Fees for Advice

Across the Tasman, the Financial Planning Association of Australia (FPA) has just released a consultation paper to members that recommends that fee-based remuneration be the standard model for all financial advisers from 2012.  It seems that the Australians are going down this path largely as a result of a number of high profile corporate collapses in which high upfront commissions were evident, and also because of competition in the superannuation sector between retail and industry funds.  The argument is that changes are needed to reduce the potential for and perception of bias in advice and to improve overall consumer confidence.

The Australian market is quite unlike the New Zealand market.  It is dominated by large dealer groups, often with extremely strong links to the accountancy industry.  There is significant overlap because of taxation issues.  Financial planning in Australia is very much tax planning driven.  This will happen in New Zealand as the more skilled financial planner practitioners take advantage of the investment taxation changes that took effect from April 2008.  Superannuation in Australia is also compulsory and there is a capital gains tax to consider when investing. 

The Australian financial planning industry is a very high cost industry.  Costs are driven by excessive compliance needs, and all the cost layers associated with dealer groups who are often strongly affiliated to product providers.

Under the proposed model, FPA members will have to adhere to six principles relating to remuneration.  (I) Consumers, rather than providers should pay for advice.  (II) Consumers must be able to understand the fees they are paying.  (III) They must be able to compare the fees they are paying.  (IV) They must be presented with fees that are true to label.  (V) Fees must be separated between advice and product.  (VI)  Consumers must agree the fee with their planner.

The six principles relating to remuneration are not rocket science.  In New Zealand there are a number of fee based advisers.  The only difference, for example, between what we do in our practice and the FPA proposal, is that fee comparisons are not readily available here because some advisory firms’ fees are not transparent, and they use a combination of fees plus trail from product or platform providers.

Unfortunately, we do not believe that the New Zealand industry as a whole will adopt the remuneration principles that the Australian FPA is proposing.  Unless it is required as part of the regulatory process it is inevitable that there will be strong lobbying opposing it.  This will undoubtedly be driven by the major product providers such as the banks and insurance companies.

Successful investing is invariably the result of a combination of product and advice.  The product or combination of products, irrespective if the product is a physical property, shares, bonds, and derivatives is very important.  But more importantly is the actual advice received and acted on when it came to making the decisions as to what products to invest in.  In our opinion the best way to receive appropriate advice is to pay for it in a fully transparent fee, rather than via some form of commission or trail fee that can be manipulated by the product provider.  That is why investors should use fee based professional advisers to ensure the advice they receive is unbiased and in their best interests.