A message in regards to the Royal Commission Recommendations

Written by Adam Cursio

7th February 2019

 

Dear Client,

Our family has been providing financial services since 1986. Some of you have been loyal clients since then. Our family business has grown to a team of six and we look after almost 2,000 clients. We have taken great pride in the fact we can help virtually anyone who has any need to deal with a property transaction, bank, insurance company, superannuation fund or investment house. We are one of the very few businesses who can do this under our four licenses we work hard to keep yet we have always maintained we work for our clients, not the institutions nor our licensees who authorise us to operate.

Through all the changes we have faced over the years behind the scenes in financial services, your lives have continued to advance and that is the most important part of all of this. Having us a part of your life has been a wonderful honour and we are extremely thankful to all of our clients. But unfortunately, after this royal commission has come and gone, you are going to see a sad change in the way financial services are delivered and more importantly how you pay for advice and financial services.

There is an obvious and inevitable shift to a ‘fee for service’ model being imposed on us as an industry and on you the client. Meaning our services to you are currently paid for by the institutions who receive your business. In future however, this will be a cost borne by you, our clients. In other words, you will end up paying for a cost currently absorbed by your providers, the banks and insurers.

While you may assume this improves transparency and the products you buy more cost effective, evidence has shows this not be the likely result.  result. Did you know up front commissions on life insurance have reduced to almost half of what the were only a few years ago. Yet the premiums for insurance continue to rise each and every year.

What we see eventuating is a new world whereby we may just have to become much more selective about the clients we deal with because fewer people will want to receive and pay for advice in this way. An upfront fee paid by the client all the time, may not be the best option for everyone who needs advice.

Does it suit us to charge fees to a more targeted client base rather than helping people from all walks of life? Absolutely not. We enjoy being many things to many people and having the flexibility to charge for our services however suits the client best. However, there is an imminent change coming and we are sorry that perhaps one day, it may not suit some of our clients to stay with us any more.

When I was eighteen commencing my degree in Financial Planning I was sure of one thing about my future. I wanted to be able to help ANYONE with their money. Not just wealthy people who could afford the fees. This concept sounded almost discriminatory to me at that time. It still does now. And this, unfortunately is where we are headed. A financial advice industry that caters only to those who can afford it. As for the rest, time will tell what the landscape will look like for them.

We understand that as long as there are people with needs, there will be is an industry. In other words we aren’t worried about ourselves and our future as a family and a business.  Our main concern sincerely is the population and how they will afford the advice they will continue to need in the near future.

There should be no reason to be alarmed by the Royal Commission report for now. These views are our own and it is absolutely business as usual for now. These changes will be some years away and we could be totally wrong about how they will affect us all.

In any case we strongly advise that now more than ever it is crucial to align yourself with trustworthy professionals in every field. You should have a good accountant, financial planner, mortgage broker, insurance broker, property adviser and solicitor close to you. Get them around a table once a year and instruct them on what to do. Ask lots of questions and if they can’t deliver what you need get new ones.

In every industry there is good and bad. Thankfully at least this Royal Commission into banking and financial services will help to oust the bad ones in ours. But as the CEOs and Chairmen who couldn’t deliver better outcomes all start running for cover, spare a thought for those of us on the ground holding the fort and keeping the industry alive. Hopefully we don’t lose too many experienced advisers in this process.

Below I have provided some more detail around the various areas affected by the Royal Commission which may be of concern to you, our client.

 

The Royal Commission Recommendations

The banking royal commission’s final report recommends sweeping changes to address misconduct in the troubled sector of financial services.

The government has committed to take action on all 76 of Commissioner Kenneth Hayne’s recommendations, saying the banks ‘must change and change forever’.

What will this mean for you, should these recommended changes come into effect?

 

1. Property and home loans

Change: To buy a property and obtain a home loan you will pay a broker a fee rather than the banks paying a commission

If you use a mortgage broker like us, you will one day have to pay a new upfront fee to obtain credit advice. At present, the banks pay their various distribution channels including brokers and in-house bank branches with commissions. The recommendation has also been made to ban ongoing trail commissions.

More than half of all home loans settled in Australia go through a broker. Customers naturally expect their broker to act in their best interests. I don’t think anyone disagrees with this.

