Advisers and fund managers given the thumbs down

Financial services industry could take five-plus years to reform

A survey (PDF) released by the Australian Securities and Investments Commission (ASIC) has found that most stakeholders don’t think financial advisers or fund managers have integrity.

Just 23% of those surveyed, including consumers, investors, brokers and government agencies, agreed that financial advisers have integrity, while slightly more (26%) thought that fund managers have integrity. And an even lower proportion, just 20%, agreed that the industry manages conflicts of interest effectively. Nearly a third of respondents suggested advisers were dishonest.

And the majority of that can be put to down to inherent conflicts of interest in how the Australian financial services system has been structured. Many financial advisers and most fund managers receive fees for their services, which have in the past and currently, are based on a percentage of assets. A lot of damage has been done to the financial services industry over recent years and could take more than five years to rebuild, according to the Financial Services Council (FSC). “The process of reform has been talking about everything that is wrong with the industry. For substantial improvements, we are talking five-plus years,” said Mr Brogden, CEO of the FSC.

Trailing commissions and kickbacks were seen by consumers as creating temptation for advisers to see their clients as simply someone to make money out of. Unfortunately, that’s the structure of the system, and until trailing commissions and kickbacks are banned, the industry is likely to see ongoing poor confidence in advisers.

Likewise management and performance fees for fund managers. When markets go up, fund managers receive higher fees, because they charge a percentage of assets under management, but as one executive noted, fund managers don’t cut their fees if they underperform. Recent financial results from Platinum Asset Management (ASX:PTM), Magellan Financial Group (ASX:MFG), K2 Asset Management (ASX:KAM) and Perpetual (ASX:PPT) show the positive effect rising markets have on their revenues and profits.

Foolish takeaway

What Australians want to see is an open and fair system, and until major reforms of the industry are enacted, that’s unlikely to happen. A fee-for-service model would make much more sense in my opinion, and while it has its disadvantages, would make the industry much more transparent and open, and bring back some much needed respect for advisers and fund managers.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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