Act in investors' interests

John Collett

September 22, 2010

Financial advice reforms under new minister Bill Shorten will benefit consumers.  
Photo: Glen McCurtayne

The new minority government may not last three years but if it can last at least two, there's a good chance the key reforms to financial advice will become law. The new minister responsible for financial services and superannuation, Bill Shorten, was a union official and trustee of an industry super fund. He should need only a short time to get across his portfolio responsibilities. That's good, because there's much to be implemented from the raft of reforms the previous government proposed in an effort to protect investors seeking financial advice.

The two big reforms - a ban on commissions and other kickbacks and putting planners under a legal obligation to act in their clients' best interest - are badly needed to enhance consumer protection. The reforms will be too late for those hundreds of thousands of retirees who have lost billions of dollars over the past decade with the collapse of Westpoint, Storm Financial, Fincorp, Basis Capital, Great Southern, Timbercorp, Australian Capital Reserve, Opes Prime and dozens of others.

These schemes invested in all sorts of things but the payment of generous commissions to advisers and accountants was a common thread running through them.

Ask yourself this: if it's such a good investment scheme, why would it be offering commissions to incentivise advisers and accountants to sell those products?

Placing planners under a legal obligation to put their clients' interests first should also strengthen the hand of the regulator, the Australian Securities and Investments Commission, in policing its beat, which it has not done effectively.

Just about all of the financial services industry, except industry funds, was hoping for a Coalition victory, as the Coalition was against most of the reforms and noncommittal on others. The Greens will hold the balance of power in the Senate from July next year, and will probably support the reforms.

The planning industry needs to get on with moving its businesses away from commissions and to a fee-based model. The collapse last week of yet another forestry scheme, the Melbourne-based Willmott Forests, has renewed criticism of planners and tax accountants who received commissions for recommending it to clients. These schemes were mostly tax rorts for high-income earners, with the investment merits less clear.

Salespeople should be working in sales, not financial planning. The minority Labor government has a plan that will help ensure sales are removed from the advice process. It is a plan that has taken about two years to formulate. At some point there has to be an end to consultation with the financial services industry and adoption of the reforms.

Shorten is ambitious and will probably be keen to push through reforms. It is always a balancing act between competing interests but for too long the interests of the powerful financial services lobby have been put before the interests of consumers.

http://www.smh.com.au/money/investing/act-in-investors-interests-20100922-15m3v.html