Australian banks choose fee-for-service

[Norbert Schlenker]

But, as important as compensation can be to advisor motivation, it’s also key to investor credibility. Yet, in the financial services industry, firms often prefer to keep the compensation low-key — complex and embedded in the products they sell. The result is that while most firms claim to add value by dispensing advice, they are paid for selling products. This creates conflicts of interest.

In Australia, the wealth-management industry is coming to the conclusion that this conflict is best avoided. As a result, some of its most prominent players are dumping commissions in favour of fee-for-service arrangements....

The decision to do away with commissions in favour of fees is largely aimed at shoring up the industry’s credibility and eliminating the potential for conflicts. Earlier this year, the country’s regulator, the Australian Securities and Investments Commission, released the results of a “mystery shopping” exercise, which found that clients were six times more likely to receive bad advice from the financial industry in situations in which a conflict exists, compared with scenarios in which there are no conflicts.

“Where the advisor had a remuneration conflict, 28% of the advice clearly did not have a reasonable basis, and a further 7% probably did not. In contrast, when the advisor did not have a conflict, the percentages were 5% and 1%, respectively,” reported Jeremy Cooper, deputy chairman of ASIC, in a speech.

Also, poor advice was three times more likely when the advisor recommended a proprietary product rather than a third-party product. “It is clear from the survey that there is a much higher risk of inappropriate advice when the advisor is conflicted,” Cooper concluded.

The idea that more than a third of clients may be getting bad advice and that the advisors’ compensation scheme is to blame has the industry on notice. In response to findings such as these, it is trying to get out in front of the conflicts issue. The Financial Planning Association of Australia Ltd. (which administers the certified financial planner designation in that country) has come out with a set of four principles designed to address these concerns. Among other things, it calls for planners to charge for planning services directly, and to disclose both these fees and all other forms of compensation on a regular, ongoing basis.

The effort to push firms toward fees is about putting a value on advice. “Financial planning advice is a service that is valuable in its own right, and consumers should be aware of its cost,” says FPA chairwoman Corinna Dieters. “Separating the cost of advice from other costs highlights the value of the advice.” ...

http://www.investmentexecutive.com/clie ... m=&nbNews=

[Bylo Selhi]

Earlier this year, the country’s regulator, the Australian Securities and Investments Commission, released the results of a “mystery shopping” exercise, which found that clients were six times more likely to receive bad advice from the financial industry in situations in which a conflict exists, compared with scenarios in which there are no conflicts. “Where the advisor had a remuneration conflict, 28% of the advice clearly did not have a reasonable basis, and a further 7% probably did not. In contrast, when the advisor did not have a conflict, the percentages were 5% and 1%, respectively,” reported Jeremy Cooper, deputy chairman of ASIC, in a speech.

Also, poor advice was three times more likely when the advisor recommended a proprietary product rather than a third-party product. “It is clear from the survey that there is a much higher risk of inappropriate advice when the advisor is conflicted,” Cooper concluded.

I guess that flies in the face of the dismissals by some here of similar reports of conflicts-of-interest by commissioned advisors in Canada as being merely anecdotal, isolated cases, and wholy unrepresentative.

[steves]

Hello??!! We are talking OZ, here. You know, OZ....Botany Bay, convict ships, Mel Gibson?

This would never happen in Canada.

[Bylo Selhi]

Hello??!! We are talking OZ, here. You know, OZ....Botany Bay, convict ships, Mel Gibson?

This would never happen in Canada.

Oh? Sticking only to the wet coast and restricting myself only to politicians whose names I can think of off the top of my head, how about Amor de Cosmos, Wacky Bennett, Bill "Fantasyland" Less-than-zero, Gordon "DUI" Cambell, Hedy "crosses are a'burn'n" Fry and Gurmant "what can you offer?" Grewal? Are you really sure you want to start a pissing match with the OZies?

[Chuck]

...the country’s regulator, the Australian Securities and Investments Commission, released the results of a “mystery shopping” exercise...

I can agree that the notion of a secuties regulatory body pro-actively doing something to look out for investors best interests is unlikely to occur in Canada.

[Bylo Selhi]

Meanwhile in the US the CFP community wants the option to opt-out of their fiduciary duty to clients. Note also the presumed rationale for this. [my emphasis] Opting-out rules would be bad for clients

Two major financial-planning trade groups took aim last week at proposed ethics rules that would allow financial advisors to sidestep an obligation to put their clients' interests first.

The proposed changes to the ethics code of the Certified Financial Planner Board of Standards would establish a "fiduciary" standard for people who hold the CFP credential, but allow them to opt for a less-stringent standard at will. "You don't see lawyers being able to opt out of their fiduciary duty, nor would you think doctors would be able or want to waive their Hippocratic oath to patients," James P. Barnash, chairman of the Financial Planning Association, said during a public hearing at the CFP's annual meeting in Santa Monica, Calif...

