SUBJECTS: Rudd Government's Future of Financial Advice reforms
ANDREW MOORE:
Rules determining how workers and retirees pay for and receive financial advice will be radically redrawn by the Federal Government. It comes in the wake of financial collapses such as Storm Financial, Opes Prime and Westpoint. The investment industry itself has called for change. There are some fears that the new reforms could push up the cost of financial advice and put some financial planners out of business. Under the reforms, investors will have to nominate every year if they want to receive and pay for advice, in a move aimed at preventing people from unwittingly paying for services that they don't want. And advisers will be no longer able to receive payments from banks, superannuation funds, and investment houses, for recommending their products to clients. Advisers will be required to act in their client's best interests.
The Minister for Financial Services, Chris Bowen, is on the line this morning to make sense of the changes. Minister thanks for you time.
CHRIS BOWEN:
Pleasure Andrew, good morning.
MOORE:
And appreciate the fact that it is a public holiday, so thanks for your time.
BOWEN:
I've got a two-year old with me, so if you a bit of background noise, it's just Max getting angry about something or other.
MOORE:
I've got a nineteen month and a three-and-a-half year old at home, so I do understand.
Now your hand in this area has been forced by the collapse of Storm Financial?
BOWEN:
Well, partly. These sorts of collapses that you referred to: Storm and Westpoint, and others, have highlighted what I think are some fairly fundamental problems in the way financial advice gets paid for. Now nothing comes for free, financial advice is expensive, but what we have seen is commissions, and some times very substantial commissions – 10 per cent in some instances – to financial advisers from product companies to recommend their products. So if you are client; if you are just a normal Mum and Dad investor, going to see a financial adviser, you would think that that advice is in your best interests, but really, what may be happening is that the advice that is being given to you maximises the income of the planner through those commissions.
I don't think that is acceptable and I don't believe the majority of Australians think that it is acceptable either.
MOORE:
Isn't there an element of buyer beware in all of this?
BOWEN:
Well, of course there is to some degree, but when you are going for financial advice I think you are entitled to some pretty basic protections, and those basic protections include that the financial adviser is acting in your best interests, and that hasn't been the law up until now. We'll make it the law that they must act in your best interests, not their own, and that they aren't getting financial advice from financial providers, which are really skewering the type of advice you are receiving. You should be able to judge the advice, on its merits, but based on some pretty basic protections that most Australians would think are already there, but they are not there.
MOORE:
Yeah, and look, Janine and I went to see a financial planner – the first time in my life - a few years ago, and we have taken some things up with him. I can't fault him; I think he has been absolutely terrific; he's done well for us. But how do you know whether a financial planner is acting in your best interests or not at the moment?
BOWEN:
Well at the moment I don't think you can. I should say, I think the majority of financial planners are financial planners who do operate in their client's best interests, but it only takes a small number to carry out the sort of wreckage we have seen across the country, with some of those corporate collapses. The other point I would make is that we actually want people to get financial advice; we think it is a good thing. It's a good thing for growing savings. But if we can't guarantee people that the advice will be in their best interests, then people won't seek that advice. Until these changes were brought in by this Government, we just simply haven't been able to guarantee that.
MOORE:
There are fears that these changes cold ruin the industry. How much of a concern is that?
BOWEN:
Obviously we have been very careful about the impact. Again, I would make the point, if the industry wants to be seen as a proper and professional industry, then people need to have the confidence in that industry. So financial planners can't say, in all seriousness, we want to give financial advice but we won't be professional and upfront and clear, and have proper payment patterns in place.
Now there will be some change in the industry, some financial planners won't like these changes and will leave the industry, I accept that. But I think this in the industry's interest ion the long run; a number of industry players have said that – people like the Investment and Financial Services Association have taken a very sensible approach to this, the Financial Planning Association itself has said that it doesn't think that commissions are sustainable in the long run. So I think those element are recognised and change is necessary if the financial planning industry is going to have the confidence of Australians.
MOORE:
Give us an idea, ballpark, of what the sector is worth? How much commission is paid per year?
BOWEN:
Look, it varies across the board. Direct commissions are worth a large chunk of income to financial planners, as well as trail commissions, and what they aren't is payments you see upfront, but when an adviser puts you on a product, the adviser keeps getting a commission for years into the future. Now you might think that's fine because you aren't paying, but of course you are paying, it's coming out of your investment, your superannuation. So for the long run, your pension or your lump sum is going to be lower, because these funds have been paying these commissions.
So you are going to pay one way or the other. You can pay upfront and know about it or you can pay all of your working life and not know about it, and right at the end your retirement income is not as good as it could have been.
MOORE:
So we are talking about 18,000 advisers, or thereabouts, around Australia. How many of them are link to banks or investment companies and the like?
BOWEN:
The majority Andrew, either directly or indirectly, are employees or product providers or receive commissions from product advisers; the very significant majority. Now there's nothing necessarily wrong with that, of course, if the advice they are giving you is in your best interests. That's why we are changing the law to say that the advice a financial planner must give you is in your best interest, not their own, and that includes taking into account all circumstances, and not necessarily recommending the products that suits them the best, but the one that suits you the best.
MOORE:
Now, when we went to see our financial planner three or four years ago, I was concerned about the cost of fees, but was very pleasantly surprised how inexpensive it was. Is this going to make a big change to that? Is the cost of advice going to go through the roof?
BOWEN:
Well it will change the way you pay for it. As I say, at the moment you pay for it, effectively through your superannuation fund. We have been very careful about this and that's why we provide several options that can be agreed on between the client and the adviser. It might be an upfront fee; it might be a percentage of the funds that you bring to the table. You might say "look I've got savings of $40,000 or $100,000, can you give me some advice and you can put a percentage on that", and then what we are going to do is to institute a system whereby you have to renew that every so often, so you are still getting value for money, because sometimes you can sign your life away but later you realise that you just aren't getting value for money anymore. That's not the way it should be. So we will institute a system, so maybe after a few years, you have the option to renew that annually, to ensure that you are getting the value for money that you want.
So there will be a change, yes, people will pay for the advice differently; it will take the industry some time to adjust, that's one of the reasons we are giving a long lead time. Some people might criticise me for that, but I don't want to completely disrupt the industry, so these changes will come into place on the 1 July 2012 so the industry has plenty of time to adjust, to change their systems and change their thinking, and we will do things in a strategic and coordinated way in the lead up to that start date.
MOORE:
Finally you say the Government should, or will, try to expand the availability of low-cost simply financial advice, and I really think that's an important measure.
I look at someone like me who didn't bother to seek financial advice until the mid-30s and you a sort of oblivious to the fact that it is all out there and available to you. I think it is a very important thing.
How are you going to do that?
BOWEN:
Yes it is. There are different people in different circumstances. If you haven't been working a long time, you mightn't be on a good income, you mightn't want to sit down and see a financial planner, but you may want to ring your superannuation fund and just get some very basic tips about what sort of fund you are in, and what your options are, that's been very difficult. So we will open that up a little more and make that easier for people, just to get the basic advice that people want, not with all the 'bells and whistles'. But you'll be able to get that for a range of financial services; it might be from a financial planner, it might be direct from a super fund, but that's important - just giving people access to that advice – and we are all living longer and need to make our money last longer, and sometimes this advice can be very helpful in doing that.
MOORE:
It can be very helpful indeed. Alright, I'll let you get back to your two-year old boy, Max. Minister for Financial Services, Chris Bowen, thanks for your time.
BOWEN:
Pleasure Andrew, thanks for having us on.