Financial planning commissions must be banned | Hewison | 1
< Back to all insights

Financial planning commissions must be banned

The time for rhetoric is over and commissions in the financial services industry must be banned, according to John Hewison, CEO of a leading independent wealth management firm and former Chair of the Financial Planners Association.
 

Hewison’s comments follow the Australian Securities and Investments Commission’s action on advertising for candidates to their financial adviser stakeholder team. This ASIC team will seek to increase competition among planners and overhaul their disclosure of fees, risk, and relationships that could create conflicts of interest.

Hewison, who has been a vocal campaigner against the commission system since the early ‘90s, is astounded that the debate continues into the 21 st Century.

"Financial disasters like Fincorp and Westpoint that cost investors millions of dollars would be much less likely to happen if there were no commission incentives for advisers to recommend them," says Hewison.

"The issue is deeper and more sinister than just sales and trail commissions. The public is paying substantial hidden costs from financial advisers who work on a commission base."
Hewison believes the quality and breadth of advice is being seriously compromised by a system of bribes, incentives, and conflicts of interest.

"The entire financial product industry is based on churning out obscure complicated ‘flavour of the month’ products just to give them a fresh sales pitch," he says.

"The key to professional financial planning advice is that it should be specifically designed for the individual client’s particular needs. It’s what they seek and what they expect. They don’t want this advice tainted by product bias, conflicts of interest, or sales commissions."

While Hewison concedes there are many legitimate planners using the commission system, he claims the regime is indefensible because individual planners can’t opt out of the systemic influence of incentives on behalf of their clients.
"Logic says that by definition, commission is a sales-oriented payment and must be seen as being biased, whether real or perceived."

Hewison says there are fundamental problems with the financial advice industry starting with a product-based regulatory regime flowing through a product-driven industry.

"There’s no doubt that the product manufacturers see the financial advisory community as their sales force and provide financial incentives to gain favour and loyalty," Hewison claims.

"Apart from sales commissions, there’s a raft of hidden incentives directly impacting the costs of client investments. These include ‘shelf space’ fees to have products included on an advisory firms recommended list, volume incentives to encourage bias towards a product or brand, promotional or sponsorship subsidies – the list goes on.

"All these costs are included in the manufacturers’ pricing but are born by all investors who are directed into managed products."

Hewison’s view is that all service providers should be responsible for carrying their own costs and price their services accordingly. He believes that consumers have the right to make value judgements based on a clear appraisal of the service offered and its relative cost.

Apart from the costs and lack of transparency, Hewison claims that advice given to consumers is also being compromised by the corruption of the research and investment selection process.
"Consumers have a right to expect that adviser-recommended investments have undergone a rigorous research process. If that process is corrupted by an overlay of listing criteria involving payment for shelf space or other matters, then the selection process is seriously flawed," he says.

On the question of the cost and accessibility of financial advice, Hewison claims the argument to justify the commission system is spurious.

"The notion that the commission system gives access to financial advice to those who can’t afford to pay is just absurd," he says.

"It implies that the cost of obtaining advice can be met by the product recommended so the consumer doesn’t need to write a cheque. It simply typifies the attitude that ‘what the consumer doesn’t see won’t hurt them’ but the consumer pays either way – sometimes more through long-ended trail commissions."

Hewison argues that financial advice should be affordable and the regulator needs to ensure that advisers are not tied down with onerous compliance requirements that won’t allow them to provide such advice.
"If a mechanism is required to enable consumers to pay their adviser by instruction to an investment institution, so be it – but let’s make sure the consumer approves it and understands what they are approving," he added.

Hewison is adamant on his firm’s stance for the sanctity of professional advisers and the separation between advice and product. "We strongly believe that financial advice and product advice must be separated in every sense of the word," he says. "Advisers must not only act but be seen to be acting solely in the best interest of their clients and their particular needs."
Hewison believes that the integrity of the financial advice profession needs to be addressed by both regulators and the profession.

"In a perfect world ASIC would ban commissions and the Financial Planning Association (FPA) would do likewise. But the reality is that the regulator won’t take on the ‘big end of town’ so the FPA needs to step up and take a firm stance as the rightful guardian of the profession and surrogate protector of the consumer," he said.

"There’s no doubt that it would be a gutsy move for the FPA as there would be a huge backlash from the institutions that have a foot in both camps. But in my view the FPA would weather that storm, and come out of it with an even higher standing because the community would know it fought for their right to untainted financial advice."

John Hewison CFP, FFPA, MFinPlan, JP is CEO of Hewison & Associates, a Melbourne-based private client wealth management firm operating since 1985. He is a former Chairman of the Financial Planners Association of Australia and a vocal advocate for reform in the financial planning advisory industry.

 

Download article

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.au

Please 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.