Royal Commission - May 2018

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The Royal Commission and the impact on you and your portfolio

Two weeks of royal commission hearings into the financial advice sector concluded on Friday with a lengthy closing statement that implicated nearly every institution that gave evidence.

The evidence covered the topics of fees for no service, investment platform fees, inappropriate financial advice, improper conduct by financial advisers, and the disciplinary regime of the financial advice profession.

Much of the focus was related to the charging of fees for no service and general poor advice by many major financial institutions. It includes the inappropriate charging of ongoing service fees by advisers, as well as a licensee business practice to leave the fees on for a period while clients were transitioning between advisers. In AMP’s case 90 days whilst with other institutions, like CBA, fees continued to be charged for many years after a customer had died.

I believe the ‘fees for no service’ issues, as well as ‘claytons choice’ when providing solutions to clients, raised in the Commission have been an issue for too long. At our practice we take our advice process and ongoing service responsibilities to our clients very seriously.

In late 2008, I engaged a large recruitment company to source new employment for me. My main condition was I “would NOT work for a major bank”. My reason being the investment and advice limitations they imposed on their advisers impeded the necessary solutions one could recommend to a client. I have to choose my wording carefully, but let’s just say the culture of the major institutions was not for me and hence I have never worked for a major bank since starting in the industry in 1999. In 2009 I knew I only had two options, leave the industry or establish Active Financial Services.

I anticipate the result of the Royal Commission will be the necessary catalyst to reshape the advice process for the large institutions and hopefully it will change the ‘profit at all costs’ culture. One day we can only hope it will be ‘people over profits’.

Impact on you

We have had some questions regarding the impact of the royal commission on the safety of individual portfolios and the overall investment market.

We don’t expect the outcome of the royal commission to have any major impact on you or your portfolio as the majority of issues raised relate to the Advice Process, and are not related to Wealth Management. When it comes to the various investment products we use for clients it is important to note that funds invested in superannuation and managed investment products are held in trust structures. In many cases, the trustee may be are large institution however the underlying funds may be invested elsewhere.

Super is also strictly regulated to protect client interests. The trustee of the super fund is responsible for operating a super fund and has a fiduciary duty to manage the super fund strictly for the benefit of members (above the interests of shareholders).

Investment performance is largely driven by the performance of the investments held within your portfolio. For example, a fall in the CBA’s share price fall would only impact you to the extent that you may hold CBA shares within your portfolio.

End result

While each client’s portfolio is different, many clients’ super, pension and investment products are invested in a broad range of assets, for example property, Australian shares, and international shares. By diversifying the investments in this way, clients are able to mitigate organisational and market risks. As the majority if of issues raised during the royal commission relate to the advice process (or lack thereof) there should be minimal impact on client portfolios.

If anything, it is a long overdue positive step for the financial planning industry and in theory should make businesses like Active Financial Services more attractive to those seeking advice - however in practice, most people won’t understand the difference and unfortunately all advisers and advisory firms will be tarnished with the same brush.

At Active we will continue to review our processes but will continue to keep the needs of our clients upfront and foremost. We pride ourselves on being a ‘client centric’ boutique firm offering tailored as well as personal comprehensive advice.

We appreciate and say thank you to those clients who have called our office to offer a personal reference to support the way we provide advice and the care we take. It is much appreciated and has reconfirmed we are doing things right.

Category: Newsletters
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