Advisers don’t want a return to commissions

Speaking at the Morningstar Investment Conference Australia 2023 in Sydney last week, president and chief executive of Franklin Templeton, Jenny Johnson, said that wholly fee-based advice is deterring clients from accessing financial advice.

“I think people are much better served with a financial adviser helping them for a few reasons,” Ms Johnson said.

“I do not agree [with fee-based] and I think that’s the model that has come out of both Australia and the UK. I do not agree that 100 per cent of advice should be delivered fee based, I think there’s about 20 to 25 per cent of the population that is better served paying a one-time commission and maybe a small trail versus paying the external fee.”

Peter Johnston, executive director of the Association of Independently Owned Financial Professionals (AIOFP), said that Ms Johnson’s comments are “only relevant to risk advice”.

“We think Jenny Johnson is half right and the ALP got it largely right with the FOFA (Future of Financial Advice) legislation in 2012,” Mr Johnston told ifa.

“Minister [Bill] Shorten at the time excluded risk earnings from the commission ban, grandfathered ongoing revenue, and forced a fee for service culture with mainstream financial advice.”

The FOFA reforms were first announced as a response to the 2009 Ripoll Inquiry. The measures introduced included the best interests duty, fee disclosure statements, opt-in requirements, and a ban on commissions and other conflicted remuneration structures to financial advisers — other than risk advice.

This ban on commissions aimed to remove potential conflicts of interest that could influence the advice provided and promote the provision of unbiased recommendations, which Mr Johnston explained does not work for risk advice.

“Most risk product/advice needs to be gently coerced onto consumers due to its intangible nature, therefore a commission focused outcome is best,” he said.

“This contrasts with consumers with a lump sum actively seeking assistance from a financial adviser.”

Mr Johnston added that while most risk advisers offer a fee for service and a commission-based option to clients, consumers much prefer the commission option.

“Trying to offer risk advice via a statement of advice (SOA) at say, $3,000, then the client needs to pay the premium is hugely problematic, no wonder the industry is on its knees with devastated inflow revenue and our national under insurance problem is at critical levels,” Mr Johnston said.

“Mainstream advice, however, must remain on a fee-for-service basis to eliminate conflicts and maintain a professional optic for the industry.”

According to Mr Johnston, the banning of the grandfathered revenue by the previous government in line with a recommendation from the Hayne royal commission was a pivotal event that caused millions of consumers to be orphaned.

“This revenue subsidised services to low-end clients. The jury is still out on how much of this revenue was retained by the institutions and what actually went back to consumers,” he said.

“It is time for Treasury and governments to finally acknowledge that risk advice is a 20 per cent subset of the financial information universe and risk advisers require a different selling skill set and approach to be successful for consumers and themselves.

“For the risk industry to survive the current exam format and education pathway needs to be appropriately amended.”

Founder and director of Forte Asset Solutions, Steve Prendeville, agreed that in the area of risk advice, commissions can be beneficial.

“I actually believe that there is a place for commission and that’s certainly in the area of insurance,” Mr Prendeville told ifa.

“You have basically put the cost in a premium rather than having to find the money each month. For those on fixed incomes, or lower end incomes, it’s a cost that is part of their overall cash flow, so I think that is one area that a commission is appropriate.”

However, Mr Prendeville stressed that if commissions are being utilised, then advisers must be providing value to their clients.

“Commissions cannot be lazy money where there’s not an ongoing service delivery,” he added.

A less obvious benefit of the move to a fee-based provision of advice, Mr Prendeville said, is that business valuations can be higher.

“Fixed fee is transparent, but it also means that it’s not product dependent. The client is paying you directly. It’s a very direct relationship. It’s not a third-party relationship, and therefore doesn’t allow for bias on products,” he said.

“The other compelling feature on fixed fees, from my perspective as a valuer, is that there’s no exogenous factors such as market movement that all of a sudden can impact a business’ revenue and therefore profit.

“I rate businesses that do not have market risk within them higher than I would that one that will go up or down, depending upon market movement.”

Similarities with the UK changes

After more than a decade of reviews and rule changes — from FOFA to the Hayne royal commission to the Quality of Advice Review — adviser numbers have taken a substantial hit, however, Mr Prendeville pointed out that much of the exodus has not come from the holistic advice space.

“Fifty-one per cent of those that are left were accountants providing limited advice, then we’ve had 17.3 per cent that were super fund advisers, and then another 18.5 per cent that were limited advice,” he said.

“So, what we’ve got now is the core of advisers, and it’s not product-led. We’ve also seen the growth of independence versus institution. All of this is affirming for client outcomes.”

Speaking on an episode of Relative Return, chief executive officer of UK-based financial services software company intelliflo, Nick Eatock, said that much like the UK following the Retail Distribution Review (RDR), Australian advice is heading in a better direction.

“There was a lot of fear about RDR at the time, particularly from the advice marketplace itself, in a marketplace where, for a long, long time, commission-based advice had been at the heart of things,” Mr Eatock said.

“The concept of moving to fee-based advice and asking your clients to pay a fee, making it very, very clear, was welcomed by some but feared by others. And what we saw, just before RDR went live, in the two, three months beforehand, the advice numbers dropped dramatically, just as they have done in Australia with the royal commission and so on.

“But what happened as a result of that was that, actually, advisers ended up having good conversations with clients. The reality was that clients were very accepting of the approach, so I didn’t hear a single adviser actually say that they’d had a challenge. But what it did mean was that advisers needed to be much more effective with their time.”

Mr Eatock added that while these changes narrowed the scale of advice and fewer clients could be reached, the advice that was provided became much more transparent.

“Technology became the enabler for advisers to get out to their clients and provide the service they did. And what we saw over the subsequent years was that the number of advisers grew, year on year.

“Alongside that, a whole bunch of new people came into the industry in the form of paraplanners as well. So, paraplanners perform, just as they do in Oz, a really important role in the overall advice landscape, and I think that’s also helped increase the access of advice to clients out there.”