The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Chris Bowen

Chris Bowen

Minister for Financial Services, Superannuation and Corporate Law

9 June 2009 - 14 September 2010

Transcript of 30/04/2010

Interview with Peter Mares

The National Interest, Radio National

Friday, 30 April 2010

SUBJECTS: Rudd Government's Future of Financial Advice reforms.

PETER MARES:

Minister, welcome to The National Interest.

CHRIS BOWEN:

Thanks, Peter. Nice to talk to you.

MARES:

Why ban commissions?

BOWEN:

Well, it's important that we get a lot more trust and confidence in the financial planning industry. It's been really dented over the last few years and I don't think people can have confidence at the moment that they were getting advice which was in their own best interest, and therefore that was important to try and get that transparency back.

The other reason is that a lot of people were paying for their advice through their retirement incomes and whittling down their retirement incomes in ways that they probably didn't even realise they were doing.

MARES:

What you're referring to there is, of course, what's called a 'trailing commission'. Many people probably don't even know what that is, even though they're probably paying one.

BOWEN:

Exactly, and that's a commission where if you get financial advice, you sign up and the financial adviser continues to receive payments out of your investment in effect, or certainly out of your fund provider for many, many years and you don't know about it.

MARES:

And you don't necessarily ever speak to that adviser again or ever get any fresh advice.

BOWEN:

That's right. That's right. So all these were areas in ripe need of reform. Recent collapses – Westpoint, Storm, et cetera – have, if you like, brought this more to public notice, pushed it up the agenda, but these issues have been around for a long, long time.

MARES:

But it's not just about those big collapses, though. Obviously, thousands of people did a lot of, they had savings in those big collapses, but it's also about the sense of trust, that if you go to a financial adviser you want to know that that adviser is thinking about your interests and not thinking about the commission that is going to be paid if you sign up for a certain product.

BOWEN:

I think that's a key point. We really want people getting financial advice – I think it's a good thing, it actually helps people plan their retirement incomes, maximise their retirement incomes – but it's got to be good advice and it's got to be designed to be in the best interest of the client. And I don't think we could say with any confidence that that's the case, and we need to have a very robust set of laws in place to ensure it's the case.

I think the financial planning industry, in the long run, will grow as a result as people get more confidence, as it's much more transparent, much clearer, that it is in their own best interest, and that conflicts of interest have been eliminated or minimised.

MARES:

Without commissions, though, how will financial planners be paid for the advice they give?

BOWEN:

Well, we still wanted to provide plenty of options for the adviser and the client to enter into. So we've introduced a thing called 'adviser charging', the adviser charging regime, and that will enable clients and their advisers to come to an agreement. Some of the options might be an upfront hourly fee, that will suit some people, and there are already some advisers who charge that way; it may be a percentage of funds under management, fees as a percentage of assets under management.

MARES:

So that would mean if I got – I wish I had – a million bucks under management, some proportion of that million dollars would be what I'd pay each year for the advice I get.

BOWEN:

That's right, with one important caveat, Peter: we've flagged a change in the law so that could only be money that you bring to the table. So if you go and see an adviser and say, 'You know, I've got $100,000,' and the adviser says, 'Well, that's fine, then I recommend you borrow another $100,000 and then we invest it all,' they can only charge it on that original $100,000 because we don't want to provide advisers with an incentive to over-leverage people.

MARES:

So [inaudible] the adviser would have an incentive to encourage me into debt because the adviser's fee would be fatter?

BOWEN:

Absolutely. That's correct. So the assets under management option will only include assets brought to the table by the individual.

And this was a big issue, without prejudicing any ongoing investigations, this was a big issue in Storm. Storm didn't have very big commissions as such, but they had very big asset under management fees, and that led to many people borrowing more than, almost in argument, they should have. So that's an important point. That's one of the options.

It will still be possible for clients and advisers to agree that the adviser's fee could be paid out of their investment, so paid out of their investment returns over time, but that's direct between the adviser and the client. It can't come from the product provider, from the fund, at all so it really gets rid of those conflicts and means that there's still flexibility for the adviser and the client to work out what suits them best but with some very clear parameters about what's allowed and what's not.

