Government Bans Commissions – Risk Not Included… Yet

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The Federal Government has announced it will ban all adviser commissions and volume bonus payments from 1 July 2012.

The exception to the ban will be commissions on risk insurance, which the Government says ‘… will be considered at a later date.’

The announcement that commissions are to be banned is included in a package of reforms called The Future of Financial Advice, released today by Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen.

the reforms … are designed to tackle conflicts of interest

In what the Minster’s office refers to as an ‘Overhaul of Financial Advice’, Mr Bowen said the reforms “… are designed to tackle conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and the mis‑selling of financial products that culminated in high profile corporate collapses…”

The package of reforms is the Government’s response to the PJC Inquiry into Financial Products and Services (the Ripoll Inquiry) and include the following initiatives:

  • A prospective ban on conflicted remuneration structures including commissions and volume based payments, in relation to the distribution and advice of retail investment products including:
    • Managed investments
    • Superannuation
    • Margin loans
  • The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients (Ripoll Recommendation No 1)
  • Increasing transparency and flexibility of payments for financial advice by introducing ‘adviser charging’ that will help align the interests of the financial adviser and the client
  • Percentage-based (assets under management) fees will only be charged on ungeared products or investment amounts and only if this is agreed to with the retail investor
  • Expansion of the availability of low-cost (intra-fund) advice within a superannuation context, eg:
    • Transition to retirement
    • Intra-pension advice
    • Nomination of beneficiaries
    • Superannuation and Centrelink payments
    • Retirement planning generally
  • Removal of the exemption permitting accountants to provide advice on the establishment and closing of self-managed superannuation funds (SMSFs) without holding an Australian Financial Services Licence
  • Strengthening the powers of ASIC to act against unscrupulous operators
  • The examination of a statutory compensation scheme
The Government has delayed any decisions on risk insurance commissions because of concerns it has about affordability and the potential for under-insurance

The Government has delayed any decisions on risk insurance commissions because of concerns it has about affordability and the potential for under-insurance.  It sees insurance as having ‘… different features from investment products, including the fact that there are no investment funds which might be used to pay for advice.’

The reform document says there will be further consultation about whether to extend the ban to risk insurance, including group insurance.

Of the other key reforms, advisers should note the Government’s intention to introduce a ‘product neutral’ adviser charging regime:

‘Advisers will be required to agree their fees directly with clients and disclose the charging structure to clients in a clear manner, including as far as practicable, total adviser charges payable, expressed in dollar terms.’

If the client does not renew the services, the adviser cannot continue to charge the client

Further, advisers will only be able to charge ongoing advice fees if a payment plan has been agreed with the client, or if the charge relates to the provision of an ongoing service.  If the client does not renew the services, the adviser cannot continue to charge the client.

Commenting on the commission element of the reform package, AFA President, Jim Taggart, said that in banning commissions the Government not only denies consumers the fundamental right to choose how they pay for advice, but goes one step further and dictates how they remunerate their advisers:

“It is a major concern that in a free market, the Government should consider it necessary to legislate how any professional in any industry should be remunerated,” said Mr Taggart.

IFSA CEO, John Brogden, welcomed Government’s reform announcements as a win for consumers and one that will build trust between financial advisers and the community:

“Our objective is to create a financial services industry where advice is transparent, of the highest quality and available to all Australians. This package, in addition to industry initiatives to enhance customer control and ban commissions on superannuation, will substantially achieve these outcomes,” said Mr Brogden.

Click here to access the Government’s Future of Financial Advice reforms, noting a detailed summary of adviser remuneration reform is contained in Appendix B.

We welcome your comments on this major announcement…



24 COMMENTS

  1. We are merely following the lead of some other countries, and seeing the demise of the finance industry. Mortgage brokers are feeling pressure to commence from 1 July 2010 – now financial advisers are feeling pressure from 1 July 2012. But the distinction between retail and wholesale is not defined – most changes only apply to retail investors. I trust the ACCC, ASIC etc will monitor retail products and see that they actually fall the same or more in cost that the commissions being removed – I think time will show that they do not…

  2. The product groups – both for-profit and not-for-profit sectors – will be rubbing their hands with glee at this announcement. Less competition, less independence of advice and fiduciary responsibilities moved onto the shoulders of their employee ‘advisers’.

