Speaking at the Australian Council of Superannuation Investors conference in Sydney on Thursday, Mr Shipton said the regulator views removing conflicts of interest as a better course of action than trying to manage them.
“In recent years, the Australian Parliament has banned commissions and other conflicted payments in financial advice. This was a recognition that the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether,” he said.
“This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area.”
Mr Shipton cautioned financial services firms to keep this in mind when assessing their own business arrangements.
“I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures,” he said.
“We have, for example, in our report on mortgage broker remuneration, highlighted the desirability of removing at least some of the remuneration-related conflicts in this sector.”
Mr Shipton’s comments come at a time when the industry associations have publicly taken differing stances on the future of grandfathered commissions.
Most consumers hate explicit fees. Most consumers hate high upfront costs. It doesn’t matter if they are better off in the long run. It’s behavioural finance 101.
Yes, there is a tiny minority of people who understand they are better off paying high explicit fees upfront and are willing to do so. Those people work at places like ASIC, CALC and Choice. They go to advisers like Philip Carman and his IFAAA friends. But those people are not representative of the majority. When most consumers are forced to pay explicit fees for advice they choose to bypass advice altogether, and instead purchase overpriced junk products or simply do nothing.
The result of getting rid of all commissions is that ASIC, CALC and Choice employees will save money, a small number of IFAAA planners will get more business, and most Australian consumers will end up significantly worse off.
“Most Australian consumers will end up significantly worse off.”
Well, let’s see.
At the aggregate level:
– More tax collected due to less use of tax-effective retirement planning strategies
– Lower levels of social security benefits paid
– Less competition as more expensive products are used and less advisers to enforce best interests duty or ensure financial institutions are delivering on their service levels.
How terrible! The Fed Government and the Banks will be horrified at this outcome!
No doubt the solution they will advocate is that Australians are empowered to self-manage through the three magic pills of greater financial literacy, fintech, and some kind of additional regulatory protections (such as breaking up vertical integration)….
The breaking up of the vertical integration will have the convenience of reducing someone’s BOLR liabilities; simplifying the Big 4’s business models to almost-utility-like status; and appearing to fix the advice ‘problem’ (while the Instos can still build fintech inspired general advice / self-service)….
Hey Presto!
Above the surface – individual empowerment and market solutions.
Below the surface – greater revenue, less competition, and more ‘ring-fencing’.
You know what would solve ALL of this? [b]DEFINED BENEFIT PENSIONS. [/b]
Not just for the politicians, but for EVERY hard-working Australian…..
None of this having to invest and manage market risk, longevity risk, and all that bulldust.
C’mon Malcolm, you know it makes sense 😉
If it’s good enough for the goose, it’s good enough for the gander.
that’s it. let the state take care of all Australians from cradle to grave.
Imagine the snouts in the troff… Imagine the fat cat public servants… I don’t think so
Yes, I wonder who the mob will hold responsible then, when there are no financial advisers left to blame.
Though the current lot of politicians and corporate executives will be long gone by then….
Come on mate, get your hand off it, I advocate a conversion of part of super to a pension as mandatory, (still account based though). However there is a need to have access to some cash at that point in life to clear debt, fund large purchases etc etc.
There is a reason no one offers defined benefits anymore… they don’t work
In case it wasn’t clear, the initial defined benefit pension comment was meant sarcastically….
With the change to defined contribution (from defined benefit), Government (understandably) passed the buck so they would not be held responsible in people funding their retirement. They created the current system – and advisers help people negotiate the system that was created – but now the politicians (along with so many others) are jumping on the anti-adviser bandwagon.
So when the advisers are gone, and people realise the shortcomings are deeper than just ‘advisers’, who will cop the blame then?
The government boffins and politicians feed themselves their own gold plated Super and insurances and don’t have any clue of the real world that Advisers and clients have to deal with.
Absolutely NFI the lot of them besides pushing more regulation, more red tape, more unnecessary costs to try to justify their own existence.
Every piece of new legislation needs to be coupled with a reduced piece of legislation elsewhere.
Our wake up Govt, get rid of VERTICAL INTEGRATION and that will allow real advisers to work with less BS over regulation you make up to defend the ISN and Banks / Insurance co vertical integration models.
Govt, please wake the hell up.
banning vertical integration would wipe out the industry. Not only banks and industry funds run this model, but also your self-employed advisers that bought a book of clients by borrowing against their house. Also, mid-tier accounting firms that use their “in-house” SMSF platform and provide accounting services around it. Do you want to see all these people out of business? Think of the unintended consequences.
In addition to the other comment, also robo advisers (those with ASIC exemption) that flog their ‘low cost’ ETF model portfolio and even private advisory firms that flog their managed investment accounts. It’s all vertical integration
It’s all very well to say this – “In recent years, the Australian Parliament has banned commissions and other conflicted payments in financial advice. This was a recognition that the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether,”
But unfortunately the govt makes us jump through red tape for ‘non-conflicted’ remuneration as well – fee disclosure statements etc.
