“Who can I trust?” This is by far the most common question we’ve been asked over many years while undertaking hundreds of independent financial education seminars and individual consultations with members of the Australian Defence Force (ADF). Sad, isn’t it? The need is so great and the demand is so constant. And yet it’s clear the financial advice industry isn’t trusted by consumers to deliver on its most fundamental promise, that is, the provision of independent financial advice in the best interests of the public it claims to serve.
It’s tempting to conclude that the financial advice trust deficit is simply caused by a few “bad apples” who have been (or will be) removed by combination of self-regulatory action by the industry and banning actions by the Australian Securities and Investments Commission (ASIC). If only the problem were that easy to solve.
The reality, so clearly exposed by the current Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, is that the problem is systemic, caused by a deeply ingrained product sales culture that is supported and sustained by a system of incentives and bonuses. These are often referred to as conflicted remuneration. They include various types of commissions, percentage-based fees and so-called ‘trailing income’. The latter has been referred to recently in the Royal Commission as ‘fees for no service’. The conflict even extends to advisers who earn a fixed salary where the retention of their jobs is subject to the meeting of product sales targets.
Of course, it doesn’t necessarily follow that all financial advisers do the wrong thing by their clients. However, it does follow that advisers who are subject to such incentives and targets are conflicted and will be inclined towards advice that involves selling products, whether or not their clients need them. In the ADF, we see this conflict at work in many ways, for example, when our members are required to decide between receiving a government-guaranteed indexed pension in retirement versus commuting that to a lump sum and investing the proceeds in a product on which their adviser may charge a percentage-based fee (aka an asset fee). So often we observe advisers recommending a product, when in nearly every case, the commission-free pension is the better option. Another common example is where ADF members seek advice on reducing a mortgage versus buying an investment product on which an asset fee may be levied. Even though debt reduction is demonstrably the better advice in many cases, we observe too often that investment products are recommended by financial planners who are faced with the prospect of earning nothing if they recommend debt reduction, as opposed to earning a percentage-based fee/commission should their clients buy products.
Faced with regular requests by ADF members for referrals to trusted financial advisers, we did two things. Our first step was to make a film called ‘Financial Advisers-The Facts and the Fiction’. This is available for anybody to view on our public website www.adfconsumer.gov.au. It outlines in detail (and frankly) how advisers are paid, the remuneration conflicts that drive them and the characteristics that consumers should be looking for in choosing an adviser. This is one of our most popular films in a library of some ten productions on subjects ranging from tax to legal advice to running a small business.
Our second step was to design the ADF Financial Advice Referral Program (the Program). Establishing the Program involved identifying licenced financial advisers throughout Australia who operate on a fee for service basis. This way we could be sure that the listed advisers were not influenced by remuneration conflicts, thereby giving ADF members a reasonable assurance that the adviser of their choice in the Program would act and advise in their client’s best interests, without regard to the commercial imperative to sell products.
As of October 2018, the Program contains some 25 advisers in all states and territories. Their practices, personalities, expertise and specialisations vary considerably, but they have one thing in common. That is, they operate on a genuine fee for service basis (no percentages, just flat fees/hourly rates). Of course, ADF members are not required to use the advisers in the Program, but we do recommend that members who want unconflicted advice (and who wouldn’t?) should have a preliminary discussion with at least two of them to assess whether they meet their needs. We hasten to add that Defence has no commercial relationship with any of the advisers in the Program, so that an ADF member who uses anyone on the list should negotiate a mutually suitable and private professional fee arrangement. All we ask (and require of the advisers in writing) is that they will only charge genuine fees for service.
Just a footnote to the discussion about the term ‘fee for service’…the financial services industry often insists that a percentage-based fee (aka an asset fee) is a professional and unconflicted fee for service. It isn’t. It’s a commission by another name. Asset fees are designed to avoid the legislated ban on conventional commissions paid to advisers by product manufacturers (except on gearing where asset fees are illegal). Therefore, it’s important to understand what a financial adviser means by ‘fee for service’. If it means an asset fee, think twice about using that adviser.
In addition to educating ADF members about the process of choosing a financial adviser, we encourage our people to become financially literate and capable in their own right. We do this, not only through our seminars and consultations, but by recommending that our members and their families take advantage of the independent and free-of-charge educational resources available through two public websites, www.adfconsumer.gov.au and www.moneysmart.gov.au.
The former (a Defence site) includes particular references to the unique employment terms and conditions of ADF members (e.g., military superannuation), while the latter is ASIC’s comprehensive compendium of independent financial education. Taken together, these websites are invaluable, independent and trustworthy sources of self-education for any members of the public, including ADF members and their families, wishing to improve their financial literacy and capability in the complex and often confusing world of financial services.
Air Commodore Robert Brown, AM
Chair, ADF Financial Services Consumer Centre