“Who can I trust?” This is by far the most common question we’ve been asked while undertaking hundreds of independent financial education seminars and individual consultations with members of the Australian Defence Force (ADF).
The need is so great and the demand is so constant, yet it’s clear the financial advice industry isn’t trusted by consumers to deliver on its most fundamental promise: to provide independent financial advice in the best interests of Australians.
It’s tempting to conclude that the financial advice trust deficit is simply caused by a few “bad apples” who have been (or will be) removed by combination of self-regulatory action by the industry and banning actions by the Australian Securities and Investments Commission.
If only the problem were that easy to solve.
Incentivised to sell
The reality, so clearly exposed by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, is that the problem is systemic, caused by a deeply ingrained product sales culture that is supported and sustained by a system of incentives and bonuses.
These are often referred to as conflicted remuneration. They include various types of commissions, percentage-based fees and so-called “trailing income”. The latter has been referred to recently in the royal commission as “fees for no service”. The conflict even extends to financial advisers who earn a fixed salary where the retention of their jobs is subject to meeting product sales targets.
In whose interest?
Of course, it doesn’t necessarily follow that all financial advisers do the wrong thing by their clients. However, it does follow that financial advisers who are subject to such incentives and targets are conflicted and will be inclined towards advice that involves selling products, whether their clients need them or not.
In the ADF, we see this conflict at work in many ways. One example is when members need to decide between receiving a government-guaranteed indexed pension in retirement versus commuting that to a lump sum and investing the proceeds in a product for which their financial adviser may charge a percentage-based fee (also known as an asset fee).
So often we observe financial advisers recommending a product when in nearly every case the commission-free pension is the better option.
Another common example is where ADF members seek advice on reducing a mortgage versus buying an investment product on which an asset fee may be levied.
Even though debt reduction is demonstrably the better advice in many cases, we observe too often that investment products are recommended by financial advisers who are faced with the prospect of earning nothing if they recommend debt reduction, as opposed to earning a percentage-based fee/commission should their clients buy products.
The real cost of advice
Given regular requests from ADF members wanting to know about how to find a trusted financial adviser, we did two things.
Our first step was to make a film, Financial Advisers – The Facts and the Fiction, which anybody can watch on our website adfconsumer.gov.au/videos. It outlines how financial advisers are paid, the remuneration conflicts that exist and the characteristics that consumers should be looking for when choosing a financial adviser.
Our second step was to design the ADF Financial Advice Referral Program, which involved identifying licenced financial advisers throughout Australia who operate on a fee-for-service basis. This way we could be sure that the listed financial advisers were not influenced by remuneration conflicts, giving ADF members a reasonable assurance that the financial adviser of their choice in the program would act in their best interests, without regard to the commercial imperative to sell products.
An independent view
As of October 2018, the program contains some 25 financial advisers across all states and territories. Their practices, personalities, expertise and specialisations vary considerably; however, they have one thing in common: they operate on a genuine fee-for-service basis (no percentages, just flat fees or hourly rates).
Of course, ADF members are not required to use the financial advisers in the program, but we do recommend that members who want unconflicted advice (and who wouldn’t?) should have a preliminary discussion with at least two of the listed financial advisers to assess whether they meet their needs.
Defence has no commercial relationship with any of the financial advisers in the program, so an ADF member who uses anyone on the list should negotiate a mutually suitable and private professional fee arrangement.
All we ask is that financial advisers only charge genuine fees for service (and we require a guarantee of this in writing from them).
Fee or sales commission?
Just a footnote to the discussion about the term “fee for service” – the financial services industry often insists that a percentage-based fee (also known as an asset fee) is a professional and unconflicted fee for service.
It isn’t. It’s a commission.
Asset fees are designed to avoid the legislated ban on conventional commissions paid to financial advisers by product manufacturers (except on gearing, where asset fees are illegal). Therefore, it’s important to understand what a financial adviser means by fee for service. If it means an asset fee, think twice about using that adviser.
In addition to educating ADF members about the process of choosing a financial adviser, we encourage our people to become financially literate and capable in their own right. We do this not only through our seminars and consultations but also by recommending independent and free-of-charge educational resources available through adfconsumer.gov.au/videos and moneysmart.gov.au.
The ADF’s consumer website includes references to the unique employment terms and conditions of ADF members (such as military superannuation), while ASIC’s MoneySmart website offers a comprehensive compendium of independent financial education.
Together, these websites are invaluable, independent and trustworthy sources of self-education for any members of the public, including ADF members and their families, wishing to improve their financial literacy and capability in the complex and often confusing world of financial services.
Air Commodore Robert M C Brown AM is Chair of the Australian Defence Force Financial Services Consumer Centre, a Director of Financial Literacy Australia and a member of the Australian Government Financial Literacy Board.