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Tuesday, May 4, 2010

No Financial Planning Commissions – So what does that mean for you?

... a "burbs breakdown"

The abolition of financial planning commissions has attracted a lot of media attention over the past week and a half, and I’ve had a number of people ask me what it all means. Well you can have a read through the 14 page “The Future of Financial Advice” information pack issued by Chris Bowen (Minister for Human Services, Minister for Financial Services, Superannuation and Corporate Law), or you can just read my blog for a simple "burbs breakdown"!

Ok, back when I first started in the industry 16 years ago, most Financial Planners were remunerated by commission. A very common scenario would be as follows:

1. Client seeks advice from a Financial Planner;
2. Financial Planner does all the research, calculations, evaluations etc, and prepares a written recommendation;
3. Client accepts recommendations and the Financial Planner receives say 5% commission from any amount invested.

No argument, it was pretty good money, BUT, if the client ultimately decided not to proceed with the recommendations, the Financial Planner had spent many hours working on something he/she would never be paid for. So I guess there had to be a higher fee for the risk that was taken.

These days many Financial Planners (including me) charge on a “fee for service basis”. This means that we simply charge a set fee for any work we do, and then rebate any commissions back to the client. Sooooo, the decision to ban all commission as of 1 July 2012 probably won’t make a significant difference to many investors.

Financial Planners that apply fees for any services provided, but offer investors the option of paying by invoice or having the equivalent amount debited from their investment or superannuation account. In our experience, the overwhelming majority of our clients do choose to have their fees paid as brokerage from their investments rather than their cashflow.

This option of giving investors the choice of how they pay a set fee will continue, with one exception. Any fees relating to gearing will need to be paid directly by invoice. Seeing that gearing involves borrowing, it should be relatively simple to factor payment into the process.

I don’t imagine most Financial Planners mind how they are paid, and I certainly believe it should be the choice of the investor.

So exactly how will it affect you?

When the changes come into effect in 2012, I believe the following issues will have the main impact:

- It will be less confusing and more transparent for investors, because Financial Planners will be required by law to express their fees in dollar terms. This means that even when fees are calculated as a percentage of the client’s funds under management, Financial Planners must still include the actual dollar amount it represents.

- In circumstances where Fund Managers may have previously paid financial planning fees (or part of the fees) from their own pocket, these may need to be paid by the investor going forward.

- It will eliminate any potential for Fund Managers to influence Financial Planners by offering higher levels of commission for their investment products compared to similar products. This will be particularly helpful where the Financial Planner is aligned to a large financial institution offering its own products.

What about insurance?
At this stage, commissions will continue to be permitted for insurance services. The reason for this is because there is a very real concern that Australians would not be able to afford to pay the fees associated with this type of service. Furthermore, even if they could afford it, they might be reluctant to allocated their personal financial resources to the setting up of insurance. The government certainly doesn’t want to be responsible for further exacerbating Australia’s already disturbing under-insurance statistics.


Quite simply, the changes are largely positive but probably won’t have a huge impact on most investors. There is a chance that some financial planning services might be more expensive as a result of managers no longer being able to contribute to the payment of fees, but this is possibly a small price to pay for the peace of mind received. Personally, I don’t know any advisers where this would be their reason for selecting an investment product, but taking it out of the equation completely just makes sense.

Hope that helps explain all the fuss about commissions at the moment.
Talk soon,
PS. If you would like to read the information pack, see the link below!