adviser reviews the portfolio and makes recommendations as to asset allocation, completes all the paperwork and implements those recommendations, then that is a charge-able fee.
I figure the bottom line is FEE FOR SEVICE!
ASIC made such a diabolical and misconstrued mess of the Review of Retail Life Insurance Advice Report 413 they reckon they have the independence of mind to consider issues such as this!
ASIC went looking for data that would satisfy a pre-determined outcome and result they were looking for.
ASIC and the FSC should just move in together as their intended outcome for the advice community are the same.
Does this really surprise anyone at all, based on the fact that ASIC now see themselves as both the legislator and regulator !
Given FOFA made charging asset based fees on leverage I struggle to see how they are conflicted. There is a natural conflict for anyone who provides a service for any type of fee. If the people within ASIC personally had to pay the legal fees for this nonsense they would realise that.
We offer all our clients a choice between asset based fees or fixed fees. 95% of our clients have opted for an asset based fee as they feel this is the best way of aligning our interest with theirs. When markets fall, we feel the pain alongside our clients. I know of a number of colleagues who only charge fixed fees and feel no pain while their clients are suffering. Why is this now being scrutinised? Isn’t it about giving clients choice, freedom and flexibility to make decisions that are best for them? How would an asset based fee compromise independence, impartiality or encourage bias?
Time for the AFA and FPA to lawyer up and see if ASIC are operating outside their mandate.