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If you come from a family, you’d know that older siblings can be both a benefit and a curse.
They’re the ones who test the new ground, run the gauntlet of ad-hoc rules and provide examples of what to do (and sometimes what not to do). Younger siblings can thereby learn the lessons without the bumps. But sometimes when behaviour is poor, then suspicion, extra scrutiny and new rules falls not just on them, but on anyone who is closely related. Our ‘elder siblings’ – the financial planning industry – had a string of bad behaviours that eventually gave rise to the Future of Financial Advice (FoFA) review. Similar concerns have given rise to this year’s review of mortgage brokers’ remuneration (submissions are due in late 2016). In this article, we’ll see what FoFA might mean for our industry, and what we might have to do to protect the value of our businesses.
The sin bin and the penalty
From 2008 to 2009 there was a series of scandals in the investment world such as Opes Prime, Trio Capital, but especially Storm Capital. In April 2010, the Rudd Labour government created the FoFA committee who looked at how commissions influenced advice, conflicts of interest and the role of financial planners. Two years later, the Gillard government passed some of the recommendations of the committee into law, such as:
- disclosure of commissions (subsequently applied to mortgage broking as well);
- an explicit fiduciary obligation requiring planners to act in the best interests of the client. Our version is the ‘not unsuitable’ rule, and of most relevance;
- a ban on conflicted remuneration. Conflicted remuneration is, in effect, commission based on the size of the deal, with the potential to influence financial advice to the detriment of the client. To receive commission on newly-placed business, planners now had to have the explicit consent of clients.
The last recommendation in particular saw the near-death of some businesses and the strengthening of others. For example, before FoFA, financial planning practices were commonly valued at multiples of about three-and-a-half times trail. But post-FoFA, getting clients’ consent introduced uncertainty and challenges. For example, corporate superannuation trail would have required the explicit consent of dozens (if not hundreds of individual super fund members). Unsurprisingly, this was considered to be unlikely, and so this type of trail became valued as low as one times the amount. Some businesses were faced with revenue falls of up to 90 per cent (because it was so hard to get super fund members to agree) and were effectively ruined. However, life insurance trail was exempted from the ban (because it was deemed desirable to encourage life cover), and so the value of this type of income actually increased to around four times the amount. Today, even diversified financial planning businesses have seen the overall value of their businesses has declined as a result of the reduced certainty about the ‘stickiness’ of their revenue.
Looks like duck, walks like a duck...
So what other industry do you know that provides clients with finance advice and usually receives a size-based commission? Who else do you know could be suspected of recommending one product over another because of higher commission? Who else does not (yet) explicitly put the clients’ interests ahead of their own? It should therefore come as no surprise to those in the industry who have both financial planning and mortgage broking backgrounds that a review on brokers’ remuneration is on the cards. Hopefully these leaders’ back-to-the-future experience will help them protect and grow our industry.
So what can we do?
‘Prevention is better than cure’ is definitely true in this case, and the implication is simple: do the right thing and you’re less likely to cop a caning. So if we demonstrate good service for a fair price, we strengthen our case. We can all do this, but at industry, aggregator and grass-roots level. But to take it one step further, long-term brokers are going to cop the consequences of bad or unethical practices by short-term cowboys who may overcharge or otherwise fall short of good, ethical practices. So to protect your own livelihood, consider reporting bad behaviour by rogue brokers to either your own aggregator or ASIC (or both). Gradually the shonks will leave, leaving us all with fewer hassles.
Secondly, do you know what your aggregator’s position will be when (or if) they participate in a submission to the enquiry? The Adviser will no doubt be interviewing the CEOs in months to come, but we can be more pro-active than that. Asking your aggregator, either directly to the CEO or via broker-representative councils if you have them, and offering your thoughts would be a sensible thing to do.
Thirdly, consider a move to fee-for-service. This has been discussed in many articles before, but understandably, unless there’s a need for change, most brokers probably won’t change. Both brokers and clients seem to prefer to have remuneration paid for by the lenders. After all, their financial resources are better than our clients! This will be an ongoing discussion.
Finally, the old drum of revenue diversification is beating again with renewed urgency. Life insurance trail is more valuable and potentially more durable than mortgage trail, so it makes even more sense to explore this as part of our service offering.
Like 2015, this year will no doubt be a busy and interesting year. Let the games begin!
John Tindall
John Tindall is a multiple award-winning broker who has also specialised in the buying and selling of trail books for MLC and Advantedge. John is also a Rising Star finalist at The Adviser's Better Business Awards 2016.