    These changes may appear to favour the consumer but the consequences will likely be the opposite. The reason being, that these changes favour the product groups who licence their own ‘tied’ advisers, yet disfavour the ‘multi-agents’ who are also the only potential source of independent advice.

    Let’s be clear, the product groups will always retain a mechanism of product sales (and/or retention) incentives for their ‘tied’ advisers. Product sales incentives which mirror the negative features of commissions, yet remain hidden within the business and accounting structures of the major financial institutions.

    For individual advisers, employment opportunities will become almost entirely dependent on being a product sales focused ‘adviser’ working for a single product group. At the same time individual advisers will shoulder more responsibility and less job security.

    For the consumer, the possibility of finding independent advice in the future will cease to exist, unless they understand the industry and are very wealthy.

  3. Again we are seeing government departments being advised because someone has an aggenda. If all fees and charges are disclosed as required what is the problem. The word commission is being presented as if the clients don’t know advisers are receiving them. Most clients can’t afford fee for service payments out of their hip pocket and prefer the system where all commissions and fees are disclosed and applied to enable the adviser to be paid for the quality of the advise that is given.

    Is financial planning only going to be available to those who can afford it and at what standard? In the industry we are well aware that there is a differing opion re commission payments especially from certain sectors of the accounting fraturnity. It appears the word commissions is viewed as a dirty word and everyone would prefer the word fee.

    It is the non discloser that is the problem not the name of the payment. We seem to have idealists advising government departments on how things should be done. If one has a huge wage packard, sure lets doe fee for service but there is a substantial number out there who rely on the availability of these payments to enable them to afford financial advice.

    Again the clients will suffer and the average adviser will not be able to compete with the bigger conglomerates who are backed by the banks and fund managers. Freedom to choose will no longer be available to the client who cannot afford to pay out of the hip pocket which is related to a substancial number of investors.

    At the end of the day all investors should have the right to choose their own adviser and have an agreed value for payment which should entail quality advice. If that payment is made up of fees, commissions etc irrespective of its label and is fully disclosed what is the problem?

    Would it not be more beneficial to weed out those who are not disclosing their payments? Or is just a case of much easier to make new legislation to catch a sector of the industry they are too lazy to review.

  4. Joanne has nailed the underlying issues very well. It seems to me many people in our industry want to be deceived and/or are quite delusional. At the end of the day all FP Practices need to be profitable. This is becoming an increasing challenge and I suspect this latest government scorched earth policy to totally destroy the perceived ‘commission’ enemy will further exasperate this problem. To survive we either put up client fees, cull staff, or go out of business. Without ongoing trail commissions, we will have no financial capacity to carry unprofitable clients so they will have to be culled. As is typically the case with misplaced government policy the consumer will be worse off as they will less choice, higher direct fees and advice will be out of reach for most. The bottom line is the bottom line, but most of those who represent us have never run a business in their ‘socialist’ utopia so thus have no natural empathy. As an extension of this crusade, I assume the government also plan to ‘outlaw’ Real Estate & Car Sales people receiving commissions, not to mention the Avon Lady.

  5. I can just see the annual “opt-in” fee being the catalyst that will cause advisers to form relationships only with the wealthier section of community. The extra work involved in explaining the benefits of dealing with an adviser to all the smaller clients and having them sign a form etc. could prove to be an admin nightmare. I gather the super fund customer service lines will get alot busier with member enquiries. That means more staff which means higher costs which equals fees staying high or getting higher.

  6. I agree with Joanne.

    I, and certainly majority of my friends, are not in a position to be able to afford an upfront fee and would much prefer a commission structure.

    Do I need financial advice? Certainly! I am a young Australian who is in the first stages of wealth creation.

    Can I afford it with fee-for-service? Most likely not as it would involve stretching an already tight budget.

    With increasing costs of living, mortgage repayments increasing, and a 12 month wage freeze thanks to the GFC – now they want to throw a Fee for Service on top of those costs?

    Where is the incentive to see the independent experts? A commission structure gave me the ability to receive the advice now and pay for it out of the investment proceeds. This helped me financial now and in the future.