ASIC cant see the forest for the trees, this will all go pear shape because of interference from the government who know jack about our industry. It failed in UK.
I always wonder why regulators are the first to create problems and are the last to find that there are problems. I guess, creating problems rather than solutions keeps them in a job. FOFA has essentially been an expensive exercise for consumers with so many gaping holes and problems created. Why are we surprised by the outcome of the Royal Commission. Both sides of politics are to blame. One side wanting to push the union barrow of ISN and compare the pair and the 4 major banks. The other side favouring mostly banks and life office AMP. Both have the same business model of VERTICAL INTEGRATION. The hapless consumer does not matter. Gouge the premium for pathetic levels of life insurance via super, offering hope which becomes hopeless at claim time while slamming an industry as is FP who followed all the training thrown at them, completed whatever course was outlined for them only to be used as scapegoats for those in charge whose incompetance and lack of vision created this mess.
Their answer of FASEA is also flawed. No thought as to the experience lost in the undsutry as advisers leave, no thought to the consumer as they plan their lives, just the legacy of bad levels of financial literacy in Australia that will haunt this economy in the years and decades ahead as our children have more debt than noahs ark and the economy itself is hit with levels of debt that the economic life of a nation and its people are strangled slowly. The industry, with vision that could assist….ours and they want to blow this industry up. Disgusting. As for our so called associations, the AFA and FPA, much like politicians on both sides have been bought and paid for in full to satisfy one objective only. Their own self interest.
The cognitive dissonance here is frightening…and no wonder the financial services sector is so widely distrusted, as it appears to be populated, in the main, by selfish, not-very-smart people who can’t think past their own self-interest. Teach clients that they need to pay for advice. Teach yourselves how to make that work. It’s not hard. Any moderately intelligent person can do it. Issue invoices for advice based on either time or the value (your clients can work out what they cave from how well you advise them…or by how much extra value you add – or you can tell/show them. It’s what EVERY other profession does. If you want to be seen as something better than a commission salesperson then BE something better!
So what you are saying is that you cannot be an ethical, intelligent, compliant and competent financial adviser who acts in their clients best interest simply because they may be remunerated via a commission payment which is fully and clearly disclosed,represents appropriate remuneration for the advice and services provided and allows the client to receive the advice and services on a cost effective basis ?
It is not these people that have a problem with self interest, it is you who have an ideological and philosophical issue with your own identity because you see yourself as someone of a higher standing.
As much as you might detest this thought, you are a salesperson who simply sends an invoice for their services and who has the propensity to over service their clients in order to appear they have their best interest as a priority, but do so in order to generate more fees….but that’s ok, because YOU SEND THEM AN INVOICE !!
….a bit like a plumber…although I don’t reckon they have seen nearly as much sh*t as you can
deliver in one day.
you will need a 50 page SOA for that mate
OK, clearly you are a genius as you stated people who don’t think like you are stupid and you know a couple of big words, well done. I have no issue for fee for service for superannuation, investment and structural advice. The point is though that clients (bar a few) WILL NOT pay a fee for advice on insurance.
I make a point of asking every single client I do business with, last 12 months probably 50 insurance clients, if they would have gone through the process we conducted if I charged an advice fee (and reduced premiums accordingly) to a man every single person has said no.
This will cause a massive underinsurance issue, or a rise in junk insurance if it goes through to all insurance advice.
I agree, but I also acknowledge the real-life pain this will cause. Thousands of legitimate advisers have built successful careers and businesses h on a model of selling to clients who are disassociated from the cost because it doesn’t physically come out of their wallets or bank accounts…
This change will be painful, there will be fewer clients willing to put there hand in there pocket and pay for advice and there will be advisers who have to shut up shop as a consequence, and there will be people who will find their business is not worth what it used to be, but as the RC has pointed out, and if you can look at it from an outsiders point of view you will see, this model doesn’t meet the community expectations and inherently stacked against the ability for clients to be able to trust that the advice they receive is truly independent.
And how do they suggest people be paid???????
By issuing an invoice for advice!!!!!! Just like any other service provider….Geez.
let’s see… a $1500 advice fee plus $500 implementation should do the trick (let’s hope it’s a sizeable premium to make it worthwhile).. oh yeas, also interested as to where the future liability exists when they do not pay for a review and the policy becomes out of date… maybe they can just go to one of those comparison sites… yes, the ones that provide no advice!!!
Don’t forget all the risks of getting sued because the client didn’t have enough cover… we still get bat to the head there is a lot of work getting a case through UW and not all go through because of health
Nah, you’d charge more than that. I do and clients continue to pay it. They make that fee back really quickly when commission isnt built into the premium.
as someone mentioned the other day what value add will you provide to justify your fee for service invoice if the commission dial back is no longer there one day, i.e. commissions banned?? “Fee for Advice and implementation $2,200 (gst incl). Annual premium payable $2,000” – yep, can really see your client going for that.
Predictable Philip Carman commentary…haven’t heard from him for a long time now.
It doesn’t really matter because he could have just pushed re-send from just about every one of his previous responses.
