Speaking to ifa, SMART Compliance founder Brett Walker said the industry gets “mightily distracted by the issue of how people get paid”.
His comments come after ifa reported recently that ASIC is seeking external legal advice to determine whether advisers who charge asset-based fees can be considered independent, as some believe there is potentially a conflict of interest.
Mr Walker, however, does not agree with ASIC’s concerns.
“There is an overlay of protection for the client in the form of best interests duty so, theoretically, the method of payment for personal advice will be secondary to the objective of client best interests in all cases anyway,” Mr Walker said.
“Asset value-based fees at least align an adviser’s interests to those of their clients. Advisers paid this way will tell you how challenging it was to operate post-GFC, but they suffered along with their clients. This is often forgotten.
“The market permits, and should continue to permit, any remuneration arrangement that the client expressly agrees to.”
AIOFP executive director Peter Johnston has also disagreed with ASIC’s concerns around asset-based fees.
In a recent email to members, Mr Johnston said, “The current noise around trying to include percentage based client charging into 923a [of the Corporations Act] as a conflicted arrangement defies common sense.”
“Trying to force our industry into hourly rate charging is not only repugnant, but flawed and conflicted. No one has offered a plausible argument that aligning your interests with clients who demand better than benchmark performance is conflicted,” he said.
Many of the aspects of FOFA simply show how out of touch the regulators and politicians are with the issues of fees and commissions with peoples super and investments.
If i’m charging a client a fee (percentage based or flat amount) it is detailed in the SOA, it is shown on there super, investment or personal bank statement. They see it upfront and they are shown it all the time. The client has the ability to turn it off if i dont provide the service I’ve promised. Or turn it off even if i do… But still i have to do an FDS to confirm this every year and get the client to Opt-In on an ongoing basis.
Contrast this to the clients we have in products that include an embedded commission. The client is advised of the comms in the SOA, and that’s it. It’s deducted from their unit price of their investments and isnt shown, cant be cancelled, and is paid even if i never see the client again, never offer any service. And even if the client decides to have me taken off the policy as the adviser, the comms component still roles on and is pocketed by the fund manager. No FDS for this, no need for Opt-In, nothing.
What a bunch of cods wollop. The client knows how much they are paying and if they don’t, then they are foolish. As for aligning your fees with performance (I didn’t really get that), then I say any Adviser who’s value proposition is outperformance has their days numbered. Shame on you and any outperformance is luck anyway.
The FPA and its constant bowing to political correctness is to blame. If we had a REAL body with a backbone that supported its members & this once great industry we wouldn’t have to put up with the circus it has become. No wonder the large institutions are selling up & jumping ship. It’s too hard, too expensive & too complex to do business.
that’s the issue. we have no representation. but the other half of your post is also very correct, too hard, too expensive & too complex.
Here’s my full statement to Larissa:
“Hi Larissa, I think ANY form of remuneration is potentially conflicted.
e.g. if I charge by the hour my natural incentive is to take more time to deliver.
e.g. if I charge on a project basis my natural incentive is to quote as high as my client will tolerate at outset.
e.g. if I charge on a commission basis my natural incentive is to sell what generates the most commission.
e.g. if I charge an asset value based fee my natural incentive is to maximise the value of assets subject of that arrangement.
If any of the above arrangements are deemed “conflicted” then all I need do is get client express agreement to the arrangement and the conflict is resolved.
The industry gets mightily distracted by the issue of how people get paid.
There is an overlay of protection for the client in the form of best interests duty so (theoretically) the method of payment for personal advice will be secondary to the objective of client best interests in all cases anyway.
Asset value based fees at least align an adviser’s interests to those of their clients. Advisers paid this way will tell you how challenging it was to operate post GFC – but they suffered along with their clients. This is often forgotten.
The market permits (and should continue to permit) ANY remuneration arrangement that the client expressly agrees to.
I hope this adds to the conversation.”
So if we engage with consultants we should determine their fee? Race you to the bottom….
Totally agree with Brett Walker comment and no client like to see the adviser receive the same monthly fee when their funds have slipped into negative territory like the GFC or other times.
This over the top regulator mandating or trying to enforce a particular model of payment is not only flawed, but also over stepping their role and biased based on the current management vendetta (Kell & Medcraft) against all FP’s.
Why do Doctors have various billing methods (bulk bill or up front), Solicitors (No win no pay or hourly), and even the ISA who gets not only a clip in the disclosed ‘low’ member fees, but then various undiclosed fees, percentages and commissions based on who they use to provide investment or insurances for their unsuspecting members.
One wonders why other industries like real estate agents who get paid substantial commissions regardless of any work done, or Unions who collect mass ‘membership fees’ regardless of whether the member utilises their service ever in their lifetime.
Perhaps it is time the gov rethought ASIC and came up with a new scheme for governing our sector, it has been done prior to their creation, so can be done again – if only we had a Prime Minister like Howard who had some decent kahunas.
most brilliant comment. ASIC need to be revamped. they are completely out of touch.
ASIC should be abolished altogether. The government has been vesting more and more of its decision-making power outside of the Parliament and into (so-called) “independent” bureaucratic agencies such as ASIC, the ATO, the ACCC, the AHRC… such that Australia is no longer a liberal democratic state anymore, but a democratic-administrative state where a bunch of unelected officials make and prosecute the laws in this country at arms-length from true accountability. Power is shared between a handful of elected representatives (the parliament) but mostly amongst a vast network of permanent bureaucracies who are barely answerable to the parliament, let alone voters.
A perfect recent example of this was Gillian Triggs, head of the AHRC, who readers may recall cited an expansion of discretionary minsterial powers without judicial oversight, as a major threat to democratic freedoms (she was right by the way) but then who failed utterly to see the irony when she refused to be dismissed by a democratically elected government, saying she was head of an independent agency!!
Parliamentary democracies are typically a chain of delegation – starting with voters, then elected representatives, the parliament (formed by representatives), a government, ministers, and finally civil servants – and there is also a chain of accountability that works in the other direction. But ‘independent’ regulatory agencies don’t conform to this model of delegation and accountability. In the traditional principal-agent structure the purpose is to control the agent. But when delegating authority to an independent regulatory agency, the principal design is explicitly not to try to control it.
As independent agencies such as ASIC gradually acquire more responsibilities, so too does the occurrence of bullying behaviours, made possible by the absence of chain-accountability, plus a one-sided ability to escalate coercive compliance when “negotiating” with the firms under its authority. There are a host of other reasons of course, suffice to say the current framework is incredibly unhealthy for the participants, consumers and ultimately the future of the country.
Think fee for service based on time is the solution then engage a solicitor and see how that goes
Surely time based fees are equally as conflicted, rewarding inefficiency and motivating some to spend a longer time than necessary researching to find the “perfect” outcome for a client to meet “best interest” .
I agree wit the comment that the client should decide how the advice is paid for and how much, absolute transparency in disclosure of fees is all that is required for this to succeed.
in a free market system we should have the freedom to contract. the client and adviser should agree how much and how to pay