There is a raft of proposed changes but the key issues for debate that clients should be aware of are:

1. Banning of product-based commissions
2. Fiduciary duty
3. “Opt in” agreements for client in respect to trailing commissions

1. The banning of product-based commissions is a no-brainer for ensuring clients are receiving advice that is in their best-interests – not the interests of a product-provider. Financial advice fee models have been hotly debated for over 20 years and we have been an active contributor in supporting a fee-for-service model while sadly much of the industry has had their head in the sand on what was clearly an inevitable conclusion.
2. We have always taken the view that as advisers of complex financial decisions we have a fiduciary duty to act in the best interests of our clients’ individual needs – so this enforcement will not affect the way we continue to manage portfolios. . In fact under common law, financial planners had a fiduciary duty anyway, but it is good to see this enshrined in the Act. With something like 75% of financial planners in this country owned and/or controlled by major institutions who are also product manufacturers, it begs the question of how they can possibly comply with the fiduciary requirement either in principle or in practice?
3. Finally, the opt-in regulation relates to the renewal of ongoing service fee agreements, which is a throwback to continuing trailing commissions payable to advisers by providers of investment products. Whilst they are referred to as service commissions, the reality is that they came into being as loyalty commissions as a method fund managers used to encourage advisers to retain the product. These arrangements will no longer be allowed under the ban of commission but this ban is not retrospective for existing investments. Most clients in these situations don’t even know these commissions are being paid to their adviser, but under the new regulations, if an adviser wishes to establish an ongoing service fee arrangement with a client, he or she will be required to have them sign an agreement annually. In the event the adviser does not provide a valuable service it is unlikely that the client will agree to opt-in in the future. This seems perfectly reasonable to me – provide a valuable service and clients will be happy to continue paying for it.

So what’s the bottom line to all of this?

• Clients are entitled to receive unbiased advice, completely free of any conflict of interest.
• Advisers are entitled to be paid for their professional advice and services and that arrangement should be agreed with the client and be totally transparent.
• Investment advice is merely one element of comprehensive financial advice and management. Investment product itself should be stripped of all payments, incentives or benefits attributable to the adviser.

Professional financial advisers provide invaluable advice and continuous service to their clients and the financial and other benefits are clearly demonstrable. In our experience, the partnership formed between client and adviser is extremely close and entails continuous contact and consultation. The adviser needs to be totally across all the client’s changes in circumstances and pro-actively respond to changes in legislation, events such as birthdays that trigger strategic changes, investment markets, portfolio re-balancing to mention just a few.

Unfortunately it seems that the regulator is so product focussed that it does not understand the true essence and importance of the ongoing relationship between the client and the financial adviser.  ASIC has recently come out with strong statements against the future existence of asset-based fees. I make two points on this – firstly, it is incumbent forASIC to understand the nature and viability of financial planning businesses and suggest a viable alternative.

I suggest to = ASIC that clients would have been glad of asset-based fees during the GFC as their fees would have fallen considerably in line with the value of their portfolios.

At the end of the day, the calculation of fees is irrelevant. It is the issue of fairness and transparency that is important; that the client fully and clearly understands what they are paying, who they are paying and the service they can expect for their outlay. It is incumbent upon the adviser to provide a service that represents value to the client for the fees they pay.