Instreet will issue a specifically tailored structured product for Personal Choice Management (PCM) which provides investment services and products for AIOFP members. PCM is a member owned AFSL holding entity that utilizes the scale of AIOFP members to negotiate superior conditions for clients and advisers. 

Peter Johnston, Director of PCM, said: “Our member feedback shows that advisors are looking for new investment options to differentiate their business from institutionally aligned practices as optimism comes back into the Australian market. We have partnered with Instreet, a strong player in the structured products sector, to meet this demand.”

“The PCM Structured Product was designed with a working committee of advisers within the association to ensure that the end result was an investment solution that was relevant to a diverse range of advisers and their clients.” 

George Lucas, managing director Instreet, says: “We are very excited to partner with AIOFP as we have always valued feedback from independent advisers to develop relevant products for their clients.

“We have been offering a tailored solution to the market for a number of years now.  It is an empowering experience for our customers as it contributes to their own unique business proposition by delivering a tailored solution for their clients that truly respond to their investment needs. 

“This was the criteria set up by AIOFP in front of us. This new product allows AIOFP members to create value for their clients. It offers them access to specific markets and build investment strategies with underlying investments covering Mid Cap US stocks, European Stocks, South East Asian stocks and Australian markets,” Lucas says.

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Johnston confirmed that AIOFP expects its member advisers and dealer groups will be far more demanding, vocal and insist on greater involvement and equity in financial products and platforms in the future.

“The major issue of ANZ’s Oasis purchase for AIOFP’s advisers relates to client ownership and equity. Especially as a number of high profile national dealer groups, who built the business with their white label Oasis products, received nothing from the sale to acknowledge both their contribution and efforts,” said Peter Johnston.

“All these dealer groups and their respective advisers received from the transaction was a new product owner of what they thought were their clients. They have now had enough of building someone else’s business only to see it sold off and then having their clients owned by another institution.”

AIOFP predicts that this key event will have ongoing industry significance and will be the basis for a major paradigm shift within financial services whereby advisers in growing numbers will demand greater control and management over their clients. SMSFs will be one option that is expected to continue growing as a solution that provides control and a say in the all important client / adviser relationship.

A properly structured Private Label platform is also another strategy that will address adviser demands. Non-institutionally influenced dealer groups are already reviewing their APLs and only supporting Private Labels that provide client ownership and equity.

Peter Johnston continued, “Over the past 20 years advisers have not sought legal advice on the ownership and structure of platforms despite a steady stream of platform sales to institutions.”

“The message has been heard by advisers as these sales have resulted in the transfer of client ownership – the core asset of all practices – and it must be addressed as a high priority.”

Ongoing feedback from the marketplace and AIOFP members strongly suggests that the Oasis buyout was the last straw for advisers; but more importantly that the institutions are listening and responding to these adviser and dealer group concerns.

Asgard was the first to build a Private Label platform structure three years ago whilst fellow institutions were reluctant to consider alternatives that would acknowledge the adviser client relationship issue. Poor inflows in recent times, has seen a change in some of the major institutions as they adopt a more conciliatory approach.

The subject of client ownership, including these recent developments and changes, will be covered extensively in the Association’s upcoming annual conference to be held in March in Thailand.

“Institutions are realising that an irreversible paradigm shift is underway and advisers will not support a platform product unless it has the ownership and equity issues addressed to their satisfaction,” concluded Peter Johnston.

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The objective of this paper is to demonstrate that politicians of all persuasions over the past 30 years have failed to make critical structural changes to protect consumers from investment product failure. Most have preferred to make cosmetic changes that have suited political objectives at the time without materially adjusting the industry’s fundamentals. The adage of ‘The future is the past returning through another door’ will continually haunt consumers and the industry well after the politician’s have moved on. As history has continually demonstrated, this outcome we can be guaranteed of.

A footnote to this paper is the AIOFP is not being critical of the regulator. ASIC are merely an organ of Government and totally reliant upon the parameters set by politicians. In fact, the recent budgetary cuts and resultant departure of 150 mostly investigatory staff is a major blow to consumer and adviser security.

