Beware financial planners’ ulterior motives

ASIC: An alarming number of incentives being offered to financial planners

A reader has alerted us to a report/warning from the corporate regulator discussed in the Australian Financial Review 24 May 06. Although it is well known that planners accept sales incentives, the sheer number of these practices came as real surprise to ASIC researchers.

Commissions paid to planners by managed funds are legal so long as clients are told. It is very much up to the investor to read the fine print and there is little the Australian Securities and Investment Commission can do to fix problems arising from investor ignorance unless the federal government changes the law, which appears unlikely.

The disclosure of these commissions can be very complex – the word ‘tricky’ comes to mind – for those not on the lookout, not asking the right questions, and not prepared to plough through bulky documents.

Food for thought:

• A planner might move your assets from one investment service/master trust to another simply because it is owned by his/her employer. The planner’s commission could be significant but the new service might offer ‘little of difference’ from the old one.
• A planner might recommend products that allow him/her to ask the fund manager to raise its standard commission.
• An advisory firm only sells the products of the fund manager that owns it, but it does not use the logo of its owner on its paperwork. Instead it restricts mentioning the ownership to one small paragraph on its website and the fine print in its brochures. This is legal disclosure?
• Fund managers pay ‘shelf fees’ – similar to a food manufacturer paying supermarkets to display its product prominently – to get their funds on the recommended lists used by some financial planners. Funds that may be better than others in the market will never get on these lists if they don’t pay, so unlike a supermarket purchase, the ‘shopper’ has no idea of what is available.

A shocker to finish!

• The ASIC report states that one planner had recommended a 30 year old switch from one superannuation fund to another with much higher fees. His projected retirement savings were cut by 38% from $355,000 to $220,000, but the financial planner and his firm stood to get paid more for recommending the new fund.