Australia's financial services sector has spent much of the past 12 months in recovery mode.
In the wake of parliamentary inquiries into the value of financial advice and the potential conflict of interests in remuneration models, review recommendations that in some parts served to create a Big Brother environment and an appraisal of the country's superannuation system, the industry has bravely taken the big hits, picked itself up and struggled on.
As the industry searches for calmer waters in the second half of 2010, another potential hurdle has emerged - political change.
On 23 June, Kevin Rudd was ousted as prime minister. In a move orchestrated by Labor factions, Rudd's deputy, Julia Gillard, was elevated to power, sending shockwaves across the country and financial markets.
The almost unprecedented move forced many into damage control, with Financial Services, Superannuation and Corporate Law Minister Chris Bowen taking the floor in parliament to declare the government's commitment to its Future of Financial Advice (FOFA) reforms.
"The government recognises the important role played by financial advisers in assisting Australians to plan for their future," Bowen said.
"By 2050, one in four Australians will be over 65. Longer-term challenges such as the ageing of the population, as well as recent events such as the global financial crisis, underscore the need for quality advice."
He said it was his belief that the reforms would address the conflicts of interest that had "coloured the perception" - and sometimes the reality - of the quality of financial advice provided to Australian investors.
"This issue is also very much about the future professionalism of the industry," he said.
"Good financial planners should not have their reputation affected by some in the industry who do the wrong thing. It has also been put to me that raising the professional standing of the industry will encourage more people to become advisers."
In April, opposition financial services spokesman Luke Hartsuyker called the Rudd government's plan to ban the payment of commissions to financial advisers merely a con.
Hartsuyker said such a ban would not end conflicts of interest.
"Contrary to claims made by the Minister for Financial Services, Chris Bowen, this proposal does not strengthen the Ripoll report's recommendation that government develop the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers," he said.
"Payments may still be made from manufacturers to advisers where the investor has agreed to deductions from the investment to cover the cost of advice. Such payments are nothing more than commission by another name.
"Clearly, where financial advisers receive fees from product manufacturers, there is always the risk of a conflict of interest in relation to the time and manner in which that fee is paid."
He slammed the government for its "extraordinary attack" on small financial planning firms, which rely on commissions to compete with the major banks and superannuation funds.
"The coalition believes that conflicts of interest can be minimised by full disclosure of fees charged and the ability of the investor to opt out of ongoing fee payments at any stage."
Of late, the opposition has kept its views on the government's FOFA reforms close to its chest.
Few would argue that Bowen or Hartsuyker's points are without good reason. Many have felt unfairly tarnished by the unscrupulous behaviour of the few. However, as an unknown quantity, in Gillard, has moved into power, what certainty is there that if a change in government does occur, that the change will not adversely affect the industry?
Will the coalition reverse bans on commissions?
The industry has begun sweeping moves away from commissions. In the past month, early adopters MLC and fellow industry giant AMP both claimed to be first to hit the tape and successfully make the transition well ahead of the proposed 2011 deadline.
Other companies are also progressing well with their fee transition, with large and medium groups said to be between 40 per cent and 80 per cent towards operating under a fee-for-service model.
However, with Bowen and Hartsuyker at odds over commissions, questions have been raised about whether commissions would reappear on the agenda if the coalition took power at the next election?
"It's probably really hard to speculate on what may or may not happen with the government," MLC & NAB Wealth advice and marketing executive general manager Richard Nunn says.
"I think . I'd probably like to make the point is we would do this anyway [make the transition to commissions] as we think it's the right thing to do for customers and we think it's the right thing to do for the industry.
"So, hypothetically speaking, if there's a change in government, or if there is a move to bring back commissions, I think as we're already there, we're now in a system where for superannuation investments we're fully fee-for-advice and we're quite happy with that, and for advisers who have made the transition are very happy with that and we haven't seen any wanting to revert back to the old way of doing things."
AMP financial planning and advice director Steve Helmich agrees.
