Main Image – Liberal government meeting to discuss the need for a Banking Royal Commission, circa 2016.
For balance, let’s not pretend the sort of deplorable behaviour we’re hearing about wasn’t occurring under previous Labor governments, but the sheer number of recent financial scandals meant the Liberals missed a trick in pushing against this for so long.
Firstly, having been in the financial services industry for over 20 years we can honestly say that there are many, many advisors who are great at their jobs and absolutely act in the best interests of their clients.
Secondly, having worked in the industry for over 20 years we can honestly say there are lots of advisers who act in the best interests of themselves and the organisations they work for. In some cases, it’s an individual being greedy, lazy or just plain daft, but for many it’s the industry structure that encourages this behaviour.
So now that we’re through the second round of public hearings, focusing on financial advice, let’s look at how we got here, some of the things we’ve learnt and how you can protect yourselves from featuring in one of these horror stories.
Why did we need a Royal Commission on banking?
Over the last decade Australian banks have been plagued by one scandal after another involving inappropriate advice, overcharging fees, sales driven cultures and general misconduct. To get an idea of how widespread the problem is, the big four banks (together with AMP) have paid out over $380 million in compensation over the past decade to clients who have suffered as a result of bad advice or a failure to provide ongoing advice services.
How does it work?
The Royal Commission, funded by taxpayers to the tune of $75 million, was established to investigate misconduct in the banking, superannuation and financial services industry. Its powers are wide ranging; the Commission can summon witnesses, take evidence and authorise police to apply for search warrants. The final report can make recommendations for the government to consider, including changing laws and regulations.
It’s split into three public hearings – Consumer Lending Practices was completed in March; we’ve just been through the Financial Advice portion and then on 21st May we start on Small and Medium Enterprises.
The final report is scheduled for delivery in February 2019, although there’s a real possibility this timeframe will be extended given the revelations so far.
Following the Commission proceedings has been excruciating, maddening and at times heartbreaking hearing the real-life stories from those affected. The examples of improper advice and fee gouging are many and well publicised so we’ll not list them all here. What we will do is provide some pointers and explanations around some of the more common terminology used:
- Fee for no service – quite literally paying for something you don’t receive. Or as some would call it – stealing. There are advisers who have hundreds of clients and can’t possibly service them all properly but will continue to accept the ongoing fees.
- Buyer of Last Resort (BOLRs) – where an organisation agrees to purchase an adviser’s client base and then places the clients into a pool on their platform. In many cases this has led to the clients receiving no advice but continuing to pay fees.
- Vertical Integration – a term you’ll hear a lot. A ‘one stop shop’ for all your financial needs. Basically, cross selling. This is where your bank adviser recommends you invest in the bank’s investment products via their bank platform. At each step of the way you pay fees to the bank.
- Best Interest Duty – part of the Future of Financial Advice (FOFA) reforms introduced in 2013. Simply, the provider must act in the best interests of the client in relation to the advice.
What changes are coming?
Clearly there needs to be massive reform coming out of this sorry affair. We’re already seeing changes with the new Financial Adviser Standards and Ethics Authority (FASEA) legislating to increase the education standards across the industry and we’re seeing more advisers looking to get their own Australian Financial Services Licence (AFSL) rather than be tied to a bank or product provider.
But after the disclosures of the Royal Commission there must be more sweeping changes on the way, perhaps the separation of advice and product and removal of commissions on insurance products and mortgages.
We welcome any changes that lift the general standards of advice.
How do I find a good adviser?
Choosing the right financial adviser is an important decision in helping you achieve your financial goals. Fortunately, there are resources available to help (and undoubtedly more will be available as new regulations are passed). A good starting point is ASIC’s list of 25 questions you should ask your adviser, but here are some pointers below:
- Ensure your adviser is licensed to provide advice (check with ASIC) and has the appropriate qualifications to do so. For example, a Certified Financial Planner (CFP) has gone well beyond the current minimum standards required to provide advice.
- Ask who owns the business and for full disclosure of any relationships the adviser has with other financial institutions.
- Ask how much the advice will cost and how the adviser charges for it – is it a one-off fee; ongoing; time, asset or commission based. And make sure that when you do receive the advice, all the fees are clearly stated (note also that annual Fee Disclosure Statements must be provided to all retail clients who are receiving ongoing advice).
- Find out if they have an investment philosophy, what investment products they can recommend and how the investments are monitored.
- Above all, read the advice, make sure you understand it and ask for clarification on any parts you don’t. It’s your (and your family’s) future you’re dealing with.
Alternatively, speak to us at Keep Wealth Partners. We are privately owned, not tied to any financial institution, do not accept commissions and we will always put your interests first.
Keep Wealth Partners Pty Ltd (AFSL 494858). This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if the strategies and products are right for you.