SUBJECTS: Rudd Government's Future of Financial Advice reforms, Cooper Review
ROSS GREENWOOD:
Chris Bowen, as I say, is the Financial Services and Superannuation Minister in this country. He announced it and joins us now on Money News. Many thanks for joining us, Chris.
CHRIS BOWEN:
Pleasure, Ross. Good evening.
GREENWOOD:
It is a bold step. As I say, I'll criticise the Government for a lot of things, but not for this. I think it's actually the right thing to do but it does raise, quite clearly, some issues about how you will implement it in two years' time. Why did you take two years to do it?
BOWEN:
Look, two reasons primarily, Ross. Firstly, the industry does need some time to adjust. There's a lot of systems changes here. This is a big change, as you say, and there will need to be a lot of transition, a lot of preparation and adjustment.
The second reason, frankly, is that the legislation will need a lot of work. We'll need to consult on some of the finer details. We've got an election later in the year which will take out a lot of our Parliamentary sitting weeks and it's going to take some time to get through the Parliament, especially as the Opposition have indicated today they're going to try and stop us doing this. So this is going to be quite an exercise and it will take some time.
The UK are doing some similar things but we're getting it in six months before the UK is. They've said at the end of 2012; we think we can do 1 July 2012.
GREENWOOD:
Now, I notice industry super funds, who have championed this cause as well, they indicate they believe it could save Australians up to $15 billion a year. I tend not to believe it, because if you're not getting your financial advice wrapped in with your investments, you're going to have to buy that financial advice somewhere else. What do you believe the cost savings might be?
BOWEN:
Well, look, financial advice has never been free and never will be free. There's always a cost. We can pay for it upfront or we can pay for it through a reduction in our retirement incomes through commissions. I think it's much better to be much more transparent and know what we're paying. Now obviously, if you're paying upfront and your investment is not affected, then all the returns that you would have got on that investment are continuing and your retirement income's going to be higher.
The important thing is to give people some choice about how they pay, and by introducing adviser charging, letting people pay hourly fees or asset-based fees, letting people pay upfront or out of their investments over time, we're giving people that choice. It'll be very transparent between advisers and their clients, and we're giving people the opportunity to actually know what they're paying, instead of it being hidden away, you know, in the fine print of disclosure. People will be very aware of what they're going to pay.
GREENWOOD:
And will the scrapping of commissions in this way, do you believe, stop financial collapses in the future?
BOWEN:
Well, it won't stop financial collapses because there's always going to be different offerings with different risk, As you know, Ross, if somebody's offering you a high risk, sorry, a low risk and a high return, that's probably too good to be true. If they're offering a high risk and a high return, if you know about that and you're prepared to take that risk, that's up to you.
But what's important here is that when you go and see a financial adviser and the financial adviser tells you, 'Look, I think you should put your money into this product', you know from now on, if these laws are in place, that the financial adviser can only be advising you that because he think or she thinks it's in your best interest, not because there's some sort of payment going to them for advising you to go down that road. If you go and see a financial adviser, it's very important that you know that the adviser's not getting some sort of commission, some sort of – some people call it – a kickback to advise you to take out that product.
So the reforms we're announcing today won't stop financial collapses, but they'll stop people getting advice to invest in bad products which happen to be in the best interests of advisers but are clearly not in the best interests of ordinary mum and dad investors.
GREENWOOD:
Well, speaking about those ordinary mum and dad investors, of course the Opposition has come out today and said this will potentially discriminate in particular against low income and, if you like, low income and also those people with lower assets as well because ultimately commissions made the advice or the obtaining of advice affordable for them. Now, of course, the answer is if they don't get their financial advice as part of the cost of investment, where will they get their financial advice from in the future?
BOWEN:
Well, I was pretty disappointed in the Opposition's response, because that would imply that it's okay to give bad advice, it's okay if the advice is tainted, as long as you're getting some advice. I think that's a very short-sighted approach. Eighty-five per cent of Australian advisers are in some way associated with one of the financial providers, so it's not in relation to small business, which they've also said.
We've also announced today, we've announced a range of things today, we've also got a lot of – commissions has got the most attention –
GREENWOOD:
Of course.
BOWEN:
[inaudible] But we've announced a range of things. One of the things I've announced was freeing up advice, making it easier to get some very simple, low cost advice, particularly targeted at low income earners. Not everybody wants to sit down with a financial planner and go through a very sophisticated financial plan about their future. They just want to get some very basic advice so we've made that easier to get through some of the things I've announced today. So you can just ring up your super fund to get some advice. Some people want to get it through a financial planner, some people want to get it just through their super fund. The important thing is that people have access to that advice, so we've done that as well today.
So we've tried very hard. I've said all along, it'd be very easy to deal with conflicts of interest but that could increase the cost of advice. What we need to do is deal with conflicts of interest in a way which keeps advice affordable and I think we've done that today, frankly.
GREENWOOD:
Could I ask a question? It was raised by somebody who sent me an email today, Brett from [inaudible] in South Australia, and he raises a really, really good point. A real life example at the moment is, let's say for example, you find an Australian share market fund that you want to invest in. You go and see your financial planner, they say, 'Yeah, we want to put you into that fund, XYZ fund, it's owned by one of the big banks and the upfront fee is three per cent'. Of that three per cent, one per cent goes to the manager – in other words, the big bank – and two per cent, that you don't really see, goes back to that financial adviser as a commission. Now, what Brett quite correctly says is will the banks therefore cut their upfront fees given the fact that it is mixed up with the advice? Will they cut their ongoing fees, which are the big ones that really bite people long term, in terms of their overall superannuation funds or indeed their investment funds? So therefore is there any checks and balances from the Government to make certain that as advice is separated from the cost of investment, that the consumer is actually winning as a result?
BOWEN:
We are going to see significant changes in the way that these things work, and of course we're not just abolishing upfront commissions, we're also abolishing trail commissions.
GREENWOOD:
Which are the important ones, 'cause that's where they make all the dough.
BOWEN:
Yeah, that's where, you know, you might see 0.01 per cent or something like that, but it comes through over the years as up to a very big amount of money that goes from your, effectively your retirement income to advisers.
Look, this is part of a range of measures. We're also looking, as you know Ross, at the Cooper Review, which is dealing with the responsibility of superannuation funds to make sure that those fees and commissions come down over time. This is really [inaudible] dealing with the conflicts of interest. We're going to see changes as a result of this; I don't walk away from this, the changes will be significant. There'll be changes to the way people pay for their advice, there'll be changes to the way that funds charge and the funds deal with advisers.
The changes will be significant but there will be, I think, very significant benefits for individual investors, consumers and also, frankly, in the long run for the financial planning industry because people need to have confidence. People aren't going to go and get financial advice if they don't think that it's in their best interests. The changes that we've made today mean that, in the long run, people will be able to have that confidence that it's worth the money to go and get good and proper advice because they'll know it's in their best interest.
GREENWOOD:
Chris Bowen is the Financial Services and Superannuation Minister joining us now on Money News. Many thanks for your time, Chris.
BOWEN:
Pleasure, Ross. Always nice to talk to you.