Accountants and financial planners have broadly welcomed the Government’s decision to ban financial planners from receiving commissions on products they sell, despite claims from the Opposition that the changes could hurt small businesses in the planning industry.
Under a sweeping reform plan released by Financial Services Minister Chris Bowen, financial planners would be forced to adopt a fee-for-service model, or charge clients a percentage of fees under management.
Financial planners will also have a duty to act in the best interests of clients and avoid conflicts of interest, and accountants have been banned from setting up do-it-yourself super funds for investors.
The changes have largely been welcomed by the financial services industry. The Financial Planning Association, which was already moving towards a ban on commissions, has welcomed the reforms, although it says some changes – such as a ban on charging fees on borrowed capital that is included in a client’s portfolio – will impact the industry.
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The accounting sector also appears supportive, with the chief executive of the Institute of Chartered Accountants, Graham Meyer, saying the changes to DIY super rules removed a “grey area” on the advice accountants could give.
But despite this positive response, the Opposition has indicated it will oppose the ban on the removal of commissions, claiming the changes could make financial advice unaffordable for low income earners and hit small financial planners hard.
“It looks to me like another attempt by the Labor Party to have a go at small business,” Opposition leader Tony Abbott said yesterday.
Peter Johnson, executive director of the Association of Independent Owned Financial Planners, also says small planners have little to fear from the changes.
“I think it’s good for the industry and good for advisers,” he told SmartCompany.
“I think the fallout for small advisers is only in their mind. I think they will find that the clients love [fee for service].”
Johnson says many smaller planning firms are already moving towards a fee-for-service model, with the percentage of his members operating on this model climbing from 30% to 60% in the past two years.
“We just think that commissions are a total conflict – that’s the bottom line. I think the writing has been on the wall for some time and advisers are realising that people don’t mind paying for good advice.”
But he does share some concerns that low income earners could be pushed away from financial advice, as many saw commissioned-based services as being free, given there was no upfront cost.
“I think it’s going to cause people at the lower end of the income spectrum not to seek advice, but that could be overcome with a bit of education.”
Johnson also supports the changes to rules around charging fees on client borrowings.
Under current rules, a client who has $100,000 of equity and $100,000 of loans in their portfolio is charged fees on the whole $200,000.
But under Bowen’s new legislation, financial planners could only charge on the $100,000 in equity, so that planners are not temped to recommend clients borrow beyond their means.
“I don’t think gearing should be included because unfortunately advisers can get carried away and gear their clients too much. That’s what we saw in the Storm Financial case,” Johnson says.
Given the timing of this year’s Federal Election, it appears unlikely laws will come into force this year.
However, Johnson has urged the Government not to play politics with the changes.
“I think the Opposition should not be playing politics on this. They shouldn’t be disagreeing for the sake of disagreeing and judge this on its merits. “