Tuesday, May 04, 2010

Talking About a Revolution

Jim Parker, Vice President, DFA Australia Limited

Australia's financial advice and retirement savings industries are about to undergo a revolution aimed at protecting investors, curbing conflicts of interest, lowering costs and improving transparency.

At the centre of reforms, unveiled by the federal government recently, is a ban on commissions paid by fund managers to financial advisors and on any other conflicted remuneration structures. The ban applies from July 1, 2012.

The reforms came out of an inquiry called by the government after a series of scandals in which investors were shoehorned into inappropriate investments by advisors compromised by sales incentives.

Alongside the ban on commissions, the government plans to introduce a statutory fiduciary duty requiring advisors to act in the best interests of their clients and to put their clients' interests ahead of their own.

The reforms have received almost universal approval from industry bodies, including the Investment and Financial Services Association, the Association of Superannuation Funds of Australia and, in a more qualified way, by the Financial Planning Association.

A separate inquiry, meanwhile, is seeking to simplify and make more efficient Australia's system of compulsory superannuation, or retirement savings. A preliminary proposal is for the creation of a single, low-cost, simplified and diversified investment strategy for the vast bulk of Australians who do not want to exercise choice in superannuation.
Taken together, the reforms are seen likely to strengthen advisory businesses that already employ fee-for-service models and which are not compromised by compensation provided by fund managers.

This is close to the new model of advice long promoted by Dimensional — one in which the interests of the client are paramount. In the old model, a product manufacturer paid commissions to an advisor (in reality, a facilitator), who in turn sold proprietary products to a customer. In the new model, the pyramid is reversed so the advisor's interests are aligned with those of the client.

In this view of the world, clients are much more inclined to stay the course and meet their financial goals. They get what they really want — help in making wise financial decisions. Advisors become true fee-based professionals, focusing on the needs of their clients and freed from having to "sell product".

The other aspect of the reforms — creating a more efficient retirement savings system — also ties in with Dimensional's long-established message. That message says that investors should focus more on things within their control, like keeping costs down and reducing taxes, and less about factors outside their control, like market volatility and media noise.

It truly is a revolution. And it has been a long time coming.