Beginning in July of next year, commissions will be banned on all investment products being sold and there will be the introduction of a statutory fiduciary duty so financial advisors must act in the best interests of their clients. All compensation must come from the client and not a product manufacturer. There will be complete transparency and each client will know exactly what their costs are and will have to opt back in on the fee arrangement every two years in writing. There will also be a ban on soft dollar benefits (as in 12-B1) to advisors/firms in excess of $300 per benefit. And beginning July of 2013, prospective up-front and trail commissions for pension related products and investments will be prohibited. Sounds pretty radical, right? Not for Aussies. These are the changes being implemented by the regulators as a result of the Future of Financial Advice reforms finalized in 2010. Read interesting blog post by Aussie here
I just returned from the annual Financial Planning Association (FPA) conference in San Diego where the issues of SRO’s, FINRA and a harmonized fiduciary standard were front and center. And to the FPA leadership’s credit, the major theme was not being divisive by pitting salesmen against advisor or fees against commissions. The focus was simply placing the interests of clients first. It’s all about the process, not the product. They made a point to state that they are model and compensation agnostic and it matters not how one is paid; fee only, commission only or hybrid, so long as the clients best interests were served. I think they hit the mark as most other industry organizations, many to which I respectfully belong, are focused on protecting their primary product and form of compensation.
One of the better breakout sessions was titled “Life without commission-Life without conflict?” organized in a panel of three including a fee only practitioner from the US, a practitioner from the UK and the Director of Advice Based Distribution for AMP from Australia. Like Australia, the UK has been undergoing a new regulatory scheme that seems to change every several years, the most recent being the “Retail Distribution Review” (RDR) issued by their SEC equivalent, the FSA Read Telegraph article bout RDR here. The RDR will ban advisor commissions beginning in 2013, a move that has many in the UK believing the advisor force will drop by over half when enacted. A movie coming to a theater near you?
The AMP Director had an interesting perspective and one that was a bit of a déjà vu moment for me. AMP, founded in the late 1800’s and one of Australia’s largest and most respected financial services firms with about 3,000 advisors was recently merged (acquired) by AXA. The Director explained that they made the decision to cut away from commissions and go to 100% fees last year, a full 2 years before the July ‘12 deadline. He went on to explain how they went through an initiative to retrain their field force, move to a financial planning process, change their product set and transition towards fee compensation. It was déjà vu for me because just after the former Equitable, founded in the late 1800’s was rebranded as AXA, I headed an initiative to retrain the field force, move to a financial planning process, change their product set and transition towards fee based compensation Read FP Mag article on the AXA initiative in 2000 here .
The Aussie Directors’ findings were the exact same as mine albeit over a decade ago. While there was a great deal of trepidation about such radical change, what he found is that the clients were far more accepting initially than the advisors. In fact, there were a couple AMP advisors in the room who vouched that after moving from commissions to fees and financial planning that their compensation actually increased, the same that we found a decade ago here in the US with the Financial Planning initiative. While we rolled out the initiative nationally with some success, it eventually ended up dying as a necessary expense cut, not because of its viability as a strategy, but because fees were inconsistent with the primary form of profitability for the firm, namely selling commission based insurance and annuities manufactured by the mother firm. Had there been a gun to our head with new regulations as are taking place in Australia and the UK, I’m certain AXA-US would be a full decade into a successful transformation. But instead they have digressed back into a proprietary product manufacturing driven distribution platform facing a potential gun to the head event with new regulations on the horizon. (With most sincere apologies to my former AXA colleagues…just calling it the way I see it)
A recent CNBC poll showed how Australians are most optimistic about their financial futures while here in the US, I don’t recall there being a time with more uncertainty. CNBC poll article here . One wonders if the confusion and regulatory uncertainty is lending to the American angst. Do the Australian regulators have it right by moving retail distribution to fee only? Time will tell. Will the US follow suit and move towards a similar set of regulations? I think the chances are far greater that we trend in their direction than they towards ours. AMP is to be commended for taking the leap towards financial planning and fees well before it was required. Will any of the large retail distribution firms in the US have enough vision and motivation to do the same? I can say that in a different time with different leadership, at AXA Advisors we made it work. But today it has yet to be seen, even with the proverbial gun to the industry business models heads. Time will tell.
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~John Kenneth Galbraith
Not until we are lost do we begin to understand ourselves. ~Henry David Thoreau