Sunday, January 12, 2014

Secret fees. Why the war on red tape is a war on us

Imagine being whacked with an annual fee for a service you didn’t get. You would want to know about it, right? Apparently we’ve voted not to.

The annual fees we pay to financial planners are so big they rival electricity bills. Many of us might not even be able to remember the last time we saw a financial planner. But if we once did, and if that planner put us into a superannuation fund or investment product, it is likely the planner is continuing to get an ongoing “kick back” or “trailing commission” - year in, year out for as long as we stay with the product.

Worth typically 0.5 per cent of the funds under management, it gets bigger over time as our contact with the planner recedes into the past. It adds up to $500 on a fund with $100,000 under management, $1000 per year when the fund grows to $200,000 under management, and $2000 per year when it grows to $400,000.

It shouldn’t be confused with the separate and larger annual fee for actually managing the money - that goes to the financial institution itself. The trailing commission is a hangover from the days when financial planners were called insurance salesmen. It was their commission for selling and keeping you in a product. (A separate, larger commission was paid to them upfront - taken directly from your funds before they were placed under management).

If you didn’t know you were paying the annual fee, it could be because you didn’t read the fine print, or it could be because you were put into the fund way back in the days when the fine print was exceedingly fine and hard to find.

It is still hard to find, which is why after a Senate inquiry into the collapse of several high-fee institutions the previous government wrote into the law a requirement for financial planners to tell you.

Every year each financial planner would be required to write to each client telling them the fee the planner had taken out of their fund in the previous year, the services that had been provided in return for the fee, the fee that would be taken out the following year and the services that would be provided in return for it.

Every second year they would be required to also send a renewal notice...

If the client said no, or didn’t send it back, that would be the end of the fee.

Planners could escape the strict letter of the law only by joining a professional association which imposed requirements no less severe.

The law required a few other things as well. Financial planners would required to act in the “best interests” of their clients and to “place the interests of their clients ahead of their own”. Astoundingly, this hadn’t previously been the case. That’s because financial planners were once salesmen. Just as a refrigerator salesman isn’t required to put your interests ahead of his own in recommending the most suitable model, insurance salesmen weren’t either.

And from July 2013 it would be illegal for any new deal between a planner and a client to be funded by “conflicted remuneration” or kickbacks. Customers would have to pay planners directly.

Rather than accept the law, or campaign publicly against it, those planners wedded to trailing commissions went to the Coalition complaining about “red tape”.

After the election, under the cover of Christmas on Friday December 20, those planners received their reward.

The assistant treasurer Arthur Sinodinos announced that “consistent with the Coalition's election commitment to reduce compliance costs for small business, financial advisors and consumers,” the legislation would be “improved”.

Gone will be the requirement to send all clients an annual statement. It will apply only to new clients, signed up from July 2013. Older clients (most of us) won’t be told how much we are continuing to pay to someone who was once our advisor. They will be able to keep the income stream and sell it when they sell their businesses.

One statement once a year would have been “overly onerous”, even though its probably the least that could have been expected from a planner who actually was providing on ongoing service.

Gone too will be the requirement for anyone paying an ongoing fee to “opt in” every two years. We will still be able to opt out if we want, but unless the planner hears from us it’ll be assumed we want to keep paying the annual fee (even if we don’t know what it is because we are not getting annual statements).

Its a deal other industries would love, made all the more invisible because superannuation contributions are deducted automatically from our wages.

Sinodinos thinks we voted for it.

In The Canberra Times and Sun Herald

Related Reading

. Professional Planner. Has the industry shot itself in the foot?

. Kohler. Not all regulation is bad

. Horin. Swimming with sharks

Related Posts

. 2010. An epoch ends. Financial planners won't get kickbacks

. Cooper is super, Brogden is a disgrace