Finally, Good Advice*

For many years financial planning has been seen as an industry with professional and ethical standards right up there with used car salespeople and Today Tonight journalists. Many surveys and shadow shopping exercises done on financial planners over the years have reinforced this negative image and the industry itself has been unable to clean up its act.

Lawmakers have also struggled to pass legislation to enable consumers to be given advice that puts their interests ahead of the interests of the planner, or the wealth management team who get their hands on the consumers’ money. There have been many changes over many years aimed at cleaning up the industry and thus far all have fallen short.

The federal government is just about to introduce laws that will see the biggest changes to financial planning to date. Yet, even as the financial planning world screams murder over the changes that they reckon are doomed to have such a negative impact that the sky will fall in, the new laws again fall short.

Firstly, the good news: The laws mean that the planner will have a duty to put the clients’ interests ahead of their own. They will no longer be able to charge commissions on the money of new clients in managed funds or superannuation.

Now, the bad news: Existing clients who pay commissions from their funds will continue to pay them. The new legislation, which was to take effect from 1 July 2012 will only start from July 2013. Planners will still be able to charge clients asset based fees, which are similar to commissions. Commissions will still be allowed on life insurance products (commissions make up to 30% of the premium on some insurance products, meaning a ban on them would’ve seen life insurance significantly more affordable).

The most recent ASIC survey of financial plans found only 3% of them were good. The rest were adequate (58%) or poor (39%). It’s a trend on par with every similar survey I’ve seen done on planners over the past 10+ years. The worrying thing is that when the clients of those planners were asked to rate the advice, 86% of them reckoned they’d received good advice and 81% said they trusted it “a lot”. Clearly what people think is good and what the regulator thinks is good are very different. What it boils down to is people being ripped off, and not realising it. And when the rip off concerns your life savings, it’s serious stuff.

That leaves only one line of defence – legislation. These new laws are an improvement on the old ones but they leave a gaping hole between crap laws and good ones. In the end, the federal government has shown great courage to go against the wishes of an industry to introduce this legislation which will be better for consumers, but there is the very real possibility that the new laws will be in effect for the months between July 2013 and next year’s federal election. Because if the opposition gets the thumbs up from the electorate, they have promised to throw the new laws out the window.

Then consumers are back to square one.

*From July 2013. For new clients only. Not when you pay asset based fees. Possibly for a limited time only.

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