    Why ban commissions? Why not give the clients the choice on how they pay the adviser? So those that want can pay upfront fees, those that would prefer commission can use commission.

    And no, I am not an investment planner. I just see this as another bad idea rushed into place as a knee jerk reaction to a couple of bad apples.

  7. What is so wrong with being paid for a service?
    No-one gets their car serviced or their hair cut and expects not to pay for the service provided. Why should Financial Planners not be paid for the service they provide?
    If the products you hold are paying a Financial Planner that is not doing anything for you, that is wrong, but if you are receiving a service from your planner why is it so wrong they are being paid for adding value to your investments or protecting your assets.
    You can get advice at a discounted price from your Industry Fund but how independant is that advice?
    A Financial Planner should be working for you to come up with the best plan to get you to where you want to be. Who cares how the advice is paid for, as long as the client knows what they are being charged and the Financial Planner is paid for the service being provided.

  8. All I have read in the last few days are statements, including those of Government ministers, linking commissions with the collapse of Storm and other financial/lending groups. Commission was not the cause of Storms demise. It was pure greed, arrogance and ignorance – by both Storm and the investors. For example, Home loans granted to people on no income. This has absolutely nothing to do with the financial advice industry, let alone commissions. How about ignoring months of buffer and margin call warnings? How would the adviser not receiving a commission have saved this situation. The sharemarket falls over 60% yet a small trail commission is the central point of blame.
    They also claim that commission causes a bias in where funds are invested. So, when someone walks into a NAB branch or an industry fund office under the new regime and requests advice on where their money should be invested from a salaried employee, is there a chance in hell it will go anywhere other than into their own products? How is this creating a more level playing field that these lobbyists and inexperienced polititions are claiming? Interesting that the pollies don’t have a problem receiving a lifetime pension from the taxpayer for doing nothing after just a few years in office, yet infer we receive fees ‘for doing nothing’. Look at the recent decisions made by this government ‘in the best interests of the people’, and tell me they have any credibilty in making such decisions. Few of them would have any experience dealing with financial advisers.

  9. What concerns me is the misinformation in this article. Asvisers are already required to disclose fees in a clear manner and in dollar terms. Advisers already require clients to agree directly with any fees payable and how they will be paid.
    The availability of low cost advice on areas such as transition to retirement and retirement planning leaves me shuddering. These areas of advice are often complex, and the thought that a person with minimum training would offer advice on such areas very likely means that people are not going to be properly looked after.
    Finally it is a constant frustration to me that the new statutory law on fiduciary obligations makes it sound like advsiers have never had a fiduciary obligation. Common law sees advisers as acting in a fiduciary role , and this legal responsibility is drummed into advisers from the onset of their training.

  10. Obviously full disclosure hasn’t worked from the Govt view and they need to take away a persons choice and ability to afford independent advice.
    The Govt should be focusing on the advice documentation required to give advice as this to me seems to be the source of confusion and the ability to baffle clients with b@llSh!t lets “Storm” events happen.
    Just another gem to add to Labour’s list of brilliant decisions since taking office.

  11. The government decisions about banning commissions I still think are wrong as they are directing how we are to be paid and not giving the public a more affordable way for them to pay for advice.

    I am not surprised by the announcement as I expect any Labour Government to always do what the Unions want (Industry Super Funds). I have been predicting a future Labour government would make this change concerning commission in Super 3 to 4 years ago. No one wanted to listen then.

    I estimate 30% of the current financial advisers’ will leave the industry within the next 2 years as was the case in previous labour government policy decisions that affect our industry.

    In 1974 the Whitlam Labour Government took away tax deductions for Insurance Premiums, 1983 the Hawke Labour Government changed Super lump sum taxes, 1986 brought in FBT and Capital Gains tax, 1988 changed the Super lump sum taxes rules again, The Keating Labour Governemnt in 1991 mandated commission disclosure, 1992 they took away personal tax deductions for personal super contributions. Added to all these changes I have highlighted, the changes to the IR Legislation y the Rudd Labour Government effective 1/1/2010 making default Super funds predominately Union run Industry Super Funds.

