Financial advisers under pressure

A GLOBAL push to improve the regulation of financial planners is emerging in the wake of clients being charged excessive fees and spectacular crashes in the industry.

This includes a ban on commissions and the requirement that all financial planners act in the best interests of their clients.

“Proposals from the regulators in both the UK and USA share the over-riding principle that financial advice should be in the best interests of the consumer, and commissions and other forms of conflicted remuneration which prevent advice from being impartial should be banned,” says Industry Super Network’s David Whiteley.

“The UK and US authorities have reached these conclusions following their experience of financial product miss-selling driven by conflicted remuneration structures, typically sales commissions. In Australia we have experienced both major scandals and the ‘slow burn’ effect of commission selling on both individual retirement savings and aggregate savings.”

Whiteley points out that the compulsory nature of super in Australia demands a higher duty of care for government, regulators and industry and that a ban on commissions would yield substantial economic dividends, boosting individual and national savings.

According to a recent study by ISN’s economics unit, the opportunity cost of workers’ super savings being directed to under-performing retail super funds by financial planners paid by commissions, and away from better-performing funds is having a substantial effect on aggregate national savings.

The report found that in the last 12 years (July 1997 to 30 June 2008), $50 billion in today’s money had been lost to national retirement savings in this way.

The next 12 years is worse. The report projects the estimated cost from July 2008 to June 2020 to be more than $180 billion.

Whiteley welcomes the start of the Cooper review into the super industry.

“It is a logical step to extend the fiduciary duty held by super fund trustees to financial planners, and therefore harmonise the regulatory systems,” he says.