Financial planners – will we be able to trust them?
by Peter Switzer
Ripoll expects the legislation not to be ready until 2012 and it means that financial planners could be in limbo until then. Business uncertainty is never good for business but this is typical of government and especially one that’s in a minority dependent on independents.
Waiting until 2012 could mean Labor will get its way as the Greens will have control of the Senate by then and that might be why Bernie is sure his proposed changes will get up.
Business as usual
After the interview, I received an interesting email from a man who prefers his privacy, but is someone who I regard as an expert on financial planners. This is what he emailed me after the interview: “I watched your interview with Bernie Ripoll. Bernie sounded good, as usual. The unfortunate thing is that it’s simply nonsense to suggest that removing commissions will fix the industry. We need to get rid of asset fees as well, because if we don’t, commissions will be replaced by them, and the conflicts of interest will continue. In summary, it will be business as usual. We’ll go to all this trouble for no reward. Very sad. The industry knows this and knows that nothing fundamentally will change.”
I returned fire to my mate reminding him that Ripoll wants an end to any payment to an adviser which could be seen as a reward for selecting one product or service from a financial institution over alternatives.
For example, many advisers won’t recommend industry super funds because there’s nothing in it for them. By the way, these funds don’t make it easy for advisers because they don’t give them good quality service and so advisers can’t service their clients professionally, though I believe some of these funds are thinking about addressing this.
Responding to my ‘return fire’ email, my mate came back with this: “I agree that volume rebates will go, but the industry is trying to water that down too. However, the key issue is the retention of percentage-based asset fees. Keep them and nothing much changes. The industry knows that, which is a very poor outcome for a huge amount of legislation!
“Ripoll investigated Storm for 12 months and recommended the removal of commissions but commissions were not the remuneration model on which Storm was based. It was based on asset fees. So, in summary, the Ripoll Committee effectively endorsed the remuneration model used by the object of their enquiry. Pretty amazing! I’m not sure that Bernie gets it really!”
In case you don’t understand ‘asset fees’, my mate is referring to an adviser who charges, say, a one per cent fee for his or her service. If you come in with $500,000 to invest, then your cost would be $5000 but if you were ‘lucky’ enough to have $1 million to invest, your fee would be $10,000, unless you were smart and tough enough to negotiate the fee down. Many people are not smart, nor tough enough.
In the case of Storm, I saw one client whose potential bill would have been $70,000! This was created by margin loans, which pushed up the assets under management and the fee was seven per cent!
My final email to my mate looked like this: “Correct me if I am wrong, and I know you will, but they seem to be attacking the charges that were not transparent that could influence a financial planner’s choice. Obviously they don’t care if someone charges a percentage fee as long as the dollar cost is shown. You are right about Storm but I do believe many of the people who fell into Storm were greedy or naive and it is always hard to legislate against this. We had one person come to us who asked us about their seven per cent fee which translated into a $70K fee. We told her we could do her plan for $3500, I think, and even let her pay it off monthly. She stopped paying after three months! You know how we have charged and it does not give you advantages in the wider community. Smarter people get it but most don’t.”
In our financial planning business we started off with a goal to be the most honest and straightforward financial planning business in the country but as I said to my mate, people don’t like writing a cheque for advice. They have preferred to tick a box to see one per cent taken off their investments each year rather than actually dipping into their own cash flow.
Ultimately it’s their choice but as a financial adviser I think it’s critical to tell the truth about everything when it comes to your client’s money and, call me old fashioned but being totally upfront about the charges has to be the starting point.
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Published on: Wednesday, October 13, 2010blog comments powered by Disqus