    My concern is that Union run Industry Funds are getting a free kick at financial planners’ expense which and are largely not for profit funds and do not pay tax. What is the point of having businesses in Australia that do not pay tax? How are we going to pay for the debts that the Rudd Government is raking up?

    These Union Run Industry Super Funds generally take any tax credits from investments that are held in the fund and do not credit the member’s individual a/cs. They use these funds as part of their operating income which is largely not disclosed to members. Yet these Union people take large salaries from member’s funds and are spending about $30 million each year in advertising on all the commercial TV and Fairfax and News Limited press and sponsor sporting clubs like Melbourne Storm. They seem to have their acolytes in the Federal government departments who have never run a small business. They also have their friends in the consumer groups and of course the ABC media.

    I THINK IT IIS TIME THE FINANCIAL PLANNING/ADVISER INDUSTRY GETS POLITICAL AND WORKS TO THROW OUT THE RUDD GOVERNMENT. Otherwise the Unions will end up running all the Super industry valued at $1.2 trillion and invest these funds that they can help them advance their industrial relations agenda by controlling so much of the investment capital in our economy. If anyone thinks this is unlikely who would have thought commissions would be banned 5 years ago?

    The Rudd Government appears to be clearing the decks of a federal election on the 28th of August as they know that most of their legislation will not get through the Senate because of the independent and Coalition Senators have the majority voting block. So we all need to talk to our clients and tell them if they want a personalised service from small business operators in the Financial Planning Industry they need to ensure that they vote this Rudd Government out of office and vote for senators that will support small business rather than union run not for profit non tax paying businesses.

  12. The governments position is weak, it simply reflects where the financial institutions are with products at present. Once they are ready for commission free risk products, that will be next.

    So, ask yourself this question.

    If commission did not exist, how would you write a strategic, business and marketing plan to build a financial advice business?

    The answer to this question will challenge you to think with vision and innovation about how to continue your passion to help people. If it doesn’t, then you will continue to allow the financial product manufacturers to drive the agenda for change.

  13. Some great comments. I was starting to think everyone had been fooled. It reminds me of an old saying “The greatest trick the devil ever pulled off was convincing the world he did exist”. Only this time the devil is the Union Funds and Large Product companies (i.e. the Banks). I will give them a clap for being able to twist the reform “they” wanted to being somehow advisers fault.

    This reform in no way provides any benefit to a client. As many have pointed out above, if anything it will increase cost to the smaller investor and reduce independance in advice (As in clients will only be advised to use the employers products).

    I’m all for consumer protection given the ABS states almost 50% of Australian’s can’t seem to fully understand what they are reading in relation to financial decisions, however where is the protection in this reform?

    Given only 5% of potential clients are high networth clients, what are the other 95% going to do under this new regime? Oh get cheap advise from a union fund employed adviser and end up in a superfund that had the worst performance over the last 12 months. Well at least they will be paying lower fees, so lets not worry about the returns or whether there were better options out there for them, which could have made them more money, as that would be wrong as they would have to pay fees for someone to help them use the better options.

    Reform away. You will get your legacy Mr Rudd, but it will be one of destroying true financial advice in this country.

    Me, I’ll adapt and change to meet the new rules, always knowing what a diservice was done to anyone trying to fund their own retirement. When the government is unable to fund my retirement I’ll be thinking of 2012 and know exactly why!!! Maybe the prophets were right, 2012 will be the end of the world, as we will all be broke execpt for the unions and banks.

  14. Once again we have been sold out by the product manufacturers and the Government. Advice for low to middle income earners has just been ruided.

  15. I can adjust & have no issues implementing as we act in the best interests of the client now & always have so this will remain. We also fully disclose our fee for advice & provide the option with the client on how they will pay for our advice & 20 years of industry study & experience. What concerns me is that all the smaller clients will no longer be able to afford the fee that I will have to charge & the fee that I will have to add to cover the admistration of this new fee & the collection of. I also hope that no commissions will now apply to the Mortgage, Real Estate, Car Salesman etc etc industries, as guess what, they all charge a commission in some way or form. Again the consumer will suffer, the smaller ones who need our assistance & advice the most. These are the people who need to begin to save so that pressure is taken off the government’s pension system, so without our industry & without our advice these people won’t save & guess what the government will be crushed until a growing reliance on the pension. But that’s OK the consumer requested higher fees & higher reliance on the pension system didn’t they.