Ironically, ASIC and advisers interests are aligned, we both rely upon third parties to perform their duties diligently to avoid product failure and the resultant carnage. A significant portion of the blame for the $29 billion of either frozen or failed products since 2006 can be attributed to the performance of  Research Houses, Auditors, Trustees and Directors of the entities. But, at the end of the day it has been the poor decisions by politicians who have the ultimate responsibility of framing market supervision and structure that needs to change.

We are recommending two fundamental changes that will significantly enhance protection for consumers and advisers when making product decisions.

ASIC’s role with Product Disclosure Statements [PDS] – ASIC have been telling consumers and the industry for many years that they do not scrutinise new product PDS’s entering the market. Arguably the message should have been clearer but consumers and the industry have not been listening. Everyone has assumed that a PDS is checked for commercial viability including the role and character of Directors/Promoters by ASIC before market release. Most have treated it as a first ‘filter’ in the due diligence process. Wrong, all PDS’s are released to the market with minimal if no ASIC scrutiny with an accompanying ‘buyer beware’ tag. This will come as a major shock to most in the industry and all consumers.
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ASIC only have the resources and ‘politician driven’ power to be reactive to product failure not proactive. In analogous terms, they are ‘policemen/women’ enforcing the laws and ‘ambulances’ attending accidents trying to look after the injured but they do not act as Protectors. Thanks to the politicians, ASIC do not have the power or resources to be proactively looking to stop the accidents happening. We are absolutely positive that all consumers and the industry would want ASIC to be proactively protecting consumers from dodgy operators and fundamentally flawed products by being more active in the front end of the industry. This can only be achieved by politicians giving the resources to stop the accidents happening and being more creative with legislative strategy.
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Suggestion 1 – Politicians legislate to give ASIC more resources to become not only the Policeman and Ambulance of the industry but the front end consumer Protector.
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The role of Research Houses in the advice process – Research Houses play an absolutely critical role in the industry for consumers, ASIC and advisers. They are unofficially empowered with the decision making role on which manufacturer’s products are good, bad or exceptional and whether they commercially survive. They have unfortunately become the unofficial ‘gate keepers’ of the industry with far too much power in our view.
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Advisers need positive research ratings to satisfy their Insurers and due diligence process, hence they rely heavily upon research houses. Product manufacturers need a positive research report to get inflows from advisers; hence they rely heavily upon a positive research rating. You can see where this is heading. The massive problem facing this intertwined relationship is that research houses are getting paid by the product manufacturers to rate their products. This profoundly conflicted relationship has proven to be extremely costly for consumers, advisers, ASIC and society generally. Of the $29 billion of failed or frozen products they all had a positive research rating. This culture has fostered complacency, sloppiness, ‘special favours’ and down right incompetent decisions that leaves consumers, advisers and ASIC wounded while the research houses run for cover behind their disclaimers. This all care and no responsibility attitude has to be stopped by the politicians.
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ASIC should be the ‘gate keeper’ to the industry, it is a far too potentially conflicted role to allow commercial operators to have this much power. Remember Joh B’s classic comment? ‘if there is no conflict there is no interest’. Advisers should be the only source of income for research houses. US Congress recently addressed the ‘shop around for a rating’ scandal that ignited the GFC, our politicians need to be brave enough do the same. There needs to be a levy placed on all advisers to fund an ASIC supervised panel of research houses. They should be generously paid to ensure that high quality staff is employed and their business model is commercially viable. All PDS’s must then be scrutinised by this panel before the ASIC process and adviser/client consumption commences. Yes a back log on PDS approval would probably happen but it is better than the alternative.
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Suggestion 2 – Politicians follow their US counterparts by legislating to give ASIC control of the research process to protect consumers and advisers.
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FOFA has been largely driven by the spate of product failures and bad advice events like Storm. With the exception of Storm [which incidentally was influenced by a large Institution] bad advice issues are on the lower scale and normally resolved by FOS or COSL anyway. The big ticket items are products failing, hence the $29 billion figure already mentioned. The reason why these products failed are varied but it is commercially inconceivable to link it to product commissions. Commissions are a fraction of the capital involved, the cold hard facts are many of these products should not have been on the market in the first place and directly linked to politicians not making hard decisions and preferring to gorge on low lying political fruit.
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Some brief views on the current FOFA proposal to demonstrate it is a superficial cosmetic approach.

