It seems many people, like our dinner party guests, have been disappointed with advice. And many are hoping that the Financial Advice reforms, known as FOFA, will fulfil their goals of improving the quality of advice and tackle conflicts of interest for investors.
However, while the reforms require advisers to act in the client’s best interests, and remove product commissions (except on insurance) there are some gaps.
Here’s what we shared with our guests.
The reforms do not require that an adviser has to investigate all financial products available in the market. Now, on one hand, that is reasonable as it would be very time consuming and expensive to undertake such investigation every time. However, the risk is that advisers will continue to recommend those products with which they are most familiar. And for around 80% of advisers, this is an approved product set that is dominated by the products of the institution to which they are owned or aligned.
In a recent article in the Sydney Morning Herald, John Collett argues “banks and insurers have been buying up financial planning firms to increase the distribution of their financial products. Of the 18,000 financial planners, more than 14,000 are aligned with, or directly employed by, a bank or insurer. And these advisers, the lion’s share, funnel most of their clients’ money into their own products.”
The proposed changes exacerbate this risk. A subsequent Herald article states: “The big four and AMP are the biggest beneficiaries of the changes operating vertically integrated businesses in which advisers and sales staff are in a position to push their own firm’s products. The changes would allow the banks and AMP to reintroduce commissions and volume bonuses for advisers and sales staff so long as the advisers made it clear they were providing general rather than personal advice.”
So, what did our dinner party guests conclude?
Here is one guest’s summary of the financial advice landscape and Multiforte: “So it sounds to me that the difference between most advisers and you is this. Around 80% of these advisers think the product provider is their customer. And you… well you see people like me as your customer. And I know which one I’d prefer.”