The fiduciary issue is at the heart of an industry divide between investment advisors, who help clients manage their money for a fee, and brokers, who traditionally have sold stocks and bonds for commissions. Though Wall Street brokerage firms have moved into fee-based financial advising in the past several years, brokers do not hold a fiduciary responsibility to act in the best interest of clients. Instead, they operate under looser "suitability" guidelines, under which they are required to choose investments suitable to a client's age, needs and risk tolerance. The brokerage industry says those guidelines, along with heavy regulation, sufficiently protect investors and that a fiduciary requirement is unnecessary. The FPA is suing the Securities and Exchange Commission over its broker-dealer rule, which shields brokers from regulation as investment advisors.

The CFP's current proposal offers "a very flexible loophole that allows these same brokers, if they are CFP certificants, to avoid the default fiduciary standard by specifying a lower standard by contract when they give investment advice," Mr. Barnash said.

[John H.]

Just what would this "Fuduciary Standard" be and how would the CFP Board propose to enforce it. At the present time the most they can do is kick a member out and tell them to stop using the CFP logo and despite what the CFP Board would have you believe, the majority of investors do not look to the CFP mark when choosing an advisor, they tend to look to family and friends for a recommendation.
Perhaps the "standard" should include telling CFP holders that they are no longer permitted to flog high cost mutual funds on a DSC basis and that they must disclose to their clients how they are compensated.
I think that what concerns me most about this whole matter is that the CFP Board want to hold themselves out as the educational "gold" standard in the industry but now feel the need to tell their members that they have a "fuduciary duty" to their clients. If the members have not gained this knowledge through the education process of the CFP, telling them will not make it so.

[Bylo Selhi]

Just what would this "Fuduciary Standard" be and how would the CFP Board propose to enforce it.

Part II - Rules
Introduction
These Rules provide practical guidelines derived from the tenets embodied in the Principles. As such, the Rules set forth the standards of ethical and professionally responsible conduct expected to be followed in particular situations.

Principle 1: Integrity
A CFP professional shall always act with integrity.

Rule 101 - A CFP professional shall not engage in or associate with conduct involving dishonesty, fraud, deceit or misrepresentation, or knowingly make a false or misleading statement.

Rule 102 - A CFP professional has the following responsibilities regarding funds and/or other property of clients:
1. A CFP professional who takes custody of all or any part of a client's assets for investment purposes, shall do so with the care required of a fiduciary;...

Standards Enforcement

All individuals who have earned the Certified Financial Planner™ (CFP™) designation must renew their licence to use the CFP certification marks annually. Annual post-certification licensing requirments include 30 hours of continuing education and adherence to the Financial Planners Standards Council Code of Ethics.

All events or series of events that give rise to allegations of misconduct against CFP professionals are investigated and, if found to contravene the code, constitute grounds for discipline, which may include a reprimand, temporary suspension, or permanent revocation of the licence...

At the present time the most they can do is kick a member out and tell them to stop using the CFP logo

When was the last time that FPSC kicked someone out for violation of the code of ethics? When was the last time they issued a media release about it? Do they publish a public list of those who they've "kicked out"? Do they make any effort to educate the public on these issues (apart from what I quoted from their site)? Do they ever refer cases to the xSCs and/or police when there's evidence of criminality?

Perhaps the "standard" should include telling CFP holders that they are no longer permitted to flog high cost mutual funds on a DSC basis and that they must disclose to their clients how they are compensated.

I though compensation disclosure was mandatory for CFPs. You mean it's not? (As for DSC, I'd be very happy to see that "scheme" relegated to the history books.)

If the members have not gained this knowledge through the education process of the CFP, telling them will not make it so.

The same applies to all professions. I'm not aware of any accounting, bar, medical, engineering, etc. association that wants to dump its code of ethics for this reason.

[kcowan]

If the members have not gained this knowledge through the education process of the CFP, telling them will not make it so.

The same applies to all professions. I'm not aware of any accounting, bar, medical, engineering, etc. association that wants to dump its code of ethics for this reason.

Speaking for the PEO, they will remove the P.Eng. certification when they discover blatant violations of said code. Of course the removal of the P.Eng. designation can prevent members from practicing...

[John H.]

From Investment Executive, in a survey of members (CFP's) results show "73% of users plan to increase their usage of mutual fund wrap programs in the next 1-2 years".
Too bad their ethics and standards don't stretch to advising clients how to build a cost effective portfolio.

www.investmentexucutive.com