Yes its that simple isn’t it. So lets see, i live in a small town do you think my clients or potential clients are going to pay upwards of $2000 for an SOA and lets say $250 per review just to walk into my office????Do i take on the mantra of other service providers and charge them for any letter i have to do, any advice at all or implementation on top of the $250 for walking through the door.
If people don’t want it. Why should they pay for it?
If you cant show clients the value of your services, such that they are willing to pay you, then what are they paying you for??
that was such as good TV show.
Urgh…. Fees invoiced like other industries…? haha.
I think commissions on risk are dead and you’ve probably have about 12 months at best. Treasury when it came to FoFA said they don’t care about job losses and now ASIC is questioning it. Even ongoing service arrangements were questioned at the RC. The preferred model is to buy insurance via the TV or industry super funds and to get advice in a 15 minute tax return meeting. This will mean only those higher net wealth individuals who can pay will be able to afford an adviser or get good cover. It’s increasingly becoming common to hear overseas countries (except NZ) banning commissions. Whether right or wrong it’s inevitable, so most advisers have left change too late. I’ve seen 5 advice firms close down since FoFa and I’m in a regional area so we’re the canary in the cold mine.
might be true, however just trying to make sense where this is coming from given 6 months into LIF reforms.. quite bizarre really. If we are going to zero commission game then can everyone please have the common sense to allow an orderly transition – there will be many financial planning businesses who have borrowed funds.. what do you expect to do with them, default loans, lose their homes, bankruptcy? Have some common sense with all of your stupid ideological comments.
I look forward to the new “magical non conflicted world”… a world where only the rich will get advice and the ones that can’t afford it won’t.. and where they will fend for themselves with general/no advice bus where they end up in poor products, underinsurance, no claims support, crap industry fund cover where claims are denied or poorly structured cover… worse still, it will be a world where the legal companies will become de-facto insurance claim specialists and where claims are sucked up by massive legal fees..and a even worse, where they will be thrown in a Centrelink supported world (that the country can’t afford) but it’s ok, this is a ideological world that will be fairer to the end consumer.
Let’s bring this change on fast..
PS let’s hope that the trusted insurance companies rebate the commissions to clients… perhaps the state gov’t could also rebate their stamp duties on these policies too… oh, it’s stamp duty not a commission.
Is this article aimed at insurance commission or fund trail. I believe it is about fund trails which are the issue. Insurance has already been dealt with—for now.
Yes, I wish EVERYBODY would be more specific on this point – ASIC, the journalists and people commenting here. Sate, clarify WHICH types of commissions you mean and are talking about at any point PLEASE! Id’ like to know which one exactly this damn article refers to please! Reisk initial? Risk ongoing? Investment ongoing? WHICH?
All ASIC wants is to have everyone with Australian Super and everyone in the default investment. Don’t be fooled the less advisers there are the happier ASIC are.
Industry funds just put their metric on number of SOA’s delievered which have a $$$ sign on each type of advice. better see insurance premiums go down 120% then too
Agree wholeheartedly with anon post above.
James Shipton lacks understanding of how the system works, it how the clients want to be paid James. Not what you want. I’m not sure why they have people like you saying these things – you seem to have no real life experience judging by your linkedin profile. Is why Australia is F**@#*. Clients want commissions as they have no money to pay for the expensive SOA that advisers have to produce to give them advice. We say ban SOA’s. !! The client has to pay some how. We are not doing it for free.
when FOFA came in, we had clients who had some money in BT ‘baby’ Wrap with built-in comms & in the BT Wrap with an explicit fee. Total cost to client under both was the same, the only difference was one was an explicit fee. Client gets FDS & calls to see what its all about, explained the situation & the fact that we were getting paid the same amount from each account, it was just that one option had our payment built into the overall cost. he was happy for us to get a payment from one but not the other and asked for the explicit fee to be cancelled.
Another PAYG-head not understanding the industry! Commissions in the life risk space have already been standardised so there is no conflict. It comes down to advisers recommending the right solution for their clients.
And be warned any adviser out there who thinks it’s smart to pick the most expensive policy for their client to get the higher payment for the now standardised 88% hybrid commission. If I ever come across your clients, I’ll be making sure they know damn well you looked after YOUR best interest, INSTEAD of theirs.
I bang my head though and wonder when these PAYG heads will finally realise that the VAST MAJORITY of people won’t pay extra fees for life insurance.
All wiping commissions out of the industry will do is heavily impact Australia’s already massive underinsurance problem and impact all future Governments welfare expenses – ENORMOUSLY!
Stop meddling ASIC!!!
The commission remuneration model works for 98% of the advisers and the industry. It’s the 2% of advisers out there, that it may not so eradicate the vermin and the system works.
Agree!… the mortgage brokers haven’t yet woken up to this… should be mandatory for everyone who works at asic to actually spend time in a small financial plng business… how their red tape makes it next to impossible to provide simple, low cost advice…where do I sign up for the mother of all legal cases… I always thought that retrospective legislation was always dangerous ground…