Financial planning reforms heading in the right direction: Kohler

At first sight the Ripoll Committee’s report looks disappointing, but with a second, closer look it gets better.

You only have to learn that it’s warmly supported by both the Investment and Financial Services Association and the Association of Financial Advisers to approach the report thinking that it must be soft – oh, so soft.

And the committee has indeed baulked at recommending a ban on commissions and has disagreed with the separation of sales and advice, with separate licences for advisers and sales people.

For the many progressive financial planners who have been trying to move to a more professional footing, with payments only from their clients in return for advice rather than product sales paid for by the banks and fund managers, supported by law, this will be disappointing.

But the combination of an explicit fiduciary duty on planners, greater powers for the Australian Securities and Investments Commission and a Professional Standards Board run by the industry, would definitely be a step forward.

IFSA’s John Brogden, meanwhile, is crowing about fees. His group has been fighting to preserve product commissions so that its members can continue to use financial planners as a sales network (“advice-based distribution”) and he clearly believes that battle has been won: “The debate over conflicts of interest should now be put aside”.

Just hang on a minute, John.

True, the committee’s only recommendation with much bite is the first one: “… that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.”

Brogden’s response to this was: “If a fiduciary duty for financial advisers is adopted, we do not believe that ceasing remuneration paid to financial advisers from product manufacturers is required.”

Actually that’s not quite what the committee is saying. In fact Recommendation 4 says: “The committee recommends that government consult with and support industry in developing the most appropriate mechanism by which to cease payments from financial product manufacturers to financial advisers.”

Earlier the committee says that any remuneration structures that are incompatible with a financial adviser’s proposed fiduciary duty (recommendation 1) should be removed.

The committee says it acknowledges that some in the industry have already indicated a willingness to move away from commission-based remuneration practices. “The committee welcomes this and recommends that government consult with and support industry in effecting this transition.”

It’s not exactly a recommendation for a ban, but the committee’s chairman, Bernie Ripoll, Labor member for Oxley, was keen to get a bipartisan report.

He did, which means the move to greater professional standards for advisers and tougher regulation will be that much more likely to happen.

That’s good, because over 246 pages the report details the most appalling suffering at the hands of advisers who shouldn’t be at large, let alone licensed as financial planners.

It runs through submission after submission from victims, advisers and regulators saying that change is needed, as well as submissions from obvious vested interests opposing it.

It also acknowledges the “structural tensions” that are central to the debate about commissions, since “clients seek out advisers to obtain professional guidance on the investment decisions that will serve their interests”, while on the other hand, advisers act as a “critical distribution channel for financial product manufacturers”.

But then it baulks at radical reform, at banning commissions and separating sales from advice, which would be at least a result of the fact that Storm Financial, the focus of the inquiry, did not get commissions – just a 7 per cent up-front fee.

But this train has a few more stations to go. There’s Jeremy Cooper’s Super System Review, also looking at commissions and conflicts of interest, and then the government itself.

At the FPA conference last week, Minister Chris Bowen congratulated the FPA on its recent decision to move away from commission-based fees for financial advice. He said: “Commissions paid to financial advisers have the potential to create real, potential or perceived conflicts of interest.”

And now the Ripoll Committee has recommended an explicit fiduciary duty and suggested the government work with the industry to find the best way to cease payments from product manufacturers to advisers.

So let’s not put aside the debate over conflicts of interest just yet.

This article first appeared on Business Spectator.