However, we do not believe that by charging clients an upfront fee, that this necessarily ensures customers interest are upheld. It simply moves a cost in an industry away from the supplier and over to the consumer. It certainly won’t encourage us to consider our clients’ best interests at heart any more than what we do now and have done for years.

We believe this will actually reduce client’s borrowing power and in turn have a negative effect on property prices as it puts pressure on demand. In fact we feel this opens the door to brokers possibly keeping the fee clock ticking without actually providing the solution and settling the deal for the client. A bit similar to a barrister representing you and failing. Their fee invoice arrives and has to be paid just the same.

2. Superannuation

Change: Every person will only have one super fund

Hayne wants each person to be ‘stapled’ to a single default superannuation account.

Your default account is the one your employer pays super contributions into, unless you instruct them otherwise. At the moment, workers who move from job to job are often ‘defaulted’ into a new super account each time. And having multiple accounts at once means you’re paying more fees than you need to.

The current system does allow you to choose your own super fund when you start a new job, but in practice, many people let their new employer make the choice for them.

We feel this is a relatively positive outcome and frankly our advice has always been to consolidate super unless there are valid reasons not to. Surely most financial planners have a similar view – there is no point wasting money on unnecessary superannuation accounts. So the recommendation has always been what most of us have done for years.

Just watch out for the ramping up of industry super fund marketing on the back of this. Be careful of the brainwashing adverts which discourage you using a financial adviser. There is a hidden war over your superannuation between the industry funds and the retail funds. Perhaps another discussion altogether.

Our recommendation is to see past that and to get advice to ensure you have the right fund for you. In short, industry funds could be considered more basic and retail funds could offer you more features. SMSFs could be used to invest in a property for example. It’s crucial that you know where you sit in the market and what your actual needs are so that you can be matched with the right fund for you.

Some things to consider for your superannuation are:

• Fees – fund fees, investment manager fees and advice fees
• Investment selection – which investments you hold and what returns are you achieving
• Beneficiary nomination – who receives your super and insurance on death
• Life insurance attached to the fund – are you maximising the tax benefits of holding insurance in super and paying for insurance with your super

 

3. Insurance

Change: Abolish commissions in exchange for client fees

It has also been recommended that commissions on life and general insurance are banned.

We are strong believers that insurance needs to be sold as it is rarely bought. This means clients don’t actively seek certain insurance products unless the risks they cover are explained by an adviser or broker. Not many people ask to buy life insurance for example, unless they heard some bad news which brought the matter to light. This is why we have a catastrophic under insurance problem in this country. And also why some of us who are aware of this, make it our mission to help people we know get cover.

Let me put this into perspective. In contrast to life insurance, a motor vehicle policy on a newly purchased car, where finance has been obtained, is very easily acquired. This is because you can’t take the car home without it. You absolutely know you need it. Or, Public Liability insurance for a tradesman who needs it to gain access to a job site. It’s a ‘no-brainer’ as you can’t live without it. We get calls every week for these two situations – absolute necessities.

On the other hand, income protection is not commonly requested. It is up to us to make clients aware of this essential part of any insurance program, and thankfully most of our clients agree. Now without income protection, the car repayments may be unaffordable if the client can’t work. The tradesmen without income protection may no longer afford to pay for his public liability insurance premium which keeps his workers on site.

So, it’s our job to sell income protection and life insurance to our clients who need it even though they may not realise they need it. For this we get a reward in the form of a sales commission from the product provider. Just like any other product in any industry that is sold to a customer. This doesn’t mean we oversell insurance, it means we find needs and fill them so that our clients can continue to put food on the table and not have to sell their family’s assets when something goes wrong.

The recommendation to substitute supplier funded commissions from these types of financial products with customer funded fees for service will just mean that less people will get help. Why would someone commit to paying a fee for advice on a product they don’t think they need?

 

Final comments

Every industry has a challenging time and perhaps now it’s our time to learn to be resilient.

More than ever we look for feedback from you, our customers, to ensure we can continue to improve and do what we love doing best.

Thank you for reading this message and we all appreciate your ongoing support.

If you wish to discuss this further please feel free to get in touch with our office.

Adam Cursio