Asset-based fees not the problem
Remuneration is only problematic when it results in recommendation bias.
As we wait with bated breath to see what recommendations contained in the PJC Report are converted into legislation, there has been much vigorous debate and discussion on remuneration practices.
Amongst this dialogue, there have been numerous assertions, including points raised by respected industry commentator Robert MC Brown at ASIC’s Annual Forum, that suggest that asset-based fees represent conflicted remuneration as they are “commission by another name”.
This is certainly a valid point of view if the fee in question is only levied against certain assets, such as the superannuation or investment portfolio that the adviser in question is directing to a particular “platform”.
The “conflict” is even greater if the funds in question are being “advised” away from a similar investment structure on which the adviser is currently NOT receiving remuneration.
The industry has always had an inordinate focus on what we refer to internally as FUM (funds under management).
The origins of this are obvious; the industry was born, and many would argue is still too heavily influenced by our big financial institutions.
Their emphasis is, logically, on encouraging inflows into their products. After all, that’s how THEY are remunerated.
But, the same is not necessarily the case for financial advisers.
An adviser who discourages a client from purchasing an investment property in favour of investing in a “platform” on which an asset-based fee is payable would be hard-pressed to argue the advice was not conflicted.
But, in this example, it is not the ADVICE that is necessarily inappropriate; it is with the remuneration structure that the fault lies.
As financial advisers, it is not only appropriate, but also logical, that we advise clients on ALL their financial assets, not just the ones placed on a “platform” that we “manage”.
That being the case, provided the method determining the fee was fully disclosed to, and accepted by the client, it would be perfectly legitimate to have a fee model that was calculated as a percentage of those assets, irrespective of where they were invested.
Where and how the fee is collected, be it from an investment platform or the client’s bank account, is irrelevant.
Under a model such as this, quite obviously, it is not the asset-based fee that is “conflicted”.
Conflict only arises where there is a recommendation bias as a result of remuneration practices. Eliminate that anomaly and the problem is automatically solved.
A financial adviser since 1979, Wayne became a Director of Paramount in 1996. He is a regular presenter at industry conferences and is a regular industry commentator for the media. Wayne was also nominated for the 2013 AFA Excellence in Education award.
He specialises in the provision of advice to those clients still firmly entrenched in the accumulation phase of their financial lives and deals with issues such as debt restructuring, tax effective investing and debt reduction, superannuation and personal protection and personal cashflow management. As a CFP member of the Financial Planning Association of Australia, Wayne adheres to the highest professional standards the industry imposes on financial advisers.
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