Room for improvement on adviser fee disclosure

In an FPA Virtual Congress session on Monday, around 400 attendees were polled around how they thought their clients felt about the way they were paid.

While 79 per cent of attendees said their clients would be “totally comfortable” with their remuneration, a further 20 per cent said they thought the clients would be “mostly comfortable”, and 1 per cent said the clients would be concerned.

Ethics Centre fellow Matthew Beard, who presented the session, said while the poll results were mostly pleasing, they did indicate some advisers could benefit from further critical thinking about how to present and structure their fees with clients.

“Warren Buffett’s become well known for his newspaper test – his test before he does something is to think about if a fair and balanced but well-informed journalist had a full understanding of this issue and they were publishing the front page tomorrow, would they be writing a positive or negative story?” Dr Beard said.

“That’s the approach that’s been taken [in the FASEA code] to the question of fees and payments. The clients must give free, prior and informed consent to all benefits being received – they need to be comfortable with the ways you’re going to make money.”

Dr Beard said it was important that fees were disclosed in plain English, and in a way that could not be questioned by a third party.

“Because this required fair and reasonable consent, this can’t be a procedural disclosure that’s difficult for a lay person to understand – you need to lay it out in a way they can make sense of,” he said.

“On top of this, it’s not just enough to get consent, you must be satisfied that any fees and charges are fair and reasonable and represent value for money. There are two tests here – the first is, is the client comfortable with this? The second is, are they reasonable that if the hood was thrown open on this and everyone could take a look, would it make sense?”

Dr Beard said that this raised the question of whether conflicted remuneration that was technically allowed, such as insurance commissions, was still questionable in an ethical sense under the code.

“The question becomes, with some fee types they might be protected by law, but are you upholding the spirit of the law? Even if you can do this because there’s some protection, should you be doing that?” he said.

“Are you providing value to the client and does that correspond with the fees you’re providing so that they’re left in a better state financially taking a holistic picture of these things?”