ASIC report raises concerns

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The amount of licensees owned by product providers is causing concern in the industry.

ASIC has completed a review of the 21-50 largest AFSLs that provide financial advice. The review, Report 362, follows on from Report 251, which reviewed the 20 largest AFSLs.

One of the key findings and concerns of the report, according to Bluepoint Consulting director Tony Bates, is that too many advisers are still being paid by product issuers. ASIC said that this would give rise to potential and actual conflicts of interest, and while FoFA reforms will remove many of the conflicts, it will not remove them all.

FOFA’s two main targets are conflicted remuneration (e.g. volume bonuses, soft dollars and geared asset based fees) and ‘C Class’ client trailers (e.g. ongoing payments to advisers where there is no ongoing service), says Bates.

“It’s about time these payments were stopped.”

ASIC’s review found that the majority of advisers were remunerated by product providers based on volumes, receiving upfront and trailing commissions. Forty-three percent of remuneration was on-going/trail commissions paid by product providers, 16% was upfront/initial commissions from product providers and 5% was volume payments/bonuses/fee rebates.

Twenty-one percent of fees were paid directly by clients according to assets under service, and 11% by a set rate.

“I’m concerned that a customer walking into an advice practice is more often than not, despite what the SoA says, blissfully unaware that the ultimate owner of the advice practice is a product issuer, and that the adviser is earning more than half of its remuneration from those products,” says Bates.

He says that it’s not surprising that advisers are feeling bogged down with FoFA, as yesterday was the last day to send out Fee Disclosure Statements for many advisers. Bates is interested to hear how clients are receiving them and how well the fees will be captured.

ASIC also expressed concern over product concentration.

“Any product failure will have a much greater impact on licensees whose product recommendations are concentrated into a small number of products, not only in relation to client losses but also in relation to the licensees’ income if a large proportion of their income is from commissions,” said the report.

However, underlying one equity fund there is potentially 80-200 stocks, says Bates, who is less concerned about this risk.

  • James Smith on 6/08/2013 11:51:57 AM

    Pat you and others keep assuming that an in house product is bad by virtue of the fact that it is an in house product. Many of these in house products are sophisticated fully implemented portfolios where managers are held accountable and asset allocations reviewed and managed in accordance with their mandate. I suspect they involve far better risk controls and accountability than the average SMSF. You also have a very low regard for advisers to assume they will devote their life to promoting an investment solution that is not in the best interests of clients and a low opinion of client's ability to assess for themselves whether the advice is in their best interest or not. More regulation is not required. A more balanced debate is. It seems that I am in the minority of advisers that recommend both in house product and more tailored solutions based on the needs of the client. I find it ironic that this approach is criticised for not being in the best interest of the client. We have protected our clients capital and retained their services for decades yet you and others still want to make out that there is something wrong. Fortunately our success is measured by our clients not you or the present regulators.

  • Pat on 6/08/2013 10:02:59 AM

    James, looking at some of your comments:

    "It would also be helpful for ASIC to research client satisfaction levels with the admin and service provided by the big super funds and the extent to which advisers fill that gap." We know, from past shadow shopper exercises, that clients' satisfaction is not correlated to quality of advice - the ability for an adviser to keep a client satisfied is not related to their ability to give them good advice. Unfortunately, clients come in with little understanding.

    "e already have regulation in place to ensure that any benefits for recommending an in house product are disclosed and service fees have replaced commissions. " And I argue that disclosure has been poorly executed at best. I have read through many SOAs, looking at their disclosure, and it is confusing with many comments about a dealer group "may receive this" who "may pay that" to the corporate authorised rep, where the adviser "may recieve a salary and bonus" from recommending the product. It is no wonder clients don't understand that disclosure. Why do we have a situation where BOLR was banned? Why did we need this disclosure in the first place? Because recommending in-house assets is a prima-facie non-arm's length relationship where conflicts of interest can (and I am sure do) very easily arise.

  • James Smith on 5/08/2013 4:40:59 PM

    Pat we already have regulation in place to ensure that any benefits for recommending an in house product are disclosed and service fees have replaced commissions. The article I responded to involved ASIC comments that the percentage of in house product with commissions on adviser books was a cause for concern. The clear assumption made was that these in house products were not appropriate and implied that more needed to be done to address this. ASIC would make a more meaningful contribution by researching clients in these accounts to determine whether the outcomes achieved met their needs, whether the fees they are paying was disclosed and understood by them and whether they are happy with the adviser service. It would also be helpful for ASIC to research client satisfaction levels with the admin and service provided by the big super funds and the extent to which advisers fill that gap. There are merits for in house products and alternatives which will be assessed by advisers based on client needs. We need to see more informed debate on these issues if we truly want to raise the bar on industry standards. The irony is that the large retail and industry super funds are not being sufficiently held to account by ASIC who continue to show limited insight into the needs of our industry.

