Financial Planners Would Do Well To Find Their Way Off The Commission Trail
The Age
Tuesday November 28, 2006
Financial planners need to face up to their reputation, writes Garry Weaven.
TWENTY years ago I addressed a similar group, but in those days it was not called the Financial Planning Association, it was the Lifewriters Association. It mainly consisted of people who made their living selling life insurance and superannuation, with upfront and trailing commissions.Superannuation was not compulsory in those days but there was some concern and acrimony in the audience because the ACTU was setting up industry super funds and spreading a simplified, fully vested and low-cost form of super throughout the workforce using industrial awards and bargained agreements; wholesale delivery, in other words.The many sales agents in the room were understandably concerned about a potential threat to what they perceived as their market territory.I told them that I thought a superior product was being delivered and they should think about the positive opportunities created, because what was happening was the beginning of a massive explosion in wealth generation that would ultimately lead to a major increase in the need for quality advice, particularly in relation to retirement planning (in other words, a lot more people would emerge with a lot more money and need for advice at the end of the process of saving).I said that those who were prepared to upgrade their skills to meet that need for quality advice would be assured of a strong market. And that is precisely what has occurred. The investment pool has gone from $60 billion to $1 trillion and the planning industry (including accountants) has boomed, and levels of qualification have been raised. The problem is that the planning industry has never been able to cast aside the historic view of it as an industry devoted to selling the products of those who will pay trailing commissions.So, instead of a clearly defined class of professionals emerging along the lines of doctors or lawyers (people providing a service in return for a known fee with a clear legal and moral obligation to act in the best interests of the client), that characteristic has been completely overshadowed by the sales baggage.So the industry is characterised by sales people predominantly selling their employer's product with a business model based on a growing annuity stream consisting of trailing commissions.This is not to say that as part of the process a person might not receive some useful advice regarding such things as asset allocation, tax and super regulations, and intermeshing with the social security system.But it does tend to mean that product and asset selection will tend to be influenced by the commissions (or lack thereof) on offer from the product or asset provider.Where this system completely breaks down is when a series of products come along that demonstrate a clear superiority, at least for a large portion of the market, but do not offer sales commissions.That is precisely the case for a large number of industry super funds. The challenge then becomes: can quality advice for those who need it be provided on a true fee for service basis?In a way, there is one simple test for this industry. Are planners and accountants and their respective professional bodies prepared to support a legal requirement that they act in the best interests of their clients?Garry Weaven is executive chairman of Industry Fund Services. This is a speech he gave yesterday at the FPA's national conference in Melbourne.
© 2006 The Age
