Recipe for greater profit
Sydney Morning Herald
Wednesday December 9, 2009
Ongoing commissions and asset-based fees inflate investment costs. Some hidden asset-based fees are really commissions by another name that, if they were banned, could cut the cost of financial advice by up to 40 per cent.Asset-based fees are paid to planning businesses from investors' accounts by financial institutions. They reward the business for bringing in clients. The fee is based on a percentage of the asset - upt to 0.4 per cent - and is ongoing.The fee is not to be confused with adviser commissions, which include an annual ongoing trail commission of up to 1 per cent and may have a once-off upfront commission of up to 4 per cent.So there are two layers of commissions: trail commissions and upfront commissions at the individual adviser level that are disclosed to the consumer, as well as the payment from the financial institution to the planning business, which are often not disclosed."I think they are a disgrace," says the managing director of financial planning firm Tupicoffs, Neil Kendall. "They are a deliberate attempt to conceal what is paid to advisers. We need to get these hidden commissions on the table; to say that they are commissions and they need to go."Commissions are blamed for the loss of billions of dollars of investors' money.Much of the response has been around ending the commissions that are already disclosed at the consumer level.However, the kickbacks in the background - the asset-based fees on investment platforms - have received little scrutiny. The platforms, owned by the large banks and insurers, are used by most planners.They allow advisers to provide their clients with consolidated reporting of portfolio performance, consolidated tax reports and enable switching between investments with a few strokes of the computer keyboard.The platform owner charges an administration fee that is a percentage based on the assets and taken from investors' accounts.While the administration fee is disclosed, investors are likely to put it down to the cost of investing, says the founder of Puzzle Financial Advice, Bruce Baker. Little do they realise that the platform owner splits the fee with the financial planning business.The more money put through a platform, the larger the portion of the administration fee that goes to the planning business. These volume bonuses go by a variety of names, including "volume over-rides", "profit share" and "platform rebates".Often these payments are not disclosed and even when they are, "consumers have little hope of understanding these payments and how they influence advice", Baker says.The financial services industry defines a commission as a payment based on a percentage of assets; where the client is unable to "turn off" the payments. As the bonuses are "based on volume, are based on assets and the client cannot turn them off, they are commissions", Kendall says.He says some planning businesses argue these rebates need not be disclosed as they are not paid to the adviser but to the planning business. Though plenty of other kickbacks exist in financial planning, Kendall says the volume bonus is substantial in dollar terms and a big influence on advice. He estimates that eliminating them could reduce the cost of platforms to consumers by up to 40 per cent. While most financial planners operate ethically and want to helptheir clients, Kendall says, they are forced to operate in a system that is geared towards sales.It's through the platforms that fees and commissions are levied by the planning business. As well as the administration fee, there will be a flat price or asset-based transaction fee and perhaps fees for joining or leaving the platform.It is common for an independently owned planning business to put its own label on a financial institution's platform and put a mark-up on the standard fees charged by the platform.The Australian Securities and Investments Commission says that for small amounts, platforms can be expensive. The benefits of using it may not outweigh the impact of fees and transaction costs.Some industry critics go further and say that all asset-based fees, not just commissions, have the potential to skew the advice being given.Consumer group Choice argues that asset-based fees provide an incentive to the adviser to recommend products to increase funds under advice. The best advice to the consumer, however, may be to reduce the mortgage and salary sacrifice into super.Hourly fees are the best way of ensuring advice is in clients' best interests.Choice says asset-based remuneration also creates an incentive for planners to maximise their income by encouraging their clients to borrow to invest.The recently concluded parliamentary inquiry into financial planning, the Ripoll inquiry, has recommended to the Government that planners have a legal liability to put their clients' interest first.But the inquiry decided against recommending a ban on commissions, saying instead that the Government should engage with the financial services industry on how it can best wean itself off them.It is the increasing power of these financial institutions and the size of the investment platforms that is behind the growth in hidden commissions.Need to knowHidden asset-based fees also:Skew financial advice.Raise the cost of advice.Significantly eat into investor funds.The consumer group Choice wants all asset-based fees banned.
© 2009 Sydney Morning Herald
Share This