The following article is based on a recent speech by the author. It was given in the context that most financial advisers earn their living through percentage-based payments (commissions) from clients and product providers. This practice gives rise to conflicts of interest and the potential for poor advice. Recognising this, increasing numbers of financial advisers are offering their services on a genuine fee for service basis (flat fees or hourly rates), free from remuneration-based conflicts. This should give consumers the confidence that these advisers will act in their best interests which is a factor of fundamental importance with imminent closure of MSBS to new entrants and the advent of choice of superannuation in the ADF from 1 July 2016.
“In the long term I think we’ll be moving to a fee for service for life insurance, the same as superannuation and assets under management businesses… in the long term, it is going to be a fee-for- service world. I’m not giving a prediction of the timing, but in ten, fifteen years’ time or whatever, I think you’ll look at financial advice and say it is an entirely fee for service world”.
These are not the words of an impractical, anti-advice, consumer advocate. Rather, they are the recently reported comments of no less an industry luminary than Craig Meller, the Chief Executive Officer of AMP. I expect that critics will seek to minimise the significance of his words as merely reflecting how AMP may position itself commercially in the future financial services environment. Such criticism is irrelevant. That’s because whatever his motives, the CEO of Australia’s biggest life insurer (with a reported 3,700 licensed advisers) should be congratulated for showing the considerable leadership and courage to say these things in public at all.
It seems like only yesterday that the big players in the life insurance industry of the twentieth century were at war with one another to win the hearts and minds of sales agents, enthusiastically offering them undisclosed volume-based commissions of up to 250% on whole of life/endowment policies, together with unsecured interest free multi-million dollar Agency Development Loans to ‘big producers’ (or even to those who promised to be ‘big producers’). In those days, visionary words promoting ‘fee for service’ advice would have resulted in outraged threats of wholesale switching of commercial allegiances followed by the Australian equivalent of the ‘storming of the Bastille’ by scandalised life insurance agents. So much for the interests of policyholders.
How times have changed. The significance of this statement by one of Australia’s key financial services industry leaders cannot be underestimated as an important signal of the inevitability of change, probably faster than most planners might prefer or anticipate. And while we should assume that a commercial assessment was undertaken before the statement was made, I have no doubt there is a significant ethical and consumer protection motivation behind it as well. Indeed, I suspect that was the principal motivating factor.
The inevitability of this change to ‘fee for service’ advice will prove to be an important factor in the latest trend towards planners seeking to ‘do deals’ with superannuation fund trustees to offer financial advice to their members. As a trustee (or as a director of a trustee company), there can be absolutely no lack of clarity around whose interests one is duty bound to serve. Therefore, no matter who appoints a trustee, including a financial institution, an employer or a union, the appointee is obliged by law to act in the best interests of all the members, not just some of them and certainly not in the interests of the appointing party.
This means that trustees who take their position seriously (few do not) would be best advised to ensure that any conflicts of interest, especially remuneration-based conflicts of interest, are removed (not merely disclosed) before any deals are done with financial planners. Failure to do this raises serious issues of ‘duty of care’, including trustees being accused of not acting in their members’ ‘best interests’ by endorsing financial advisers whose remuneration is fundamentally conflicted.
I have observed at first-hand the benefits of the appointment of a panel of un-conflicted financial advisers. This observation has been made in the context of a large employer, the Australian Defence Force, in which I am currently the Chair of the ADF Financial Services Consumer Centre. I have lost count of the number of times over the years that ADF members have asked to be referred to a ‘trusted financial adviser’. This was also a regular question posed by clients when I practised as a chartered accountant.
As a result, Defence established in 2014 a panel of forty four licensed financial planners from across Australia, all of whom have given Defence a written Undertaking that they do not receive any form of conflicted remuneration, including commissions, asset fees, volume bonuses or other product incentives. Importantly, on the basis of this Undertaking, advisers whose AFSL holders are ultimately owned in whole or in part by financial institutions are not automatically excluded. This initiative is called the ADF Financial Advice Referral Program.
The ability to access un-conflicted ‘fee for service’ financial advice is of fundamental importance to the Australian public. Perhaps counter-intuitively for some of the ‘old school’ in the financial services industry, the adoption of a ‘fee for service’ approach, while loosening controls over their networks of planners/advisers, will deliver trusted advice to many more Australians at a much reduced cost to AFSL holders and at a substantially lower commercial risk.
Therefore, without wishing to put words into the mouth of AMP’s CEO, ‘fee-for-service’ advice is not only inevitable, it’s good for institutions, for financial planners and for consumers alike.
If you are thinking about seeking financial advice, the ADF Financial Advice Referral Program provides a list of advisers who have undertaken to provide genuine fee for service financial advice to ADF members.
Air Commodore Robert M C Brown AM BEc FCA