"There doesn't need to be a reversal because this is the position we want to be in anyway," Helmich says.
"This is, I think, trying to make advice more accessible to more people and by making it more transparent there's certainly the opportunity to attract more people to use advisers.
"So now we've got a situation where advisers and clients will determine what advice fee is payable, how, when and how often and it won't be determined by product manufacturers.
"No matter what happens in the future, we wouldn't be changing."
Professional Investment Holdings (PIH) chief executive Robbie Bennetts says the company's dealer group, Professional Investment Services (PIS), is 80 per cent of the way to operating on a fee base.
Bennetts, who has moved into more of an advocacy role with PIH since David Johnstone's appointment as PIS chief executive earlier this month, says if a coalition government reversed the ban on commissions, not everyone would reverse with them.
"I think everyone would stick to what they have done. However, I would see a new industry would grow," he says.
"I would see that the groups that have made that transition would grow. Now whether they had subsidiaries off to the side or whether it be new groups that jump up out of the ground, if the system changed again I would see that you'd have new boutiques growing up to the changed system."
For DKN Financial Group chief executive Phil Butterworth, the ban on commissions is critical.
"If a product does fail, then the focus should be on why the product failed and not on a commission paid," Butterworth says.
"So therefore the only question to an adviser should be was the product right for the risk profile of the client and was the allocation of their investment appropriate, so therefore the commission shouldn't be a driver.
"The financial aspect shouldn't be an issue in regards to rationale why the advice was given for that product."
He says if a change in government caused the reversal of a commission ban, industry bodies such as the Investment and Financial Services Association (IFSA) and FPA would remain firm and continue with their own bans.
"The only problem with that is that you don't have to be a member of the FPA or IFSA to operate in our industry and therefore the industry can still be tarnished by high commission activity where inappropriate advice is given and commission was involved," he says.
"I think the opposition may come in that view, but on the whole the industry will still be moving down the non-commission route."
Rebates
Like commissions, rebates have created a distinct divide within the industry.
The biggest contention the industry has with the government's stand on banning rebates is it's lack of understanding. The general consensus is volume rebates should stay as payments between platforms and dealer groups are based on a service, while rebates to planners should go.
"I think there is also a lot of confusion around exactly what's meant by volume-based payments," Nunn says.
"So a lot of groups out in the market are rushing ahead and putting white labels in place, private labels in place, and we think it might be a bit premature and I think we just need to understand a bit more about what the government is really thinking on that."
In Dealer Group Advisers principal Andrew Wheeler's view, the government needs to understand that platforms are IT based and anything IT is a volume business.
"My view is that material levels of rebate on platforms are very narrowly received and it could be less than 300 businesses get more than $50,000 in a rebate over what could probably be 1000-plus clients - because if you're getting that level of rebate it won't be a one-man band," Wheeler says.
"It's a high-risk business because of the short shelf life, so they need to make reasonable profits because they have to pour money into development because they can't sit still.
"My view is that you accept that IT will always provide volume gains because volume is so important to them, which is only the way of the world. And so if you accept that, then you need to focus on the quantum of the rebate so the client is fully informed and it's the rebate at the adviser level that matters, not at the dealer level."
"If a dealer secures $1 million or $2 million in marketing or shelf space fees and they've got 500 members, it's not a big deal and from a client perspective there is $2 million split over 500 businesses, well that doesn't mean much does it," he says.
However, he says what does matter is what the adviser has received.
"So you've got to combine disclosure with the new fee-for-service requirement. So if you have disclosure linked with the client choice on the charge, you have solved the problem and you could even go a step further and have people make it a requirement of a SOA (statement of advice) that the client needs to understand the level of any financial rebates received on the investments they are placing in agreeing to their fee," he says.
Earlier this month, DKN made moves to alter its platform arrangements with BT Wrap, with suggestions the group firmed up a new five-year deal to emphasise its lack of concern for the potential ban on volume rebates.
