Today marks the commencement of the Financial Planning Week. In the lead up to the week there has been an interesting exchange of "ideas" between the Financial Planning Association and the Industry Super Network, predictably around the place of commissions within the financial services industry.
To review the basic arguments, the anti-commission lobby, strongly supported by the industry super network, believe that the payment of commissions to financial planners distorts their ability to provide the best possible investment advice to clients. The theory goes that planners will favour investment products that provide the planner with a healthy commission rather than the product that will provide the best investment result. Industry super funds like to push this point because they do not offer commissions to planners and therefore feel that they are not being fairly considered by advisers because of this.
The opposite side of the argument is that by taking commissions rather than imposing upfront fees, planners are able to provide good quality investment options for their clients at affordable prices. This being especially important for the wealth accumulators who are just starting to build investment portfolios and likely to think twice before throwing large chunks of cash at their adviser.
It seems to us that the truth is somewhere in between. What concerns us is that neither argument really takes into account the real elephant in the room - Ownership bias. We think that this is the biggest potential problem for investors. By ownership bias, we mean when you rock up to a financial adviser who's firm is owned by a particular financial product provider. Common examples are financial planners linked to the major banks and AMP. Advisers are under real pressure in those organisations to recommend the products of their parent i.e. Commonwealth Bank planners recommending Colonial First State investments and margin loans, CBA home loans and insurance.
Some of these style of planners are moving away from commissions. MLC for example, owned by NAB, have come out in recent times saying they are moving away from a commission based remuneration model to an upfront fee model. What they don't say is whether there will be pressure placed on their financial advisers to recommend MLC / NAB products to clients.
An interesting question to ask at this point is where do industry super fund financial planners fall on the issue of ownership bias? Unfortunately they have a very restricted range of products on which to advise - the investment options within their respective industry super fund - quite a severe form of ownership bias in the scheme of things.
Ownership bias seems to provide a great deal more potential for advisers to recommend sub-par in-house products compared to a commission based planner who at least has a choice of products across a range of providers.
Ideally, though, you should be looking for a financial adviser who is free from ownership bias and do not accept commissions from products if you want the very best financial and investment advice.
Have a great Financial Planning week!!