1. Banning of product commissions – totally agree, it is an inducement that leads to conflicts of interests. Will make a huge difference but most have already done it anyway.
2. Opt in – totally unnecessary, with a no commission environment advisers will be charging clients directly. Each and every year advisers will be judged on their performance and clients will be making a ‘cheque book’ judgement on whether to pay or not. Considered to be a political concession to the Industry Fund lobby.
3. Bests Interests – nice cosmetic touch but we are subject to a fiduciary duty in the courts anyway. Quickly changed from the original proposal of Fiduciary Duty when the full ramifications were considered.
4. Platform rebates/profit share – Industry Funds subsidise their advice practices with their internal platform profits, why can’t independents negotiate a share of a platform profit to subsidise advice? Platforms are administration services not investment products. A clear case of favouritism for Industry Funds.
5. Banning risk commissions in Super – Australia has a $1.3 billion underinsurance problem already in a commission environment, it will only exacerbate the problem. Widely considered to be a poorly thought through ‘red herring’ to leverage publicity.

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We trust you can now see that these 5 FOFA items, when put into context with our two suggestions, will make little difference to whether products will fail or not. As previously stated, these failed products should not have been on the market in the first place. Until the supply and scrutiny process is addressed the adage of ‘the worst thing about history is that every time it repeats itself the price goes up’ will continue to haunt us.
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Finally, It should also be noted that an advisers entire commercial and family life depends upon clients avoiding product failure, it can and does destroy every aspect of their life. It is inconceivable to even suggest an adviser would select a product purely based on receiving a very short term benefit knowing that it would fail.
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FOFA has received unprecedented publicity and has conditioned every one for change. The AIOFP hopes politicians will embrace the occasion with sound, commercially driven decisions that will make a real difference to the industry going forward.
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We welcome your comments and feedback.

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A Discussion Paper Presented to Minister Bill Shorten

1. Fiduciary Duty

While there is currently no statutory fiduciary duty, the vast majority of advisers already behave in a manner that is consistent with such a duty.  i.e., they act in the best interests of clients and place their client’s interests ahead of their own.  The duty should underpin the current characteristics inherent in adviser / client relationships e.g. Trust, Loyalty, Transparency, Objectivity, Ongoing Engagement, Due Care and Skills.

We understand Treasury is considering the introduction of “a reasonable steps qualifier” which requires further clarification.

We believe any fiduciary duty should be “Principles based” but provides sufficient clarity and certainty for advisers and clients about the nature and ramifications of the relationship.

2. Insurance and Commissions

AIOFP accepts that commission banning on investment based products is a thing of the past, however commissions on “Risk based products” should not proceed.

The removal of commissions on Life insurance can potentially undermine the quality of advice obtained or even discourage people from seeking advice altogether.  We support the consumer’s right to choose how they pay for advice as well as flexibility in how advisers can charge clients.  Further we recommend the same treatment for wholesale clients and retail clients in relation to a ban on commissions.  We do not support the Cooper Review’s final report recommendation that commissions should be banned on all insurance products in super, including Group Risk and Personal insurance.

The concern is even greater for accumulators who do not have the where with all to pay fee for service relating to risk advice.  It would appear that the proposed legislation may actually harm those that it purports to help.

3. Intra Fund Advice

We support the belief that financial planning advice cannot be easily broken into simple single components due to the inter-relationship between individual pieces of advice.  This potentially exposes consumers to inappropriate advice by limiting the scope advice provided by not making adequate enquiries.

We require a level playing field that is applied to the advisory sector as well as those that are fund or institutionally based.

4. Volume Payments

Volume based payments are commercially legitimate and are a consumer benefit, fostering competition in the financial services area.  Particularly on a “platform basis”, product selection is “neutral” and unbiased.  Platforms promote efficiencies and administration benefits that are passed onto the client within the form of a rebate or other benefits.  Volume reflects reality e.g. economies of scale.

5. Opt In

Opt in is seen to be an issue of significant concern that may result in administrative nightmares causing reduced services to low end clients or prohibitive costs.  A suggested alternative may be for an “Opt Out approach”, similar to Risk cover increases.

