AUSTRALIAN CFP'S FORCED TO ABANDON TRAILERS

Pretty soon, financial planners who are members of the Financial Planning Association (FPA), which administers the Certified Financial Planner designation in Australia, will have to give up the practice of receiving a trailing commission from investment product providers if they wish to continue membership.

According to news reports, under the FPA proposal, members holding themselves out as financial planners will be required to give up trailing commissions from product providers. The organization is advocating that its members transition to a fee-for-service model and receive all compensation directly from clients.

While the FPA doesn't consider taking a trailing commission wrong per se, it perceives it is as a conflict of interest in the case of a financial planner taking compensation from a investment product provider, such a mutual fund company, and also offering advice on investment selection.

So far, the FPA is the only member of the international Financial Planning Standards Board (FPSB) to eliminate the practice of trailing commissions from product providers. The move seems to be eliciting new debate about the ethics of the practice, which is an entrenched compensation scheme in Canada.

The move should have an immediate impact on the Australian investment industry, since the FPA represents more than 12,000 advisors who manage more than $630 billion in assets.

Australia's advisor industry has been plagued by credibility issues, since the collapse of Storm Financial last year. Storm managed more than $4.6 billion in assets using white-label index fund products — which charged a very high 7% fee up front with a 1% annual management fee. To further juice commissions, the advisors in the firm apparently directed many clients take out collateral secured loans, which matched client money by as much as 85 cents on the dollar.

When markets went south last fall, clients losses sparked margin calls. Many clients were retirees who shouldn't have been heavily invested in equity products. In a number of cases, the clients stood to lose their homes, which they had used as collateral, and still remain hundreds of thousands of dollars in debt on top of their market losses.


Canadian compensation not under review


There hasn't been anything quite like the Storm collapse in Canada — a colossal example of permitted advisor abuse — to make the industry re-examine compensation schemes. In Canada, trailer commissions are a widely accepted form of advisor compensation, and most professional organizations are perfectly fine with the practice, provided it is disclosed to clients.

The FPA's Canadian counterpart, the Financial Planning Standards Council (FPSC), does not take a position on how advisors are compensated as long as that compensation is disclosed to the client.

Cary List, CEO of the FPSC, says he first heard about the FPA proposal at the FPSB's semi-annual meeting in Tokyo back in April.

"Would we welcome this type of initiative? We would, if it were feasible in Canada," he says. "Until the actual compensation structure from mutual fund companies changes it's kind of a moot point. We would never require planners to give up [their trailer fees] because it would make it too difficult for them to make a living.

Under the current rules, it's your right to earn fair value for your services, as long as you disclose how you're paid."

List says concerns about a possible conflict of interest in the planning arrangement can be reduced through disclosure and transparency. Investors need to see that planners are putting client interest ahead of their own when recommending products.

"Provided the consumer is made clearly aware of how compensation is paid, we think it is an effective way to offer planning services," List noted. "Our members must disclose to their clients that they are going to be paid by the mutual fund industry. The client may be unhappy with that and opt for a zero trailing commission for their advisor, instead of paying 1% for assets under management. I think we we'll see more and more planners move to that sort of model because clients are starting to recognize that as an alternative. We support that, as long as the planner offers competent advice and puts client interests ahead of their own."

Ken Rousselle, president and CEO of Professional Investment Services (Canada), an advisory firm that has an Australian parent company, believes Canadian compensation practices are fine, as long as clients know what they're paying for and deem it appropriate for the services they receive.

"I don't believe change is needed in the compensation advisors receive for the financial planning advice they provide and/or the investments they sell. There are a multitude of choices — fixed fees, no-load, deferred sales charge etc. — advisors can utilize to satisfy any type of clients" he says. "Whether an advisor charges a fee or a commission is not the issue; the issue is whether clients are fully aware of how much they're paying for this advice?"

He adds "Some clients would [probably] prefer to continue to pay 'embedded' commissions, they should have the right to decide," he says.


(08/18/09)
Filed by Mark Noble,
mark.noble@advisor.rogers.com