MARES:

This is The National Interest on ABC Radio National. I'm speaking to the Minister for Financial Services, Chris Bowen about the changes to the financial advice industry and getting rid of commission-based payments.

Minister, one of the fears is – well, I suppose there are two key fears here – one, a lot of financial planners will go broke because this has been the way they're paid, and the other is a lot of people won't get advice because they won't like making upfront payments.

BOWEN:

Let's deal with the first one first, about the impact on the financial planning industry. Firstly, structural change is going to happen in the financial planning industry anyway; it's already happening. The average age of a financial planner in Australia, I think, is 58. We're seeing a lot of practices for sale, et cetera; that's before any of these changes come into place. So there is going to be change.

Now, will the changes we've announced lead to more structural change? I think they will but, as I say, I think that's, in the long run, in the best interests of the financial planning industry. Why do I say it'll lead to structural change? There'll be some planners who say, 'Look, I just don't want to work under this arrangement, I just don't think I could make it work,' and they will exit the industry. There'll be others – and I know of people in this situation – who've looked at becoming a financial planner, thought about it and just thought, 'No, look, there's too many conflicts, I just wouldn't feel comfortable'.

MARES:

And the compromises, the compromises are too great.

BOWEN:

Yeah, and I know a number of those people will be, you know, more attracted to come into the industry.

Now, I know there's an argument about small business that some people have raised. Eighty-five per cent of advisers in Australia, financial advisers, are actually affiliated with one of the large financial services companies, so they're owned by banks and superannuation funds in effect, and they've got those links. So this isn't just about small business. The vast majority of advisers in Australia are actually linked in some way or another to one of the big financial services providers.

MARES:

Well let me jump in there because that's another potential conflict of interest. If I go to an adviser who ultimately is owned by a bank or another big fund, they're going to sell me that bank's product, aren't they? They're not going to sell me someone else's product.

BOWEN:

Well, that why we put in these rules, and there's two key rules. One is the ban on commissions, and that applies to in-house advisers as well so there can't be any incentive to sell more products, bonuses, or any incentive to say, 'Go out and sell more of our product then your salary will be higher'.

Secondly, the fiduciary duty. So at the moment, there is actually no duty on advisers to act in the client's best interest, so we're going to make it a fiduciary legal duty to say, 'You must act in your client's best interest, and if there is any conflict between your best interest and the client's, the client must come first'. Now, that will mean, in some cases, if you go to a financial adviser who's linked to one of the providers, they may need to say to you to meet their fiduciary duty, 'Look, we just can't, we just don't have a product which is in your best interest, we can't help you'.

MARES:

'Because we only recommend products from bank accounts,' or whatever.

BOWEN:

Exactly. So they're either going to have to expand their product range or recommend that they go and see somebody else, and that will be a matter for the planner to assess, but they'll need to justify their decision to ASIC, to the client, to the courts, you know, in the worst case scenario, that they acted in the client's best interest and if they don't, they run the risk of losing their licence and their livelihood, so it's going to be something which is front of mind for them.

MARES:

Let me come back, then, to the other point I raised, which is people will now be reluctant to get financial advice because they have to pay for it, or they're more, they can see they're going to have to pay.

BOWEN:

Sure, sure. There's two points to make there. But firstly, Peter, as you say, you're seeing how you pay for it. Financial advice has never been free, it never will be free, and people are currently paying for it out of their retirement incomes. I accept that if it's more upfront and transparent, that will be more confronting for people and will make them think about the choice they're making. But I think that's not a bad thing. I mean, that's how the society in our economies need to work, that people are aware of the costs and make an upfront, clear decision about whether the cost can be justified against the benefit.

But we have done some other things as well. We're expanding the range of what we call 'intra-fund advice' which is simple advice, which is primarily given by a superannuation fund to its own members. So if you ring your superannuation fund, you might just want some simple questions answered about retirement planning. So we want to expand the availability of that as well as the other things that we're doing, and providing those options to people to pay over time, the various ways of calculating the fees.

I think financial planners – it's a competitive field – they'll be competitive about trying to get business and keep their costs down as much as they can. It won't be cheap, it won't be free, but at least people will know what they're paying and they'll be paying it upfront, in full knowledge.

MARES:

Minister, thank you for your time.

BOWEN:

Great pleasure, Peter. Nice to talk to you.