In a top-notch exposé, Adele Ferguson and Deb Masters have shone a light on the systemic failure by Commonwealth Bank of Australia (ASX: CBA) to incentivise its financial planners in a way that encourages them to do the right thing by clients. It's an important story that everyone who hopes for a secure retirement needs to understand. I've explained in this article how the situation is encouraged by the government's attempt to wind back the FOFA reforms, and Owen Raskiewicz has shown here that the regulator will not act expeditiously to protect you from the practices of fraudulent financial planners. Here's what you need to know about Australia's financial system: this knowledge could save you thousands.
1. Big financial institutions such as Commonwealth Bank, Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and AMP Limited (ASX: AMP) all take commissions on products such as life insurance. They all oppose the Future of Financial Advice (FOFA) legislation passed by the previous government that makes it a lot harder for planners to receive trailing commissions, and they all support the current government's decision to wind back the laws. Incidentally, Arthur Sinodinos, who lead the charge against FOFA, has temporarily stepped down from his role as Assistant Treasurer, since his woeful appearance before the Independent Commission Against Corruption (ICAC), when he repeatedly claimed he could not recall past events.
2. Financial planners will try to sell you their products, for which they receive commissions, even if it's not in your best interest. Four Corners last night covered the case of Noel Stevens, who had switched his valid, in-force, life insurance from Westpac to Commonwealth Bank, despite the fact it was not in his best interest. When he became sick, Commonwealth Bank refused to pay, causing the ailing man mental anguish – it is literally hard to watch Noel's suffering on television. The judge described the bank's conduct as "negligent" and demonstrating "misleading and deceptive conduct," ordering the bank to pay out the policy. The bank appealed the ruling and lost, though Noel had died by then. To quote Stevens' lawyer, "This wasn't, however, a case where we can say that the financial planner acted in a rogue fashion. This was almost a systemic type approach to it."
3. Commissions encourage behaviour that is not in the interest of clients. To quote the extremely honourable Commonwealth Bank financial planner and whistleblower, Jeff Morris, the system "was not set up to provide quality advice to people. It was set up to push product and push CBA product. It's as simple as that."
4. Banks and ASIC do not act expeditiously to prevent fraudulent or questionable conduct. Adele Ferguson asked former CBA compliance officer Rod Gayford: "So the bank says it operates rigorous compliance and risk management framework. Was that your experience?" He replied, "No. I don't see how it could with only one-and-a-half compliance officers." Don't forget, questionable financial planners were making CBA a lot of money. After Commonwealth Financial Planner, Don Nguyen was originally suspended, supposedly for fraud, he was reinstated and promoted.
5. Don Nguyen's clients Merv and Robyn Blanch lost $160,000 because he put them into high-risk investments, contrary to their instructions. However, the bank's subsequent actions show just how inconsiderate it is. Initially, it offered compensation of less than $7,000 for the harm done by its number-one planner (number one, because he made CBA the most money). Not only that, but the bank sent a "Statement of Advice" that differed from the one provided to the Blanchs at the time. To quote their daughter, Merilyn Swan; "it contained several pages that weren't in the original documentation. And it also contained four tables that were not in the original statement of advice." Eventually, worn down, the Blanchs settled for $95,000.
Foolish takeaway
The attitude that you can trust a financial planner because they work for a big institution has been shown to be false. Do not trust any financial planner who takes trailing commissions, it's as simple as that. Either pay a flat fee or do it yourself. There are plenty of ways you can get help with your finances, and there are plenty of financial planners who charge a fee, rather than commissions (however, you won't find them working at the big banks).
