Whenever a dishonest financial planner duds a client, the industry is quick to blame the individual planner. However, remuneration structures that encourage conflicts of interest often contribute to wrongdoing.
The dodgy practices of financial planners at the Commonwealth Bank (ASX: CBA) in 2007 and 2008 are one example of this. The Chairman of Commonwealth Bank, Ian Narev, has recently said, "We had the wrong people giving the advice and the business was structured wrongly, and remunerated wrongly, and the culture was wrong."
Many of the victims of those seven financial planners were elderly. For example, Mervyn and Robyn Blanche lost almost two-thirds of their $260,000 of life savings. As Narev points out, this outrage occurred, in part, because the business and remuneration created a conflict of interest for the financial planners.
The Freedom of Financial Advice (FoFA) reforms were meant to improve the standards in the financial planning industry. Introduced by the former government, their main goal was to make conflicts of interest less likely. Motley Fool analyst Scott Phillips wrote this open letter in support of the reforms, calling for "conflict-free financial advice."
Jackie Pearson recently wrote an article about the FoFA reforms for The Australian Financial Review in which she casts doubt about whether the reforms will be wound back. "Even if some parts of the new laws are amended," she wrote, "it seems that others… will stay in some form." I'm completely baffled by the use of the words even if. Pearson omits the fact that government has clearly stated they intend to amend FoFA.
Almost two weeks before Pearson's article, the Assistant Treasurer, Arthur Sinodinos, said he wants "legislation drafted by early February 2014" to modify the FoFA reforms. More specifically, he said that: "removing the opt-in will be an important step in winding back unnecessary administrative impositions on industry."
And that's not all. Sinodinos also said "Fee disclosure is another area where FoFA went too far." Therefore, the government is "planning to streamline [FoFA's] requirements so that the imposition on industry becomes less onerous." In fact, Sinodinos has promised a "new deregulatory approach."
Mr David Whiteley, CEO of the Industry Super Network, earned the ire of Jackie Pearson for his public comments in support of the FoFA reforms. In a 2011 post titled "Pearson's Punch: Dear Mr Whiteley," Jackie Pearson likened Mr Whiteley to a battle weary soldier in need of a holiday. She said he must be "punch drunk" or suffering "post-traumatic stress disorder," because he supposedly implied some financial advisers have something to hide.
Appearing on Lateline Business, Whiteley was rather more convincing than Pearson. He said:
"These reforms will have a quite considerable effect on national savings in Australia… as much as $100 billion could be added to national savings. That's a function of people not paying commissions for financial advice and a function of financial planners recommending the best value funds, rather than the funds that just pay commissions."
