Losing money is never at the top of anyone's 'to do' list, and not surprisingly, the financial planning industry has come under fire in the wake of the global financial crisis as many short-changed investors look for someone to take the blame.
There are even reports that lawyers are bracing for a spike in cases against planners. But do planners deserve all the flak?
To get the scoop on the forces driving the industry, Peter Switzer spoke with Conexus Financial's Simon Hoyle.
As editor of Professional Planner magazine and a regular Fairfax contributor, this is an issue close to Hoyle's heart.
Losing money for the wrong reasons
While equity market downturns are a fact of life - crashes happen, as Switzer wryly observes - Hoyle says 'even the best diversified portfolio structures the right way and with the best fund managers in the world involved in managing your money, they're occasionally going to fall victim to these downturns, but if your plan is long-term, you can ride the downturns out.
When the market crashes like that, that's losing money for the right reasons.'
The problem, says Hoyle, is when people lose money for the wrong reasons.
'You lose money for the wrong reasons when the investment that's been recommended to you is wholly inappropriate,' says Hoyle.
Fortunately, such planners are few and far between.
'On the occasion when things go completely haywire, it's a very small minority of the industry that's responsible,' he says.
'You look at the industry generally and the vast majority of planners do a fine job. They make recommendations for the right reasons, and they operate on a very high ethical and moral base.'
Still, Hoyle is concerned with the quality of financial planning advice that's given to Australians.
Drilled down, he explains, the problem is when financial planners make investment recommendations that are made for reasons other than the best interests of the client - product commissions are payments by fund managers to the financial planner.
'The existence of the commission payment has the potential to influence and bias the advice.'
Hoyle describes the problem as 'endemic' - because if one fund manager pays the commission, they all have to.
Moves to stamp out product commission
Product commission, it seems, has been an industry-old tradition: Hoyle says there's nothing new about it, but amid headlines of financial collapse as a result of irresponsible planning, both the industry and government are making moves to change this and remove the conflict of interest.
'I'm accused, regularly, of having nothing else to talk about except financial planner remuneration, but the fact of the matter is that if you could clean that up and remove it from the argument, then a lot of the issues and the problems would just go away.
'Financial planners can operate on a different remuneration basis - a fee for service basis, where the client pays for the advice directly to the planner and there is no reward to the planner from fund managers,' says Hoyle.
Some planners have already gone down this road. While the percentage of planners operating on a fee-for-service model is relative low (Hoyle estimates between 15 and 20 per cent), he tips the current regulatory reviews and parliamentary inquiries are likely to drive that number up significantly over the coming years.
From 2012, the Financial Planning Association itself will ban product commissions for members. This means fund managers will have to attract financial planners based on the fund's performance rather then the commission they'll receive.
'What a radical idea that is,' laughs Hoyle.
Hoyle also adds that because commissions have been built into a cost structure of a managed fund, the cost of investing in the fund should come down if the fund manager is no longer making that payment.
The catch
The issue, though, is more complex.
Fee for service models are not as simple as they seem.
Hoyle says there are different ways of defining 'fees', which again confuses the issue.
For example, some planners prefer to charge for the percentage of assets under management, effectively removing the potential for specific product bias, they're not rewarded anymore for recommending one product over another.
'But it still requires some aggregation of funds for the planner to get paid,' says Hoyle.
'And financial planning is not just investment advice.'
For example, if the best advice a financial planner can give an individual doesn't involve any investment at all - such as to pay off debt, to make additional contributions to superannuation, or simple budgeting advice - how does the planner get paid?
In this instance, Hoyle says, by a schedule of fees or an hourly rate.
'It takes a lot of time and a lot of expertise to do a plan properly,' says Hoyle.
The regulations surrounding financial planning are rigorous - financial planners have to commit a fair number of hours to put a plan together, often up to 20 for a single investor.
While this may be expensive, the one-off cost should be considered an investment, not an expense.
'If you value financial planning advice, that's what you'll do,' says Hoyle.
In the move towards transparency, the change may come from industry consensus or government regulation.
Either way, says Hoyle, it's a step in the right direction.
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