  16. Oh well I guess I can now go to the fund managers direct and get unbiased free “advice” about my superannuation and what I should do.

    Successive government ministers have been nothing but banstanding dupes out to grow their own profiles and secure their jobs.

    Now the lower paid Australian’s will have to “pay the bill”

  17. Interestingly we will see clients opt out after 12 months and “go it alone”. Without reviews and support from research and Dealer group…along comes another product failure and who will be to blame…the original adviser that recommended the product/strategy and was never allowed to continue the client relationship. Don’t worry this will happen. The Government and ASIC can not stop product failure, the client will still want compensation.

  18. I Have been in the Financial Service industry for over 34 year and have had one complain from all the clients that i have serviced over the years and this was because the client was trying to wrought the system by making a false claim on a disability policy and got sprung.
    I have worked in excess of 80 hours per week for all these years and have been rewarded a reasonable and fair income for the service that i have provided.As previously stated by others above the collapse of Storm and other financial/lending groups had nothing to do with the commissions and ongoing trail commissions received by adviser’s and in most cases our clients recovered due to our advice not to panic and not cash in the losses and the fact that they were not placed in any greedy margin lending schemes.The CEO’s and so called Economists who are getting paid millions of $ are the ones who’s job is to make sure that collapses that we have seen in resent time do not occur and that clients money are protected,the Advisor can only advice according to the law and on information that is and has been provided to him, i do not know of any advisers that will not place their client interest first and if they do not you will soon loose the client.What is going to be created is similar to the legal system where most people would be too scared to seek advice or take legal action as the fees charged will become prohibitive except for the wealthy.It is interesting to note that the Politician who make these decisions keep on getting paid after they stop giving any service and there Superannuation payments received are not related to performance but keep being funded by Tax payers. Clients are already notified of commission/Fees charged in writing,and have the option of either being charged a fee or have commission paid to advisers,what is wrong with that?I wish i had the same options when dealing with solicitors.

  19. I take particularly offence to having my hard earned and fully disclosed income referred to as a “kick back” constantly in the media during the reporting of this issue.
    No other industry does more compliance and gives more disclosure than us but somehow we are now criminals receiving something we are not entitled to ??
    Bye Bye labour from me.
    We have already booked our appointment with our local member and will take with us some of the compliance/fact finding/SOA templates etc we use.
    I urge you all to do the same, particularly in non labour electorates.

  20. A commission or a fee is still the same, just a different name. If industry funds have a crediting rate they pay to super fund members (after “fees, charges and other costs” (including advertising)) and an earning rate which is 2+% more, is this difference a fee or a commission? Yes, most certainly it is! They just try to hide this fee/commission and say “we don’t charge high fees”.

    As if people believe it only costs $78 per annum for their administration costs when combined, the industry funds spent over $600 million in advertising in 2009 (next they’ll be believing you get “an absolutely free holiday” from a building society for taking out a home loan).

    Also, as mentioned by Peter, the individual industry fund members don’t get the benefit of tax credits, it gets “ripped off” them. So the ones taking more “risk” don’t get rewarded for it (unlike in a SMA in other super funds).

    Most now have little charges here and there, e.g. like a $10 per year Binding Nomination Fee; a $1.95 per week Insurance Service Fee; a $10 Bad Investment Year Fee; etc.

    As Debbie asks, what truly independent advice does a member get from an industry fund?

    I thought Australians had the right to choose super funds? With the industry funds wielding their size as perceived (by them) power, and with threats and false advertising, this right to invest in other good performing super funds is now being further choked off. Re-iterating what Trent says, 95% of Australians will be worse off.

    Is that “Fiduciary responsibility”? Client first? Don’t think so.

    Financial advisers already have and show a fiduciary responsibility to their clients in many ways. One way is that Financial Advisers show in dollar and percentage terms what the client will pay, so the client isn’t having the wool pulled over their eyes (unlike all the above).

