Financial planning commissions have to go, the question is how: Kohler

Just because the report from the joint parliamentary committee on financial services did not explicitly recommend banning commissions, don’t think that they don’t have to go.

That’s the message financial planning luminaries have been getting this week as they troop around Canberra, cooling their heels in lobbies and waiting rooms, infesting Parliament House cafes.

The financial services industry has had just one thing on its mind this week: finding out whether the Ripoll Report will mean an end to commissions for financial planners.

It was unclear in the recommendations. The joint committee recommended an explicit fiduciary duty for financial planners (putting clients first), and that the government should consult with the industry to develop the “most appropriate mechanism by which to cease payments from product manufacturers to financial advisers”.

The immediate reaction from the commission-payers was that commissions and volume bonuses were compatible with a fiduciary duty, and that life would go on. The word “consult”, it was thought, means finding loopholes and ways around things. Phew.

But the message in Canberra this week has been quite different. As I understand it, the heads of all the industry bodies, as well as the lobbyists for the banks, AMP and AXA, are hearing the same thing from Bernie Ripoll, head of the inquiry, the Minister Chris Bowen, the Shadow Minister Chris Pearce, and from Treasury: commissions have to go.

It’s just that the politicians on both sides, as well as Treasury, don’t want to legislate for that – they are insisting that the industry leaders do it themselves (under threat of legislation).

The reason for this is quite interesting, and logical – and not a million miles from that other story in Canberra this week: the deal over the CPRS legislation and the convulsions in the Liberal Party.

It’s about compensation. Legislation that destroys private wealth requires compensation or risks ugly High Court lawsuits and damage to sovereign investment standing.

The focus of the negotiations over the CPRS has been on compensation for power generators and coal miners because of the legislation that reduces the value of their assets. They’ve got more compensation, but they’re still complaining it’s not enough.

A legislated ban on commissions would wipe out colossal amounts of wealth among financial planners. A firm that earns steady trailing commissions is worth 3-4 times revenue when it is sold; a firm that charges by the hour or a fixed rate for a financial plan gets one times annual revenue on sale.

Even if such a scheme were grandfathered, so that existing commission arrangements could continue, they would have to end when dealerships were sold, so value would still be destroyed.

Financial planners around the country are in a state of panic and uproar about this; their own retirement plans are going up in smoke and it’s clear they won’t go down without a fight.

Unlike other industry bodies, the Financial Planning Association has been working for years to persuade members to move away from commissions and finally, in October, the board approved the new policy from CEO Jo-Anne Bloch. But even that hard-fought victory only involves a transition beginning in 2012, and it’s only for FPA members.

Interestingly, ASIC has now dealt itself out of this discussion with a radical submission to the Ripoll Inquiry, recommending a legislated ban on commissions as well as percentage-based fees paid by clients. Like your correspondent, ASIC is now regarded as a terrorist.

As a result, Treasury has now become the key bureaucratic player in the progress towards reform, with politicians on both sides demanding an end to commissions and all other payments from investment product manufacturers to financial planners – smoothly, and without compensation. Somebody has to negotiate this, and it will be Treasury, not ASIC.

Reform will be tricky and require leadership from the top of the industry that has so far not been evident, except from the FPA.

But the alternative is bad legislation, because legislation is always bad. Just look at the mess known as the CPRS.

This article first appeared on Business Spectator.