FINANCIAL planning is at the crossroads and has an opportunity to raise itself to a level of professionalism that is long overdue.
Australians are encouraged to invest so they can self-fund their own retirement, taking the pension burden off taxpayers.
It is vital that the financial planning industry evolves to a point where investors can be certain the advice they receive is in their best interests.
In recent weeks, both the Financial Planning Association and The Investment and Financial Services Association have called for a move away from commission-based remuneration in favour of fee-for-service.
The financial landscape is littered with investment disasters where a financial planner has provided questionable advice that was tainted by conflicts of interest.
The Storm Financial case highlights one aggressive investment strategy that was marketed to investors and where the level of remuneration the adviser received was directly tied to the sum invested.
Under this type of arrangement, financial planning commissions are calculated as a percentage of funds invested. They are either deducted directly from the investment or are paid by a product provider as a marketing expense.
The FPA has said that this type of commission payment has developed such a negative reputation that it is essential to make changes. The associationhas recommended members adopt a fee-for-service charging structure by 2012.
It is important to define exactly what "fee-for-service" means.
At present, financial advisers are able to advertise they charge on a fee-for-service basis — yet base their fee on the amount invested. For example, the charge for someone investing $200,000 is a flat "fee-for-service" of $2000. An investor who has the same investment strategy but invests $400,000 is charged $4000.
Others charge a percentage of funds invested packaged up as an "adviser review" fee, but in reality is another kind of commission.
By looking at more evolved professions, the spirit of fee-for-service can be clearly seen. Lawyers and accountants have worked under a genuine fee-for-service model for many years. A lawyer who does conveyancing for a property does not get paid based on the value of the property. Similarly, an accountant who completes a tax return does not base the fee on the size of the refund.
Both professions bill their clients based on the type and level of work they have preformed. The advice is not connected to the amount of money involved at all.
In its purest form, fee-for-service disentangles the advice from the type and level of investment, and means that advisers can provide recommendations in numerous areas that are not investment-linked. They are also in a position to recommend investments and strategies where commissions are not paid, such as an industry super fund or direct property.
A complete ban on commissions in the financial planning industry is inappropriate as in some cases this model is best for the client. However, fee-for-service must be clearly defined, and not just a smokescreen.
Mark Armstrong and James McFall are directors of Property Planning Australia and The Property School.