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The Real Future of Financial Advice in Australia

By Steve Manning

It’s been a strange time

In the same week the senate inquiry released a damning report against the financial advice provided by Commonwealth Financial Planning (CBA), the government quietly rolled back some of the FOFA (Future of Financial Advice) consumer protections and now seem ready to block a Royal Commission into CBA. Earlier they announced cutting $120 million from ASIC’s funding, opting for less regulatory oversight of the financial sector.

ASIC Chairman Greg Medcraft told a press conference on Friday 27th June that ASIC is drastically understaffed with only 30 people to monitor the roughly 40,000 financial advisers. It’s open season for the banks.

Is it just a few rogue planners or how the banks do business?

Greg Medcraft told the press conference that there were problems across the industry and added that “Commonwealth Financial Planning is not the only dealer group he is concerned about”. The banks all offer substantially the same products, in the same way, at the same price. This is common for an oligopoly (rule by few) where a price war seldom breaks out. Who has ever heard a bank spruik (promote) a managed fund on price? Their main differences are the colours, logos and marketing spin.

The power of the banks

Milind Sathye (Professor of Banking and Finance, University of Canberra) in his submission to the inquiry into competition within the Australian banking sector in 2011 concluded the four major banks ”wield unprecedented market power never seen in Australia’s banking history before”.

The banks (with AMP) control or influence the majority of advisers (could be higher than 80%) and according to Superguide (April 2, 2014) there could be as few as 31 truly independent advisers in the whole of Australia. These are advisers who have their own licence, charge fees only (no commission) and never benefit from account based fees (a % of the investment).

If the banks didn’t get a return on the costs (and risks) of licensing or rewarding advisers they would stop doing it. They must be getting a good return through product distribution.

So who cares if CBA clients get ripped off?

In the months leading up to the senate report, CBA endured unrelenting bad press about the advice they had given yet watched their share price reach new heights. It must have been surreal for Ian Narev (CBA chief executive) to read a damning indictment on page 1 of the daily newspaper and a glowing report in the business section.

CBA shareholders clearly don’t care if CBA clients get ripped off. It would also seem the government doesn’t care and the inquiry felt the regulator (ASIC) didn’t care enough. Clients care and good advisers, tarnished with the same brush, care.

So where is the ‘real’ future of financial advice?

A compliant Government, overwhelmed regulator and all-powerful banks leaves the future of financial advice with the banks. The fox is looking after the chickens.

The Financial Planning Association has called for a summit with a ”clear and independent charter around the changes needed to restore community trust in financial planning…” “If we can’t have a summit which commands the respect of the public, one with genuine teeth that can truly deliver positive changes, we would fully support calls for a Royal Commission.”

Without a Royal Commission or the proposed summit, little will change and the bank ‘product machine’ will churn on to the next disaster.

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