  • Pat on 5/08/2013 3:02:34 PM

    James Smith, well may in-house products be appropriate for a client (I can't see commissions ever being appropriate), but don't you think that the whole in-house product/commission/% fee structure provides a greater opportunity for an adviser to put their own interests ahead of the client's?

    Very few people are saying that in-house products create a conflict of interest, but it does make acting on those conflicts considerably easier.

    If I get paid more to sell a product (be it in % terms, commissions, volume bonuses, etc.), it is fair to assume that a planner may be sufficiently induced to recommend that product in lieu of many other options that may be better suited for the client.

  • James Smith on 2/08/2013 12:47:50 PM

    ASIC clearly do not understand that it may be in the best interests of a client to be invested in an in house product and that the adviser receives a trailing commission to service these clients. To assume that there is no value in the in house product and that the adviser offers no service is simply untrue. The immaturity of the comments raised by ASIC is hypocritical given their criticism of the professionalism of our industry. Why is it not reasonable to recommend an in house product to some clients and receive a servicing fee and recommend alternative options where it is more appropriate. The irony is that we are getting to the stage where advisers will not recommend an inhouse option purely to be seen to be independent rather than acting in the best interest of the client. The other irony is that if the in house products are so bad why is their legislation proposed to permit intra fund advice from these in house products. What difference does it make whether the client pays for an adviser employed by the in house product compared to service fees paid to a self employed adviser.
    Grow up ASIC your bigoted views are unbefitting of a regulator.

  • Bates on 2/08/2013 10:21:32 AM

    You may be right GAB. Clients don't know don't care.

    Look at Roy Morgan Research article today.

    51% of Financial Wisdom clients think their adviser is independent. 48% of Godfrey Pembroke advisers think their adviser is independent.

    Clients don't know. Don't care. Doesn't matter

  • GAB on 1/08/2013 3:58:05 PM

    Thanks Bates. Frankly I don't think alot of clients care. We beat ourselves up about institutional ownership of product and advice but the clients just don't care. I'm non-aligned but I use BT Wrap as my main platform for client investments. BT Wrap is owned by Westpac and when I tell my client that they think it's great...they feel safer knowing if I disappear their money is with a bank (fact).

    Banks own financial planners to get distribution...its normal business. Clients don't care so why should we...except its clearly not a level playing field anymore. ASIC is concerned about the ability to compensate investors for losses so if they help herd advisers into the bank mother ships it solves that problem.

    This objective of gaining professionalism...i'm just not sure this industry knows exactly what that is. If they think being independent and non-biased means professional, well i'm afraid to say it may never happen in our lifetimes.

  • Bates on 1/08/2013 2:03:49 PM

    I agree GAB. An advice fee charged to a cash account in a platform is unproblematic.

    It becomes slightly problematic if the platform is owned by the parent company of the advice firm and there are other remuneration items arising form that ownership. It becomes more problematic if the adviser has only one platform on their APL and client's are shoehorned into the platform. It becomes more problematic if the parent company, the owned platform and the owned advisory practice all have different names and this disclosure is lost somewhere on page 37 of an SOA. Not sure if FDSs will improve this clarity.

    The problem for a client is if this scenario is the case with the majority of advice as ASIC has just woken up to.

  • GAB on 1/08/2013 12:06:37 PM

    Bates, do some research and then come back with sensible comments. Let's look at superannuation platforms. Is there something wrong with advice fees being paid from the clients cash account in super? It's still their money whether its in super or not. It's tax effective to pay advice fees out of the super fund.

    Upfront commissions are now pretty much banned so that leaves some grandfathered what. In most cases it would be cheaper for a client to stay on that fee paying mechanism than have their adviser convert them to a fee for service. Too many consultants out there who automatically link commissions to getting no service....wrong wrong and wrong. These older style products will eventually disappear over patient.

  • Daniel Boce on 1/08/2013 10:31:09 AM

    No worries ASIC. You pay out my debt on the C grade clients my licensee said I had to take when I took over this practice, and I'm fine with this.

    And if ASIC wants to remove Conflicts of Interest on Products, why not remove single APL's per licensee. Does ASIC honestly believe AMP's, MLC, Onepath, BT etc etc APL have any differing Risks??? So why not force a licensee to have maybe minimum of 3 APL's for their licensed FP's??? Cue product manufacturer uproar in 1,2...

  • Peter on 1/08/2013 10:14:39 AM

    I am sure Fund Managers would support this.

    they would be happy to stop paying trails, but would they rebate to clients ?

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