It's time to shut the gate

As we get closer to legislating educational reforms for the Financial Planning industry, the usual suspects are lobbying intensively for a "soft-touch". Reading between the lines, and on the back of the recent interim report from Commissioner Hayne, those with the most to lose will do anything to try and retain the current financial planning landscape.

However, significant change is already underway. Three of the four major players (ANZ, CBA and NAB) have announced to the market that they will separate their financial planning businesses from their traditional “financial product manufacturing” businesses to create (in their own words) an independent financial planning offering to the market.

It appears that the major players are trying to get in front of what will likely be forced on them post the Royal Commission. However, it is difficult to see how these financial planning businesses will survive without commissions and product rebates to prop them up.

One of the major impediments to creating a financial planning “profession” has not necessarily been the remuneration arrangements or vertical integration structures. The achilles heal has been the barriers to entry which essentially have been non-existent for too long. It is often quoted that the entry requirements in terms of education and training are more onerous for hairdressers than financial planners, and this is alarming when you think about how long it takes to recover from a bad haircut versus poor financial advice.

While there are changes coming in lifting the education and training standards for the financial planning industry, unfortunately “the horse has well and truly bolted”. However, what we have seen is the ability for a lot of financial planners to remain relevant because they were able to be remunerated via product commissions or rebates, often without the client knowing what they were paying. With the spotlight now well and truly on remuneration arrangements, and moves to switch off “grandfathered” commissions, suddenly these same financial planners will be thrust in to a role of delivering advice for a fee. As their business is separated from the “mothership”, and they are put forward as “independent” financial planners, they will be forced to sit in front of their clients and convince them of their value and the new requirement that the client will now need to start paying them a fee from their own pocket.

This clearly is not going to wash for a lot of clients. For the simple reason that clients won’t see value for money. For too long the whole fee arrangement for financial advice has been wrapped up in the sale of financial products, with clients paying a commission or “service fee” linked to their superannuation which was paid to the financial planner from the product (and in the eyes of the client not directly from their pocket).

So where to here with the desegregation of the traditional vertically integrated financial planning model? Clearly clients need to understand the important distinction between financial advice and the sale of a financial product. When a person goes in to a Mazda car dealer, they know they are going to be sold a Mazda and not a Toyota. The same mind-set needs to occur in the financial planning industry. Financial planners (and their bosses!) that want to deliver independent financial advice, and importantly charge clients directly for this advice, need to deliver advice which is without conflict. Going forward independent financial advice cannot be “dressed up” as selling a financial product. Call it for what it is – ie non-advice product sale and give clients the choice to pay for this service as a commission or fee.

This distinction between financial advice and the selling of financial products is fundamental. It will also allow a number of existing financial planners to remain in the industry as “financial product salespeople/agent” and help clients who are not prepared to pay for financial advice or who don’t feel they need advice.