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 Financial Happenings Blog 
Sunday, October 25 2009

The issue that tends to get the most air time and newspaper coverage in highlighting all that is wrong with the financial planning industry is the issue of trailing commissions.  This is the pratise whereby advisrs are paid a fee from product providers for recommending a client invest in that product.  The perceived problem with this is the accusation that can be alleged that a planner is recommending a product based on the amount of commission they are receiving not because it is in the best interests of the client.

I agree that this is a practice that needs to be looked at.  However an even larger issue for me is that of ownership bias.  This is where planners, because they are owned by a large financial services company tend to recommend that company's investment products.  I think the same allegation of whether this recommendation is in the best interest of the client can be levelled at a planner.  At least with trailling commissions, planners can recommend what they think is the best outcome for client.

Of course, combining the two is probably the worst of all outcomes.

An article published in the Herald over the weekend provides some interesting data on this issue - Finance advisers mostly a sales force, report says.

"In the year to June, for example, 80 per cent of sales by financial planners at Westpac and its subsidiary BT went to funds owned by the bank. The in-house sales figure was up from 72 per cent a year earlier.

For financial planners working for money managers AXA and AMP, 82 per cent of their sales return to their parent company. Colonial and the Commonwealth Bank retain about 72 per cent of the sales of their financial advisers.

The study was based on figures from July 2005 to June 2009 from almost 6000 superannuation products obtained from the six leading planning groups."

Now it might well be that the investments offered by these planners are in the best interests of the client.  Unfortunately there is such a level of perceived conflicts of interest for investors that theis assertion would be seriously doubtful.

The research based approach used by A Clear Direction suggests that the type of funds recommended by the big financial institutions tend to be actively managed, higher fee offerings which over time tend to provide below average performance.

In conclusion, take care when using the services of the big financial services industry that the advice being offered is in your interests not in the interests of the controlling company.

Scott Keefer

Posted by: AT 08:00 pm   |  Permalink   |  Email
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