Banking Royal Commission findings: How it affects financial planners

Financial planners will no longer be able to gouge unsuspecting clients with fees for no service under a royal commission recommendation.

Financial planners will no longer be able to gouge unsuspecting clients with fees for no service under a Royal Commission recommendation to have all advice fees renewed annually — and in writing.

The fees for no service fiasco was one of the commission’s most shocking revelations, along with advice fees being charged to dead people, and has already led to large amounts of compensation repaid to ripped-off clients.

In his report, Commissioner Kenneth Hayne said financial planners would not have the public’s respect until the fees for no service issue was fixed. He said the “total amounts taken were very large”, with an estimated $850 million to be paid back and regulator ASIC suggesting it could reach $1 billion.

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Nigel Jeffares with Mick and Beth Spence fell victim to financial planner Brad Sherwin, who was jailed for fraud.

An estimated one in three Australians have used a financial adviser at some stage.

There are more than 25,000 such planners in Australia, which Mr Hayne described as “something between a salesperson and a professional adviser.

“The industry has moved from scandal to scandal, causing financial harm to clients, and damaging public confidence in the value of financial advice. This cannot continue,” he said.

“I do not believe that the practice of giving financial advice is yet a profession.”

Currently advisers only need client approval to charge ongoing fees for new clients after July 2013.

An estimated one in three Aussies have used financial planners at some stage.

Mr Hayne’s other recommendations for financial advice included:

* A new disciplinary system for advisers involving a single body that could receive complaints from clients;

* Advisers giving clients a written statement if they are not “independent, impartial and unbiased”;

* Reviewing by 2022 the government’s moves to improve quality of advice through improved education and ethical standards;

* Repealing old but ongoing “grandfathered” trailing commissions for financial advisers “as soon as is reasonably practicable”.

In its response, the Government said it would agree to end all grandfathering of conflicted remuneration from 2021.

“Grandfathered conflicted remuneration can entrench clients in older products even when newer, better and more affordable products are available on the market,” it said.

Reforms that came into force in 2013 banned trailing commissions for new clients but existing arrangements were grandfathered. Mr Hayne said this grandfathering could not be justified today.

Major banks have already announced steps to reduce or eliminate these commissions, with Westpac the first to act last year by announcing that advisers employed by BT Financial Advice would no longer receive grandfathered commissions. This would remove the commissions on up 140,000 client accounts and cost Westpac an estimated $40.8 million in revenue.

While the crackdown on financial advice was expected, one of the financial planning sector’s big fears — structurally separating advice businesses and financial product manufacturing businesses — was not recommended.

This could have potentially forced breakups of companies such as AMP, or prevented its advisers from recommending any product provided by the company.

Mr Hayne said such a step would be costly and disruptive and the benefits might not outweigh the costs. “I am not persuaded that it is necessary to mandate structural separation between product and advice,” he said.

Originally published as Banking Royal Commission findings: How it affects financial planners