Will
2006 be the year in which the financial planning industry straightens
up? Don’t hold your breath. There were some signs as 2005 ended that Eureka Report‘s
campaign for reform, plus growing consumer pressure, was bringing about
the beginnings of change, and it’s possible that the Westpoint collapse
will eventually be a trigger for reform, but the forces against it are
powerful, the stakes are high and officialdom is weak.

As 2006
begins the Australian Securities & Investments Commission (ASIC)
still refuses to distinguish between sales commissions and direct fees
in its governance of financial services. Are we at Eureka Report
the only ones who think there is a difference between advisers being
paid commissions by the promoters of investment products and genuine
independents who are paid a fee directly by a client? Apparently so.

On
Friday, the chief executive of the Financial Planning Association of
Australia (FPA), Kerrie Kelly, issued a press release expressing grave
concern that 4,000 investors have $300 million at risk with Westpoint
Corporation. Actually, make that $300 million up in smoke in Westpoint.

What
she didn’t mention was why the money was lost and why the FPA is
putting out a press release about it. The answer – which has not been
mentioned in any of the publicity surrounding Westpoint – is that the
various funds that were created under this banner paid an average
commission of 10% to financial planners to flog them. That’s right – 10%.

That means every dollar that was invested in the Westpoint
mezzanine funds became 90¢ immediately. Investors started 10% behind.
Planners knew this but recommended the funds anyway because even honest
ones can be blinded but such huge commissions. Their clients, needless
to say, did not know, or were informed only in unread fine print.

It
is early days yet in the examination of what went wrong at Westpoint,
but at this stage it looks like the losses roughly correspond to the
commissions paid to financial planners. In other words investors never
recovered from paying 10% to the sales people who flogged them the
investments.

It is an absolute disgrace and, as a class action
gets under way, along with ASIC’s investigation and that of the
administrators from PricewaterhouseCoopers, could well produce lasting
and fundamental change in the financial planning industry.

In
her press release, Kerrie Kelly reminded financial planners they have
an obligation to act in their clients’ interests. Why do they need to
be reminded of that? Because Westpoint paid commissions to planners,
thereby setting up a conflict of interest that has arguably cost 4,000
people an average of $75,000 each. Would planners have recommended
Westpoint without the commissions? Of course not. Kerrie Kelly and the
FPA must face this.

So must ASIC.

Read more on the Eureka Report website here.

Peter Fray

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