Macro

In huge news today, IFA reports that the Financial Planning Association of Australia has "sought the removal of the current stamping fee exemption in relation to listed investment entities due to its inherent conflicts of interest for advisers". The story continues:

FPA chief executive Dante De Gori said he welcomed the opportunity to consult with Treasury on the merits of the current stamping fee exemption in relation to listed investment entities, adding that he continues to support the removal of non-client directed fees in all financial advice services...
“At this point in Australia, all other forms of product directed payments that a financial adviser receives from clients, have been banned, leaving most financial planners only receiving fee for service payments,” Mr De Gori said.
“Between 2009 and 2012, all of our members transitioned away from these payments to ensure that clients are receiving unconflicted advice.
“As a result, FPA members currently receive on average around 8 per cent of their total revenue from investment commissions, with the majority of this being phased out by 1 January 2021 when grandfathered commissions will cease.
“The FPA supports the government’s efforts to improve the quality of financial advice that all Australians receive. Ensuring that people receive unconflicted advice, that is in their best interests, is vital to the provision of financial advice that Australians can trust and rely on.”

This is an obviously sensible conclusion for anyone who asks a very basic question: what is in the best interests of Australian consumers (ie, not fund managers or advisers)? 

Are they better served by having completely conflict-free financial advisers who are only paid by their clients for the advice they render? 

Or is it in consumers' best interests to have conflicted financial advice that is corrupted by fund managers paying huge selling fees to get advisers to encourage their clients to invest in the fund managers' products (these fees are as much as 1.5% to 3.0% of the money advisers pull from their clients)? 

Blind Freddy can see that completely conflict-free financial advice is in consumers' best interests. Why is this so hard for a very small minority to understand?

Some counter that these huge selling fees have no impact at all on the recommendations advisers provide. But I don't know a single independent party who agrees with that proposition. A senior financial adviser, David Graham, with Story Wealth Management, quotes Charlie Munger in response:

"Show me the incentive and I will show you the outcome", Charlie Munger

It is demonstrably obvious that the 1.5% to 3.0% selling fees have a huge impact on advisers' recommendations. If they did not, fund managers would not be paying the commissions, which are typically worth 2 to 4 years of their management fees---they would be raising the money for free as all other unlisted funds and ETFs do.

I was speaking with one manager that has an LIT recently and they relayed this story. They were pitching to a leading stockbroking firm---a well known, brand-name firm---about their LIT offering.

One of the first questions asked by the brokers in the presentation was, "If I get my client to invest with you guys, can I get my commission in three months time?" After confirming this was possible, the broker then said, "You run Aussie stocks, right?" The manager worked in a completely different asset-class...

Writing on Linkedin, another adviser, Thabojan Rasiah, comments:

Stockbrokers cannot continue to defend the rort that is the commissions they receive for selling LICs and LITs to their clients. I guess when they are receiving 1-3% for pushing clients into investments (on behalf of investment managers) why would they want to give that up? With all that has been revealed in through the Royal Commission, it is about time everyone in financial services is held to the professional standards that consumers deserve and should expect. For those that argue they need to get paid somehow, there are plenty of us that only get paid a fee directly by our clients to provide them with advice that is in their best interests...not to line the pockets of others.


peter calo

What is the difference between a financial advisor paid on commission and an old style life insurance salesperson paid on commission? The answer is nothing. They are both salespersons who sell you products that will earn them the most amount of money for the least amount of aggravation.

Christopher Joye

Agreed!