Expect letters. If you’ve had a financial planner steer you into a product in the last few years, that person is about to write to you. He or she will have to, even if they haven’t been in touch. He or she has been taking your money.
The first letter (due on the birthday of you accepting their advice) will do more than simply tell you how much the planner has been taking from your accounts. It’ll also ask if you want the withdrawals to continue. If you don’t you merely need to do nothing. The withdrawals will stop. If you do want your accounts continually drained you’ll have to send back a form. It’s called “opting-in”.
That’s what financial planners and the organisations that employ them have been engaged in a last-ditch battle to stop. Living off ignorance and amnesia, they’ve been desperate to ensure their long-forgotten clients don’t remember what’s being taken from their accounts and can’t easily stop it.
The Coalition has been backing them rather than us under the guise of stopping red tape. So keen has it been to do their bidding rather than ours that it waited until the parliament wasn’t sitting to introduce a regulation that would smother the requirement. The requirement had been due to become mandatory on July 1.
Then, when parliament resumed last week it delayed tabling the regulation. What’s not tabled can’t be disallowed. On Thursday it refused a formal request from the Senate to table it forthwith. Labor ended up tabling the government’s regulation itself and on Monday moved a motion to disallow it.
The disallowance motion is likely to pass. The Coalition’s attempt to appease financial planners will pass into history. Asked by the Australian Financial Review last week what he thought about its rear guard action Clive Palmer replied: “They can stick it up their arse and you can quote me on that.”
The Coalition meanwhile fulminates against “retrospective fee disclosure requirements,” even though the fees that will be disclosed aren’t retrospective, they’re ongoing. And it makes the - correct - claim that any investor who really wants to know what was being taken out of their accounts can look...
The payments are noted in the fine print of the annual statements for each product provider. But for someone who has multiple annual statements (it is quite common to be signed up for multiple products) it’s quite a bit of effort to look up each one and then ask the provider to stop. One simple “opt-in” box removes the red tape. The Coalition says it’s against red tape, but it’s really against red tape for planners rather than their clients.
Older clients get no relief from red tape whatsoever. Before making explicit payments to planners from their clients’ accounts financial institutions used to pay implicit - hidden - payments known as upfront and trailing commissions. The planner typically received upfront 2 per cent of the amount to be invested and then a further 0.6 per cent per year for as long as the money stayed with the product provider. It provided a powerful incentive to advise in favour of the product paying the money and an even greater incentive not to recommend the client leave it.
Although the upfront part sounds bigger, it isn’t. Rainmaker research reckons that over the past five years upfront commissions have accounted for 8 per cent of annual commission payments, ongoing trailing commissions 67 per cent.
Most of the old trailing commissions aren’t disclosed to the clients. They don’t appear on their annual statements. The product providers say they don’t have the computer systems to recognise them (although curiously their systems recognise the planners to who they are being paid). Labor’s legislation ignored old fashioned ongoing trailing commissions. It applied only to new-fashioned explicit payments.
And the worst part is that many of those payments may be going to no-one at all. They are being taken out of accounts in order to reward long forgotten planners, but the planners themselves may have died or shut up shop.
Institutions remove the commissions, hang on to them and pay them to no-one. More often than not those institutions are owned by banks.
They are called “orphan commissions”. Rice Warner actuaries believes the old-style commissions untouched by both the Coalition will cost consumers $6.1 billion over the next eight years. A staggeringly high proportion may be orphans. The financial institutions won’t tell us. Mortgage Choice found last month that 89 per cent of us “do not currently have a financial plan in place that was created by a financial planner,” suggesting that most commissions are orphans.
Neither side of politics has had the courage to tackle them. Industry Super has. It wrote to the Australian Securities and Investments Commission last month asking for an urgent investigation to at least determine the extent of orphan commissions.
The government’s financial system inquiry releases its first report on Tuesday. If it is serious about making the financal system work for us it’ll stamp out orphan commissions and stamp out commissions altogether, including the old ones. Anything less will suggest it works for the banks.In The Age and Sydney Morning Herald
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