    As for extending the intra-(industry)fund “simple” advice. News Bulletin:-

     TTR/Pension, Super and Centrelink payments and ‘general” retirement planning are not “simple” advice.

    It can be all intertwined and pertinent to each situation, which is individually unique, with different strategies and outcomes

    I’d like to see industry fund members trying to get this extension of advice, as they don’t get any service from these funds now, so it’s ludicrous to believe that that service will be extended.

    A bigger number (i.e. – extended advice) multiplied by zero is still zero.

    As Trent alluded to, if you do get to speak to someone and get some advice “You pay peanuts, you get advice from monkeys”!

    Statistics show that people who use financial planners end up with more funds in retirement. Why? Quality advice coupled with up-to-date research on market trends, good debt reduction and wealth creation strategies (not just supporting their own industry by “creating jobs for our members” and inflating asset values in reports to members).

    More funds in retirement means less reliance on Government (read as – “us taxpayers”) pensions, yet as Michael again said, Australians will be more reliant on the pension moving forward, until the government is crushed.

    Is this the backlash from Labor politicians whose super balances went backwards (virtually the worst downturn in history) because of the GFC?

    Trying to blame dedicated specialist Financial Planners for this and take it out on them is not right.

    The downturn caught out the cowboys (Storm Financial, et al) but their practices of outrageous 7% to 8% fees and organising huge margin loans for low income earners and pensioners who did not have the capacity to repay those debts should have been picked up by the lenders and authorities earlier instead of being wooed and sucked in by the head honcho.

    To try to direct how a professional gets paid is ridiculous. As Michael says, who/what australian will be next?

     Mortgage Brokers
     Real estate sales people
     Car sales people
     Retail sales people
     Elite sportsperson managers

    and the list could go on and on.

  21. It’s all been said, I can’t add much more except to say that we are just seeing another example of the most incompetent government this country has had since Gough Whitlam’s and I actually liked Gough. Rudd is the biggest phoney I have seen ever running this country and his useless incompetent government needs to be kicked out. Is anyone surprised after the insulation debacle, the school building rorts, the economic nonesense of the stimulus giving cash handouts to all and sundry, the refugee chaos, the ETS debacle etc, etc. We in financial services are now just another victim of complete incompetence. God help this country!

  22. The real issue does not seem to be acknowledged by any of the comments I’ve read here.

    The problem that the government is trying to combat arises from the informational assymetry inherent in the financial services industry. This refers to the fact that the adviser is actually in a position of power since he/she is far better at navigating the financial world than the client, regardless of whether everything is fully disclosed. This is acceptable as long as the adviser has minimal conflicts of interest, which is only the case if no commissions are paid.

    A telling example of the concept of informational assymetry and conflict of interest is the doctor and patient scenario. Imagine if one pacemaker company paid the doctor commissions for recommending their particular brand to a patient! How would anyone know for sure whether they were getting the most appropriate pacemaker, or indeed whether they really needed one at all? The fact that financial commissions do not sound as outrageous as pacemaker commissions is outrageous to me.

    Going back to the high-level arguments, there remains the problem of under-insurance, under-advice, etc. which would be made worse by the changes. This issue should actually be considered separately from the fee vs. commissions question. I believe that, given the lack of appreciation of financial advice in Australia and the positive overall effect that financial advice has on society and the economy, there is a strong case for the government to step in and make it more affordable (although obviously this is more easily said than done from the point of view of the budget).

    I believe that banning commissions is a step in the right direction, but I also believe that it needs to be accompanied by a strategy to make financial advice more affordable. Commissions are definitely a very counterproductive way of achieving this.

  23. The problem is not fixed by banning commissions because the real problem is product supplier’s ongoing control of the advice industry. Over 80% of all advisers, maybe more, are employed or licensed to a product group.

    And the most conflicted remuneration structures of all are salaries paid to advisers employed by product suppliers to push their products.

    This product control of advice increases the information asymmetry mentioned above.

    Product control of advice ensures that advice will not be in the best interests of the consumer, because it remains secondary to the placing of products by the adviser.

    Product control of advice ensures that advice will remain incidental to product sales and not be universally available. No sale no advice.

    Banning commissions doesn’t fix this inherent structural problem.

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