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A Discussion Paper Presented to Minister Bill Shorten

1.1    The objective of this paper is to highlight some issues that exist in the Australian financial services industry that may not get raised by the Institutional and Industry Fund sectors but deserve serious consideration.

1.2    BASIC ASSUMPTION – The Government wants a healthy independently owned sector to maintain balance and choice for consumers with advice and product. The only other option is an industry totally dominated by the Banks, Life Offices [Institutions] and Industry Funds. The independent advice market represents approximately 15% and currently contracting due to Institutional purchasing activity and day to day operational difficulties smaller practice principals are facing. It is common for the smaller groups to sell/join the larger national independent groups who are then selling to the Institutions.

2.1    LOSS LEADING BUSINESS MODELS – The Institutions own or directly influence over 83% of the advisers in the market. The far majority of these institutionally owned practices operate at a significant annual loss whereas the independently owned sector must prove solvency to ASIC to maintain their AFSL. The Institutionally owned practices are permitted to ‘hide’ these annual losses in the balance sheet of their parent company and subside their practices with the embedded profits the Institutions make on the book of business accumulated in their wealth division [from the activity of the practice].

2.2    Essentially, the Institutional practice is a ‘funnel’ for client monies into their wealth division, they are permitted to operate at a loss and the wealth division profits subsidise the advice delivery. The ratio is around 10 to 1 i.e. for every $10 million the institutionally owned practice loses on advice they make $100 million on the embedded profits in the wealth division on the book of business the practice has delivered.

2.3    We have raised this matter with ASIC some time ago, they acknowledged its existence, dismissed it as irrelevant and declared ‘we must cater for all business models’.

2.4     Industry Funds are also operating unprofitable advice practices but are subsidising the practices out of general revenue from other profit centres within their platform business model.

3.1     FOFA REBATE PROPOSAL – The AIOFP agrees that commissions from investment products should be eliminated from the market but however contend that platform rebates/dividends should be treated differently.  A Platform is an administration service that reports to its members, it is not a managed fund or similar. Consumers do not invest into a platform [like they do with a managed fund] they are charged a fee to use the platform to deliver a reporting service back to them. Industry Super Funds are also a platform with similar functionality and service to their members. It could be argued that all Industry Fund members pay for a loss leading advice function that only a fraction use.

3.2    Like Institutions and Industry Funds, Independents want to also use platform profit margins to subsidise advice delivery. Platform profits are a critical revenue source to the survival of the independent sector.

3.3    This begs the most obvious question – why can’t independents operate the same business model as the Institutions and Industry Funds with their white label and private label manufacturing platform models? This strategy allows the independents to use their scale with the Platform providers to get an institutional fee structure that delivers superior pricing to the consumer and a margin/dividend to the independent practice shareholder to subsidise advice delivery.

4.1   TRANSPARENCY IN ADVERTISING – Pre 2005, institutionally owned practices had to clearly demonstrate on all business cards, advertising and paperwork who owned the license they are operating under.  This gave consumers upfront clarity on who they were dealing with and the likely direction of the advice.

4.2    Since 2005 this ‘mysteriously’ changed with Institutionally aligned advisers being allowed to masquerade as an ‘independent’ with no indication on any advertising who they are licensed to. They now only have to divulge their ownership in the FSG during the first client interview. At this point the ownership issue is used as a ‘comfort’ strategy after the adviser’s ‘sales pitch’  and all the clients monies would commonly be channelled in one direction. We raised this issue with Nick Sherry in 2007 who demonstrated genuine surprise the practice had changed.

4.3    Successive Government’s over the years have insisted on transparency as a key     plank in the quest for a professional industry, this is a very fundamental function that has escaped scrutiny.

5.1    INDEPENDENT TRUSTEE/RE ROLE WITH ADMINISTRATION/FUNDS MANAGEMENT – During the 1980/90’s this role was exclusively with the independent trustee sector, the Institutions have now taken control of the functions in house with staff and paid ‘professionals’ on the trustee  committee. Considering the function is largely a supervisory role ensuring that the administrator/custodian/fund manager is adhering to all laws and acting in the best interests of the clients/members, surely this should be performed by an APRA approved third party to avoid conflicts.

