Swimming with sharks

January 13, 2014
couple with money

My husband worked in the finance industry so friends assumed he could recommend a good financial adviser. “A lot of them are sharks,” he’d tell them. “And most of the others aren’t any good.” He was delighted when the federal Labor government took action to clean up the industry. After the Storm Financial and other such scandals cost thousands of ordinary Australians their life savings, landmark legislation was passed in June 2012. The law, known as the Future of Financial Advice (FOFA) legislation, gave clients of financial advisers greater protections.

But just before Christmas, when most people were too busy racking up credit card debts to notice, the Abbott government announced it intended to change the FOFA law. Amazingly, the government wants to remove the requirement for financial planners to “act in their clients’ best interests.” The changes, said Assistant Treasurer, Senator Arthur Sinodinos, would “reduce compliance costs for small business” in line with election commitments. But according to some experts, the government’s amendments could usher back in the bad, old days.

“Financial advisers have gone through years of not being trusted,” David Whiteley, chief executive of Industry Super Australia, told me. “They were dragged kicking and screaming to these changes. And the first opportunity they’ve had….well, they’ll go back to not being trusted again.”

A lot of baby boomers, like me, are products of the Age of Aquarius. Back then it was a badge of honour to be anti-materialist and innumerate. But in 40 years we’ve travelled from the Age of Aquarius to the Age of the Human Calculator. Now the world belongs to those who have a self-managed super fund. Over the decades governments have shifted more financial risk onto our shoulders. With compulsory super from 1992, we were promised a richer retirement. But we have to manage it right. Many of us ageing flower children are wilting under the strain.

Three years ago The Australia Institute published an excellent report on financial literacy. It revealed only a minority of Australians – one in five – are really on top of things. These human calculators are alert to the best deals in electricity, gas, water and phone plans. They’re scarily rational and competent. The rest of us are overwhelmed, oblivious, erratic or foolishly over-confident in our approach to money. Quite a few do really dumb things. People are in desperate need of good financial advice. We arty types can see the folly of our past: while we danced with flowers in our hair our numerate buddies were quietly laying down their first home deposits. We need help to make amends. We need trustworthy financial advisers who speak a jargon-free language, write user-friendly documents, and always act in our best interest.

As the Parliamentary inquiry into financial services showed, this was far from the case before Labor’s reform legislation. The financial planning industry was wracked by potential conflicts of interest. Investment funds often paid financial advisers a commission in return for money invested with them. Financial advisers faced a potential conflict between recommending investment funds that were best for the client as opposed to funds that provided them, the advisers, with the best commission. And these commissions were paid as long as the clients’ money was left in the fund. Clients might make a single visit to the financial adviser to set up an investment plan but the adviser might reap the resultant commissions for years, with no incentive to contact the clients or review their investment strategy. Also, clients were subsidising the commissions paid to the advisers through having to pay higher fees to the fund.

Under this conflict-ridden system clients have been at risk of not getting impartial advice; also they’ve often been kept in the dark about the hidden commissions, rebates and fees. After long negotiations and compromises with the industry, Labor’s key changes were passed. But the Abbott government now says these changes created “unnecessary complexity, imposing significant burdens on industry….increasing the cost of advice to consumers.”

I might be arty but I do live with a human calculator who’s taught me a thing or two. It strikes me as outrageous for the government to weaken the FOFA law. For a start, the government wants to remove the catch-all provision that requires advisers to act in their clients’ best interest. The government also plans to remove the requirement for advisers to have their clients ‘opt in’ to service agreements every two years; and it will exempt advisers from having to provide an annual fee disclosure statement to clients who’d signed with them before last July. It will also modify the ban on “conflicted remuneration.”

A spokesman for the Financial Planning Association, Dante De Groi, said the changes would reduce costs without reducing the FOFA’s effectiveness. But John Berrill, superannuation specialist at litigation firm Maurice Blackburn, disagrees.“There’s some red tape and regulation with [Labor’s legislation] that will add administrative costs,” he said. “But do they provide consumer protection that’s worthwhile? Yes. I’ve seen people lose hundreds of thousands of dollars under arrangements the FOFA law was going to protect people from, and with these amendments, there’s doubt about those protections.”

Not everyone is a human calculator, or is married to one. Yes, we all must try to get our act together. But most of us need advisers we can trust. The government appears to be putting the interests of the financial advice industry before consumers’. It’s got a lot of explaining to do.

What’s your experience with financial advisers? Are you a human calculator? Do leave a Comment.

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