Don’t wait for change on how advisers are paid
It’s one of those situations in which, 20 or 30 years from now, I reckon people will say, “I can’t believe they used to do it that way.”
I’m talking about the fact that companies that offer investments often pay financial advisers to sell their products to clients. There’s a clear incentive for advisers to recommend inferior investments because those companies pay them higher commissions.
Many advisers say that, nevertheless, they choose the best investment for clients. But how can a client be sure? Adviser recommendations — including finance companies that later went belly up and other poor investments — have left many people in doubt.
Recent changes should help with this. The code of conduct for authorised financial advisers says they must “place the interests of the client first”. And advisers can’t say they are independent if they are not.
Also, they have to disclose all income — including entertainment and trips — they receive from financial product providers. But I’m not confident that clients fully grasp what the disclosure means, or realise they are simply not told about good investments that pay low or no commissions to the adviser.
I would like to see an end to commissions and the like. Instead, clients would pay fees to advisers, just as we pay doctors and lawyers. Sure, clients would seem to be out of pocket. But if commissions disappeared, that money should turn into higher returns on investments. And — importantly — clients would invest in the best investments for them. The difference is likely to easily offset the fees over the years.
It was encouraging, therefore, to see a recommendation along those lines in the Commerce Committee’s recent report on its inquiry into finance company failures.
It’s a gently worded recommendation — that the government “investigate the possibility of banning conflicted remuneration structures in the provision of financial advice.”
But it’s backed up elsewhere in the report. It discusses an adviser’s duty not to act if he or she “has any interest in the matter which could be in conflict with the interests of the client.” The relationship between adviser and client, “once established, cannot be avoided by mere disclosure of a conflict; the duty is not to act.”
And I like the suggestion that the government investigation include “consultation with the Australian authorities on the model proposed in that country.” Not only Australia, but the UK and US are moving towards banning commissions.
Why do we lag behind? In submissions to the Commerce Committee, “the point was made that investors are often reluctant to pay fees for advice, and fees would need to be higher in the absence of commissions,” says the report.
But surely there’s something wrong if an adviser can’t show a client that they are worth their fee.
I know of more than 30 financial advisory firms who already do that. They are listed on the Info on Advisers page on www.maryholm.com. All charge fees only — except with a few long-term clients who have opted for the old system. Those exceptions aside, if a provider gives these advisers a commission, they pass the money on to the client. That helps to offset the fees.
With a growing number of advisers practising this way, and adviser organisations looking into the issue, perhaps commissions could cease without government intervention. But, says the report, “There is also a need for effort by the public … to be prepared to seek and pay for truly independent advice.”
I suggest you don’t wait for the law to change. If you use an adviser, discuss switching to fees. If you’re looking for an adviser, go for one that charges fees.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.