5.2    The institutions also treat it as a healthy profit centre charging clients around 12 basis points whereas the cost from the independent trustee sector can be as low as 4 basis points. A change in policy will provide consumers with lower costs and integrity in the process.

6.1    CONFLICTED RESEARCH HOUSE BUSINESS MODELS – Research is the most important function in a practice, it is fruitless to have the best staff, practice, administration and have a flawed approved product list. The practice is therefore an accident waiting to happen.

6.2    The industry largely relies upon Research House ratings to assist their client recommendations. Most advisers do not have the time, expertise or resources to perform the task personally or internally. Over the past 25 years it     has become acceptable in Australia for product manufacturers to pay research houses to rate their products. This profoundly conflicted process has been blamed for a number of second tier product manufacturers ‘buying’ favourable ratings to give them legitimacy with the market. Basis Capital, Westpoint, Great Southern, Timbercorp, Astarra and Willmotts are only a few examples of groups     that purchased a rating and ended in catastrophe.

6.3    If the Government is serious about protecting consumer assets this culture has to be eliminated. Elimination of conflicted research practises will lead to an elimination of “dodgy” product manufacturers from the market.

6.4    Product failure is by the far the greatest cost for consumers with in excess of $6 billion being lost over the past 5 years. The attached article (fig. 1) demonstrates that US Congress has finally dealt with the matter.

6.5     The major issues affecting the research industry are too many operators in the market, insufficient revenue and larger practices negotiating group discounted deals further diluting the revenue pool.

6.6    The Research Houses have become the ‘gate keepers’ in the industry with advisers needing a rating and product manufacturer’s needing inflows. These ingredients have lead to a conflicted dubious environment where inexplicable ratings have been ‘shopped’ around and paid for, leaving clients and advisers the victims.

6.7    Our suggestions are each adviser is levied a fee, the pool is managed by ASIC with 2-4 Research Houses tendering for revenue to deliver advice to advisers and  paying for ratings legislated against. The other option is self regulation by boycotting those who accept conflicted payments. There are only 2 conflict free retail Research Houses in the market, Mercer and McGregor the other 8 accept conflicted payments of varying descriptions.

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Dr. Maddern is President of Melbourne based Maddern Financial Advisers Pty Ltd (MFA). Established in 2003, MFA offers a full suite of ntegrated financial planning, investment, retirement, insurance, superannuation, lending and taxation solutions to a growing base of over 2000 clients.

John Ardino is the Managing Director of Lifespan Financial Planning (Lifespan). Lifespan commenced in 1994 and now has a network of 130 authorised representatives operating from 110 offices across Australia, principally in NSW, Victoria and Queensland.

In welcoming Dr. Dennis Maddern and John Ardino to the AIOFP Board, Peter Daly said both Directors are highly experienced professional business practitioners with extensive industry experience and knowledge.

“The addition of Dennis and John’s skills and experience to the Board will complement those of our existing Board,” added Peter Daly.

“I am confident the AIOFP Board is well positioned to guide the organisation into the future and will successfully address the challenges and issues facing the financial services industry.”

The other members of the AIOFP Board are Tony Siragusa of Money Guidance Pty Ltd, Ben Jayaweera of Growth Plus Financial Group and Executive Director, Peter Johnston.

AIOFP has also confirmed that the Board will meet with Minister for Financial Services & Superannuation; Assistant Treasurer, Hon Bill Shorten MP on November 4th to articulate the views of the independent sector of the Financial Services industry.

“It is important that the all sectors of the industry are consulted by the Federal Government, in particular those of the non institutionally owned providers of professional financial advice,” said AIOFP Executive Director Peter Johnston.

At the meeting with Minister Shorten, it is the objective of the AIOFP Board that a broad range of issues important to the future viability of the advice industry are communicated and discussed, in particular transparency in advertising, loss leading practice strategies by institutions, independent trustee / RE functions, conflicted research house business models, etc.

“With the addition of the two new Directors to the Association’s Board, AIOFP will continue to promote the benefits, importance and value to Australian consumers of financial advice that is provided by independent / non institutionally aligned advisers and AFS licence holders,” concluded Peter Daly.

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