Butterworth says such suggestions couldn't be more wrong. "Where we sit, the contract we have with BT and Trust Company is not a rebate. We have actually packaged up a platform together and we then have the role of pricing that and taking it out to the market and we get paid for doing that. So there is no such thing as a rebate in our contract with BT," he says. DKN has around 50 different licensees that use its platform, with around 300 financial planning firms that also use the platform, he says.
"Rebates are basically at two levels - can we continue to pay the rebate to the planner and should an AFSL (Australian financial services licensee) or a dealer group continue to be paid a rebate from a platform or from a fund manager," he says.
"So first of all from a fund manager perspective, we don't believe that rebates should be paid at either a dealer or an adviser level. At a platform point of view, regardless of what we believe or not, it is certainly the government's intention to remove rebates at the advice level - so whether we like that or not, that is what is going to happen.
"At a dealer group level, we believe platform rebates should be appropriate as long as those fees don't go any way to conflicting at the advice end because really a platform is really a service and therefore like any service you should be able to get scale benefits for size."
Cutting the provider cord
The concerns surrounding volume rebates and commissions has not only forced a number of players to renegotiate their product provider arrangements, but for many the proposed changes in legislation have forced them to cut ties.
Bennetts remains open to the idea of working with new joint venture partner, CUA, to develop customised banking products for its advice network.
Last month, PIS, through parent company PIH, entered a joint venture agreement with the customer-owned financial institution.
Under the terms of the joint venture, PIS will distribute CUA banking products and services through its accounting and financial planning network.
Though while Bennetts is keen to talk up the possibility of expanding its relationship with CUA, he remains coy on whether PIH has severed ties with its existing providers.
"We'll continue to monitor the situation over the next period of time," he says.
"It's always been the aim of this business to provide a range of choice for the consumer out there, about getting the consumer the best possible options and we'll keep that as broad as we can providing its satisfying everyone's requirements along the way."
Snowball Group is in the process of reviewing its suite of product providers in a bid to secure lower costs on platforms and portfolios for its clients.
Snowball managing director Tony McDonald says the firm's decision to review its providers is not in direct response to government reforms, but a move by the group to position itself for a whole new industry.
"It's best summed up this way: put aside all the complications and strip it back to its essence. What's its essence? Its essence is that you don't want the product unduly influencing the advice," McDonald says.
"That's the essence of it. So everything has to be tested against that. So it's not as simple as saying B2B (business-to-business) arrangements are okay by definition. It's not as simple as that."
However, he says B2B arrangements done properly and where they reflect the efficiency dividend and where they don't influence the advice is an argument he can understand. What he doesn't understand is the blanket argument that B2B is okay.
He says: "That's not the issue. The issue is, are most B2B arrangements okay because they pass the test? And on that basis there are a lot of B2B arrangements that will pass the test.
"Having said that, there is another question that needs to be asked: even if that's the case, will the consumer embrace arrangements where they are in place?
"In some sense, will the consumer be a tougher critic than even the regulator in that regard, just because of the simplicity issue. So even if it's perfectly legitimate from the influence test, is it about simplicity and that's an interesting question that I don't think we'll know the answer and market forces will determine that."
McDonald would not be drawn on whether the listed group's review process would mean severing ties with its existing business relationships.
"We've looked and continue to look at the whole white label platform space and we're well down the path on looking at that," he says.
"We're looking at lowering the platform costs for our clients. We're looking at ways to do two things in the portfolio, to lower the cost but to bring alpha managers who charge more but deliver more value.
"It's not about price, it's about value in that regard and where it isn't alpha returns we're looking at lowering the cost of the market return."
For Helmich, the transition to a fee-only remuneration model for its advisory network caused the group to hold discussions with its external providers.
"The good thing is that the major providers and the platforms we deal with all were really supportive and complied with us with our move," he says.
"Some smaller providers and some who weren't getting large flows were removed from the list or placed on hold. It was nothing in terms of significant flows."
