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Financial advice

Address the systemic issues of financial advice

John Hewison
Founder and Director
11 Nov 2015

The problems and issues plaguing the financial advice industry are systemic issues and cannot just be dismissed as a case of a small number of bad apples in the industry, advised Peter Kell, Deputy Chairman, ASIC, at the AFA 2015 National Adviser Conference in Cairns. 

I agree wholeheartedly with him. The government can make all the changes it likes in relation to education standards, codes of ethics, professional practicing standards etc. but it won’t fix the systemic problem that administers the majority of financial advice at the consumer level. Yes they are important changes but they are merely cosmetic.

As an independent financial adviser for more than thirty years, there has always been a universal issue concerning the provision of financial advice to consumers, driven by the conflicted interests of financial institutions. Many of which have corporate agendas that are not aligned to best interest duty.

Corporations, particularly those that are publicly owned, are driven by the need to achieve profitable outcomes and returns to their shareholders. Individuals employed to run these major corporations are measured by the performance criteria of profit and return on investment outcomes, and remunerated accordingly. Hence, financial advisers employed by these institutions are remunerated based on the volume of business they generate.

What difference does this make?

Independent professional financial advice practices are committed only to client relationships and achieving positive outcomes for clients, for which they charge a fee for service. They are measured and remunerated on client based outcomes, not on profits generated. There is a distinct difference in attitude, measurement and discipline between the “corporate culture” within a financial institution, and a “professional culture” in an independent financial advice practice.

The supervision and compliance requirements necessary to achieve proper control over individual adviser behaviour and training is considerable. This has been an issue that has driven many large international institutions away from Australia, the most recent being UBS.

As I have said many times before, major financial institutions do not want to be in the advice business. It is not profitable as part of their business model and it is difficult to manage. Not only do they have to pay adequate remuneration to professional advisers, they have to meet compliance costs and provide infrastructure which is extremely costly. Professional independent practices can be profitable as they do not have to answer to a corporate owner with highly paid executives, they do not have significant infrastructure costs nor do they have to achieve a margin to generate shareholder dividends.

Why are financial institutions in the advice business then?

Funds under management are the big ticket item for major financial institutions and also the reason they are in the advice business in my opinion. All major financial institutions in Australia have both managed funds and investment administration platforms which account for funds in excess of $2 trillion. With an average annual management fee of around 1.5 per cent, this is big business. It’s the reason why major institutions are lobbying hard to try and protect control.  

In the 80s and 90s, institutions relied on kick-backs and other incentives to buy loyalty from advisers. Then they invented the loyalty commission or “trail commission” that was simply designed to discourage advisers from switching investments to another institution. This became a regular revenue stream for advisers but provided no value to the client. It also became the basis for the valuation of most financial planning practices. The ban placed on commissions via the recent change in legislation has brought a halt these practices, however grandfathering of existing arrangements remains.

Not only have these arrangements unreasonably inflated the cost to the consumer, it clearly encourages advisers to make conflicted recommendations to their clients, regardless of whether this advice is in the client’s best interest.

The Financial Planning Association (FPA) has had all the measures in place to achieve high quality professional advice for many years. In fact, Australia is considered the global leader in regulation and professional standards, as represented by the FPA. Therefore this is just a matter of the industry “catching up.”

Minister O’Dwyer and her parliamentary colleagues must remember that their primary objective is to protect the public interest and improve the standard of financial advice in Australia – not to protect the interests of large institutions that will the clip the ticket of Australians’ investment savings.

I urge the Federal Government to urgently address the systemic issues surrounding the conflicted interests of financial institutions, which control more than 80 per cent of financial advisers in Australia, or the current problems will perpetuate.



Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.