Monday, April 26, 2010
Congratulations, thank you Chris Bowen
Financial planners will have to earn their keep openly from their customers as part of sweeping changes that will outlaw kickbacks and commissions and revolutionise superannuation and investment advice from 2012.
Fiercely resisted by parts of the industry, the changes go further than recommended by the Senate inquiry set up in the wake of the collapse of the Storm financial group that cost thousands of Australians their life savings.
That inquiry recommended in November that the government merely "consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers".
Instead Minister Chris Bowen will legislate to ban the payment of all types of commissions on all investments other than insurance from July 2012. The deadline is ahead of a similar reform in the United Kingdom that will take effect at the end of that year.
The legislation will also require financial planners to "place clients interests ahead of their own," something they are not currently obliged to do..
"We are facing an ageing population. Access to quality advice will be an important part of planning for that future. The reforms will give Australians advice that is in their best interests, rather than the result of incentives or commissions," said Mr Bowen.
Crucially the new law will not only ban the payment of upfront commissions, sometimes worth 1 to 2 per cent of the sum invested, but also the hidden but more significant "trailing commissions" worth 0.55 to 0.60 per cent of the funds under management for each year that it stays invested. On a 200,000 investment these can cost $1200 per year, or more than $24,000 over 20 years whether or not continuing advice received. The financial research firm Rainmaker estimates that Australians pay more than $1 billion in ongoing commissions per year, a figure that would be far lower if investors only paid for advice when they wanted it.
"This will end the kickbacks and commissions and intertia payments that four million Australians have endured for decades, said Industry Super Network chief executive David Whiteley.
"It'll make the commercial funds more like our industry funds. We might have to stop running those compare the funds TV ads. But that's a small price to pay for good public policy."
The Coalition has indicated it will oppose such reforms. Treasury spokesman Joe Hockey gave the industry a commitment in November that "the Liberal Party will not support the banning of commissions. We will not do that."
The changes will only apply prospectively, meaning that Australians in existing superannuation funds will continue to pay on-going commissions, giving the industry time to adjust. However changes to the operation of so-called default funds recommended the Cooper superannuation review are likely to outlaw the payment of trailing commissions for 80 per cent of fund members in any case.
To soften the blow of upfront charging by financial advisors the minister has hinted that government will make such charges tax deductible when it responds to the Henry Review. The concession would cost $1 billion. Mr Bowen said the government would reveal its position on tax deductibility when it responds on Sunday.
Published in today's Age
Future of Financial Advice - Information Pack
. Cooper is super, Brogden is a disgrace
. "Cease payments from product manufacturers to financial advisers"
. Why you shouldn't trust a mortgage broker
. Australian Financial Planners are shockers!