Despite a series of financial planning scandals over the last few years, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has shocked the country as it uncovers extraordinary levels of dishonesty and unethical conduct.
Many people are probably wondering if they should trust anyone in the financial services industry ever again.
If you’re one of those people, I understand how you feel.
To help you make sense of what’s been uncovered, over coming weeks, I’d like to break down some of the individual stories to help you understand what happened and how you might avoid similar problems.
You may recall that a Fair Work Commissioner, Donna McKenna, recounted how she was “gobsmacked” by the advice she received from celebrity financial adviser Sam Henderson.
Staff at Henderson Maxwell impersonated Ms McKenna by calling her industry fund and pretending to be her. They may have been trying to get information about her account to ‘understand her circumstances’, but there are no reasons I’d accept that type of conduct and neither should you.
If you don’t provide your adviser with the information they need, and if you don’t give your consent for them to obtain it, then your adviser should warn you of the consequences of doing so and perhaps decline to provide you with advice. They should not, under any circumstances, ‘pretend’ to be you.
In the end, there was possibly no material harm done to the client (given a commonly used release form would have provided the same outcome), but my concern is more with the precedent that is set in the minds of staff who are encouraged to push the envelope legally and ethically, in order to simply save time.
This is bad, but this advice firm’s particular approach to their ‘best interest’ duty was even worse. Despite knowing that Ms McKenna would forgo $500,000 if she implemented his advice, the adviser still recommended that she move her funds out of her industry fund and into a self-managed superannuation fund (SMSF) run by his firm.
Thankfully, Ms McKenna declined that recommendation, but you might ask yourself why any competent and ethical financial adviser would recommend a strategy that would cost their client half a million dollars if they implement it.
The answer: conflicts of interest.
What do I mean by that? The adviser benefited financially from the recommendation and prioritised his interests over those of his client.
All commercial relationships involve conflicts of interest, but advice professionals manage that conflict by avoiding ‘indirect remuneration’. Indirect remuneration refers to payments made to the adviser by someone other than the client.
In reality, even if you pay your adviser a fee for their advice, if they are paid from any other source in addition to your fee, their advice can be influenced by the benefits they’ll receive from people other than you.
In the worst cases, they’ll recommend those products and strategies that pay them the most, rather than those that are in your best interests.
In this case, Ms McKenna’s adviser was paid more if she set up a SMSF managed by his company than if she retained her existing fund. The benefits were indirect but real. Sam Henderson’s ‘advice fee’ wasn’t increased but if Ms McKenna implemented his recommendation, he could charge for the set up and ongoing management of a new fund.
…even if you pay your adviser a fee for their advice, if they are paid from any other source in addition to your fee, their advice can be influenced by the benefits they’ll receive from people other than you.
Self-managed super funds have their advantages but there are significant costs and obligations associated with them.
In addition, if the adviser attached a % asset based fee to his client’s super balance (something he couldn’t have done with her industry fund), he would have made even more money for his firm. Advisers who use this fee justify the ongoing cost as a way to cover their ongoing investment advice. However, asset based fees are often arbitrary, based on the money you have invested rather than any ongoing value provided by the adviser.
These fees drain your account and line the pockets of your adviser.
Some advisers bamboozle their clients with complex strategies to justify their fee or to persuade clients’ to implement strategies they don’t need.
As I mentioned earlier, conflicts of interest exist in every relationship. In an advice relationship, the best way for you to manage this risk is to ensure you engage an independent adviser and pay in full for your advice before you get it.
Bottom line: your adviser’s fee shouldn’t vary based on what they recommend.
So, how do you avoid ending up the same situation as Ms McKenna?
- Agree on a fee for your advice upfront.
- Check your advisers Financial Services Guide (FSG) and ensure they are not paid commission or indirect fees (such as volume bonuses). If the FSG is long (over 3 pages is already a bad sign), do a word search to be safe.
- Check for any association with, or ownership by, any product manufacturers or any arrangements your adviser might profit from recommending.
- Choose an adviser who doesn’t charge asset based fees.
Bottom line: your adviser’s fee shouldn’t vary based on what they recommend.
The Financial Services Guide is still a good starting point to help you understand how your adviser is paid and what associations may impact the advice.
Then, make sure you agree upfront (via a Terms of Engagement) as to how your adviser will be paid during your advice relationship. Ideally, your adviser should only be paid by you and not from any other sources, directly or indirectly.
One of the biggest causes of poor advice is a misalignment of interests stemming from who pays your adviser. Make sure you pay your adviser a flat fee upfront and check they do not profit from any other source that may influence their advice.
One of the biggest causes of poor advice is a misalignment of interests stemming from who pays your adviser. Make sure you pay your adviser a flat fee upfront and check they do not profit from any other source that may influence their advice.
To minimise the risks of receiving advice influenced by an adviser’s self-interest, pick an independent adviser, someone who has publicly and legally committed to avoiding these conflicts and acting in your best interests.
