Orphan clients’ evolving into a consumer crisis – over regulation and industry self-interest the cause

Paul Tynan

The financial services industry dilemma of having sufficient resources and advice practitioners to service the needs of orphan customers is not a new story, it’s a crisis that has been around for years.

If this scenario wasn’t bad enough, the Haynes Royal Commission recommendations that facilitated the introduction of retrospective legalisation served to compound the crisis by accelerating the increase of orphan customers right across the financial services industry.

For example, in the 90’s, the rollover products of the time, had features that not only included nil entry/entry-free access, but also provided the customer the option to pay a distribution cost upfront; or opt for a clawback alternative over a number of years.

By being in the “driver’s seat”, the client could choose to remunerate the adviser upfront or alternatively via an ongoing trail commission arrangement via the clawback option.

I highlight this point because the purpose of trail commission was NOT to provide ongoing service to the client, but the distribution cost associated with the product.

The Haynes Royal Commission highlighted payments of ongoing commission for no service; however, the storytelling inside the Royal Commission was all one-way and failed to properly understand and appreciate the historical and commercial reality of the product design!

Motivated by self-interest and desire to rid themselves of legacy products, the institutions were happy to support this single sided narrative and incorrect reality – and failed to challenge the consumer/industry fund/agenda driven lobby groups.

Professional associations and dealer groups also displayed the same mindset and as a result, collectively – failed both the consumer and advice sector by doing so.

Now we have millions of Australian consumers on platforms, in products and with insurance companies and fund managers who have no access to the much-needed services of professional advisers. They have every right to ask how decades of government led reform and industry rationalisation that was supposed to enhance greater access to advice, deliver better products, reduce costs and improve service has failed them so catastrophically.

The Haynes Royal Commission has resulted in more regulation and over compliance which has seen costs to the customer reach record levels, the number of advisers’ plummet to 15,000 and consumers unable to access and afford advice in an era of legislative and regulatory complexity.

At the centre of this perfect storm were the self interest groups and their fanatical obsession and belief that commission based remuneration structures created a conflict-of-interest situation. This tunnel vision and lack of marketplace awareness resulted in banning of commissions and fast-tracked advice becoming an elitist service that’s unaffordable for most consumers.

It’s common best practice for businesses across the globe to incorporate commission into product development as a means of funding distribution and its associated cost. This structure still dominates many industries including professional services, manufacturing, health, general insurance, motor vehicle, real estate, etc.

The institutions initially benefited as the number of orphan clients grew, and they (orphan clients) became major profit centres. Inside the institutions, orphan clients were referred to as “rivers of gold” as they were a source of a very lucrative administration fee.

These same institutions are now rapidly jettisoning their wealth arms as over regulation has made it too hard to do business in this current environment.

It’s both an indictment and one of the darkest of chapters in Australia’s economic history that so many orphan customers now sit in products without access to much needed personal/professional advice because of the fanatical obsession and lobbying of self interest groups that has ultimately resulted in harming the very consumers they purported to represent.

Furthermore, these same self interest groups view the provision of professional financial advice as a boutique profession that only services consumers who can afford advice.

Looking to the future, Australia will continue to have Royal Commissions; however, if they too fail to heed the lessons of the past, and that recommendations have flow on effects, especially when enquiries are singularly focussed on planner misconduct – the outcome will be yet another financial disaster for the nation.

As I end this commentary, it’s with regret that I reflect on a once viable and thriving profession of advice practitioners that has all but been halved and transformed into a boutique service accessible only to those few consumers who can afford advice at the detriment of the many.

By Mr. Paul Tynan, CEO