Financial planners propose fee model

01/05/2009 - 14:26

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The Financial Planning Association has recommended a fee-for-service remuneration model for financial planners, a back flip on its previous advice.

Financial planners propose fee model

The Financial Planning Association has recommended a fee-for-service remuneration model for financial planners, a back flip on its previous advice.

In a consultation paper to the federal government, the FPA said the new model should start from 2012, which allows enough time for financial planners to step away from the current commission-based advice.

Financial planners currently use commission-based, fee-for-service or a combination of both remuneration models, a model the FPA was previously advocating.

The paper argues that changes to current remuneration practices are needed to reduce the potential for bias and to improve overall industry sustainability and consumer confidence.

"While people should be free to choose how to pay a financial planner, removing commissions will dispel accusations of conflict of interest," FPA chief executive Jo-Anne Bloch said.

"Payment for financial planning services should come from the client not the product provider.

"Continuing the commission-based regime is unsustainable and will only act as a disincentive to people utilising financial planners.

"Only 3 out of 10 Australians seek advice and to ensure that more people have successful long term financial outcomes is in the interest of all Australians, it creates good public policy, but it requires people to take the step to get advice."

The Industry Super Network (ISN) today welcomed the FPA's paper.

"Today's announcement is a step in the right direction in that it acknowledges conflicts of interest inherent in the commission system need to be addressed," ISN said.

"However, the consultation paper falls short by underestimating the nexus between remuneration, conflicts of interest and professionalism.

"The hallmark of a professional is the avoidance of actual or perceived conflict of interest and is the standard adhered to by other professionals such as doctors and lawyers.

"Financial planners should be required, by law, to act in the best interests of their clients.

 

 

The FPA announcement is below:

 

 

The Financial Planning Association (FPA) has recommended that, from 2012, fee based remuneration becomes the standard model for financial planning advice.

This means that the profession will be encouraged to transition away from commission paid advice.

FPA members and the broader community have been asked to respond to a consultation paper which argues that changes to the current remuneration practices are necessary to reduce the potential for bias (and the perception of bias) and to improve overall industry sustainability and consumer confidence.

Financial planners in Australia, including FPA members, currently use commission based, fee-for-service or a combination of both remuneration models.

FPA Chief Executive, Jo-Anne Bloch, said the Association had been closely examining the issue of remuneration for many months and the decision to push for a transition away from a commission model was not taken lightly.

"The FPA Board, supported by two FPA member committees, has given this great thought and concluded that a move away from commission based remuneration is key to protecting both consumers and the reputations of financial planners," Ms Bloch said.

"While people should be free to choose how to pay a financial planner, removing commissions will dispel accusations of conflict of interest. Payment for financial planning services should come from the client not the product provider.

"Continuing the commission-based regime is unsustainable and will only act as a disincentive to people utilising financial planners. Only 3 out of 10 Australians seek advice and to ensure that more people have successful long term financial outcomes is in the interest of all Australians, it creates good public policy, but it requires people to take the step to get advice.

"This is about giving all Australians the best possible access to financial advice.

"The Board asks FPA members to review the paper closely and approach the debate with an open mind, with the community in mind, and with the future of the profession in mind". Ms Bloch added.

Under the commission-based system, on-going services provided to a consumer by a financial planner are paid for by the product provider, such as a super fund, to the financial planner through their licensee, for recommending the product to the consumer.

Commissions are not paid directly by the client and cannot be switched off. They are paid until the client withdraws their funds or ceases life insurance cover. Commissions also bundle charges and make it difficult for clients to understand what component of the commission relates to advice, product, or administration.

Under the fee-for-service or direct-charge model the consumer is billed directly by the financial planner based on an agreement with the client. The product provider might be required to facilitate or execute the payment on behalf of the client, but this becomes an administrative issue rather than one of perceived influence or control.

Ms Bloch said the changes, if adopted, would apply to new clients from 2012. Legacy products using old systems, life insurance arrangements, and longstanding businesses that may be unable to change at this stage need to be fully considered so we arrive at a practical and logical arrangement for consumers, members, and product providers.

"We fully recognise that this might be a difficult time to discuss such a change, but we also recognise that change is afoot whether we like it or not. Our members are tired of the endless distraction and fruitless debate that commission based advice brings. FPA members demonstrate a commitment to professional obligations that others in the marketplace don't and they want to be recognised for their professionalism, for the fact that they are unencumbered by product bias, focused on advice and that they put their clients first.

We will consult fully with our members, and product providers, to ensure a mutually appropriate transition period," Ms Bloch said.

"We have recommended this position which we feel is essential for the longevity and success of the financial planning profession and for the continued protection of consumers".

 

 

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