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Financial advice: commissions aren't the problem

The central problem the industry faces is that selling and advising shouldn't go together. Photo: Jessica Hromas The central problem the industry faces is that selling and advising shouldn't go together. Photo: Jessica Hromas
Despite the recent government decision to defer the Future of Financial Advice (FOFA) reforms, the battle will continue to rage because there's so much money at stake.

We don't yet know whether industry super, which wants financial advisers to be as regulated as possible, or the big banks, insurance companies and large dealer groups, which don't want much regulation at all, will win.

But we already know the losers. As long as everyone is convinced commissions are the problem, the financial behemoths are winning the war against you.

The government's approach – being fought by industry super – raises the spectre of "general advice" loopholes and a repeat of the costly Storm Financial disaster. But the Labor and industry super alternative might result in a bank teller breaking the law simply by providing useful information while selling an insurance product.

Don't get me wrong - big, upfront commissions paid to a product peddler (a big bank) purporting to be your adviser are immoral. But the problem is even bigger than that and it's one FOFA, no matter how the legislation ends up structured, won't fix.

To quote a well-placed acquaintance: "The problem with the bloody financial advice industry is that most of the advisers are owned by the bloody product manufacturers."

You would think twice about visiting a doctor whose primary source of income was from the pharmaceutical company that supplied his medications, wouldn't you? And you probably wouldn't want to be represented by a lawyer on the payroll of the company that ran the local prison. So why accept financial advice from a person paid by the company that makes the products they recommend?

That's the fundamental problem. The financial advice industry is built on a conflict of interest – of which commissions are but one example – that costs consumers a fortune.

If you use an adviser, the commission they get on a life policy may cost you, but the bigger problem is if they're stuffing you and your portfolio full of in-house products.

FOFA may ban some commissions, but who is going to stop the boss tapping the advisers on the shoulder and suggesting that product sales are a bit low this month?

Similarly, an industry fund adviser is unlikely to suggest a member consider a self-managed super fund, or a fund that's not their employer's.

While the media is banging on about bank tellers' commissions and the legal nuances of the "best interest" test, keep sight of the fact you've been failed no matter who wins this fight.

Banks and insurance companies will be free to use their advisers as distribution outlets for their funds, insurance and loan products. Industry super can use advisers as a tool to stop you switching elsewhere.

Collectively, we're all being taken for a ride while the big industry players steer the spotlight away from the central problem this industry faces, which is that selling and advising shouldn't go together.

The FOFA laws, no matter what form they take, won't protect you. Nowhere does the phrase "buyer beware" carry more weight than in financial services. It really is down to you to look after your own interests, because the law won't.

Richard Livingston is the managing director of Intelligent Investor Super Advisor, an online service providing advice on superannuation and investing. This article contains general investment advice only (under AFSL 282288).

Author: Richard Livingston
Source: Sydney Morning Herald

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