Nunn says neither NAB nor MLC has had to sever any relationships just yet.
"Obviously, as we construct our approved lists, our product suppliers know our stance on fees and on any sort of conflicted payments," he says.
"Our list is being constructed with that in mind and no we haven't had to remove or discontinue relationships with anyone recently."
Opt-in continues to create confusion
Another contentious issue and concern for the industry is the government's opt-in rule.
"I think from a burden point of view and a governance point of view it's going to be very hard to manage," Butterworth says.
"No-one denies the fact that you should be seeing your client every year and providing an ongoing service if you are charging an ongoing fee for that service, but to have the obligation to get the clients to opt in every year, I just think there is no other industry where that's required.
"So if we are moving to fee-for-service and we've got a fiduciary obligation, then there's got to be an onus on the client to determine whether they continue to pay a fee or not. If they don't feel value, they should then turn the fee off.
"So I think there's a lot of debate around that issue and we really do feel that at this point there's not a lot of movement from the government on that point and I think that's a mistake."
Helmich says the firm is seeking greater clarity around how the opt-in rule will or won't work.
"We know clients value what our planners do so they are more than willing to have a relationship with planners," he says.
"We just want to get the wording on it. Some people have been talking about three years or one year and I think the industry needs to work through with the minister and get those outcomes and nail down what it is and work out the practical way for it to operate."
SG and Australia's superannuation system
The state of Australia's superannuation system took centre stage earlier this month following the release of the Cooper review recommendations on Australia's super system and the government's commitment to lift the superannuation guarantee (SG) to 12 per cent by 2019-20.
Despite concerns SG would be affected by the changes to the resource super profits tax all the superannuation changes remain the same, a spokesperson for Bowen said.
"We certainly support the increase in super contributions. It's just quite clear that most Australians are going to be under-funded in retirement one way or the other so any sensible initiative that elevates that is a good thing. We just hope that the coalition recognises that," McDonald says.
"Obviously there is an issue about the funding of it, but we'd hope that the importance of that in the national interest.
"I thought superannuation was starting to become a barbecue topic. It wasn't there yet. It was starting to become a barbecue topic and then the GFC (global financial crisis) came, the caps on contributions came, a fair bit of warring within the industry came and then the reform came, and I'm not sure so much if Australians are never going to get engaged. I think it was more a case of almost a perfect storm came and the consumer kind of sat back and said this is just all too hard at the moment."
In McDonald's view, the government should go through with the reform but do so in a way that it is done with the least amount of noise.
Similarly with the FOFA reforms, concerns have been raised as to whether a change in government would reverse the proposed increase in SG or recommendations under Cooper.
However, Association of Superannuation Funds of Australia chief executive Pauline Vamos says such significant backflipping is unlikely.
"I would be very surprised. These are in the main, sensible recommendations," Vamos says.
"People forget that we are a 1.1 trillion-dollar industry. We're going to be $3 trillion to $5 trillion in 10 to 15 years' time. We are providing retirement incomes for people, it's a mandatory system, it has been going now for a number of years.
"What [the Cooper review] is doing is codifying and putting in place minimum standards that can be regulated against. If we want to be treated seriously, then we're going to need serious regulations."
Hartsuyker says the coalition will thoroughly review Cooper's 177 recommendations.
He says the SuperStream proposal and any other measures that deliver greater efficiency in the sector are worthy of further consideration.
However, he says the coalition does note concerns raised by the industry that the MySuper and 'choice architecture' proposal could lead to an increase in the cost of superannuation administration, rather than a reduction.
The coalition is concerned the recommendations do little to reduce the lack of competition in the superannuation sector as caused by Labor policies such as mandated default funds in modern awards, he says.
He says the recommendations ignore the importance of competitive pressures in keeping costs down.
As speculation mounts about when Australians will vote for the country's next government, the industry can only wait and hope any change that comes its way will be of benefit to the profession, their business and their clients.
