Former Storm Financial investors gather after collapse.
Former Storm Financial investors gather after collapse.

Advisers' client duty a cut above

THE umbilical cord may not have been cut cleanly but formal separation of financial planners and payments from product manufacturers now seems inevitable.

The Parliamentary Joint Committee on Corporations and Financial Services chaired by Bernie Ripoll has delivered its report after nine public hearings, 398 formal submissions and the report contains 11 wide-ranging recommendations aimed at improving both the quality and accessibility of financial advice to investors.

The inquiry which ran from February looked at issues arising from the collapse of Storm Financial, Opes Prime and other similar collapses. Under the microscope was the role of financial advisers, the general regulatory and licensing environment and specifically the role of commission arrangements and remuneration models for financial advisers.

Despite a lot of speculation the Ripoll committee did not go down the radical path and recommend a ban on commission payments as some submissions urged. Rather it opted for a more measured and moderate approach by recommending that the federal government consult and support the financial services industry to develop "the most appropriate mechanism by which to cease payments from financial product manufacturers to financial advisers".

That sounds like the death knell – albeit one without firm time frame - for payments from product manufacturers that have the potential to influence and distort both adviser recommendations and approved product selections.

But while a lot of the focus has been on the commission issue the number one recommendation – if accepted and implemented by the government – is likely to have a profound, long-term effect.

The committee is recommending that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers to place their clients' interests ahead of their own. ASIC believes about 85% of advisers have an association with a product manufacturer which underlines how profound a change this could be.

A fiduciary responsibility will set a new, higher and legally enshrined professional standard for advisers – and if effective move them from the role of broker to steward.

A reasonable investor may ask what difference this will make. The notion that an adviser will put  clients' interests first is something that most investors probably assume is the way their adviser operates today.

But reading some of the Storm Financial client experiences in the Ripoll report makes it painfully clear that at least in that organisation that was not happening. No-one is suggesting Storm was representative of the broader industry and the report slams the one-size fits all approach regardless of individual personal circumstances. The committee's view is that at least for some Storm clients the "advice to engage in an aggressive leveraged investment strategy was clearly inappropriate".

It is impossible to say even with the benefit of hindsight whether a fiduciary responsibility would have prevented a business model like Storm's developing but combining the extra individual responsibility with the establishment of an independent professional standards board,stronger ASIC surveillance and banning powers and more focus on improving financial literacy are all part of the package of measures that surely will lower the risk of a Storm sequel.

The federal government is unlikely to move on the Ripoll recommendations until it has heard from the Cooper Review on super to ensure the changes are sensibly coordinated. But the challenge is now firmly in front of the two key industry bodies – the Investment and Financial Services Association (IFSA) that represents the product manufacturers and the Financial Planning Association (FPA) representing the advisory industry.  The challenge is to work out practical ways of turning the Ripoll committee's recommendations into commercial reality and that will include grappling with the issue of how financial planning administration platforms – wrap accounts and master trusts – operate within the realm of financial planners having a fiduciary responsibility to clients and not receiving payments from product providers.

Both IFSA and the FPA have made policy shifts towards fee for service financial planning models and major groups led by MLC have publicly announced that is the direction they are taking their advice businesses.

So the Ripoll committee recommendations (if accepted) are likely to accelerate that process and while that may mean short-term disruption the longer-term prize is an industry that stands apart from product payments and is valued by investors for the advice it gives rather than the products it sells.

For more news and information visit the Vanguard Investments news site.

Related: Investors furious at Storm Inquiry

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