The low-down on the Banking Royal Commission

I’m sure you’ve all heard about the Banking Royal Commission – but want to get the low-down on what it is and how it may impact the financial services industry moving forward? Read on!

 The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was a review by the Federal Government, commenced in December of 2017 to report on misconduct in these sectors.

The commission’s final reports have been handed down, including 76 recommendations they would like to see implemented in the financial services sector. Among these are a few key changes that are certainly going to impact a lot of financial professionals.

How mortgage brokers get paid by banks

 The Royal Commission has recommended that mortgage brokers no longer get paid by the banks to help you secure a loan. What this means is that either brokers will now have to work for free, or more realistically, they’ll have to charge customers for their time.

Previously, your mortgage broker would compare a range of different loans for you to get the best deal and then be paid by the bank you took out your loan with for bringing them your business. Now, brokers will need to charge you, the customer, for their time to do this.

I see this as a bad thing. Customers aren’t going to want to pay that fee and instead will walk into a bank and take out a loan without the guidance a mortgage broker can provide. While I don’t work in this space, I’ve seen the benefits of brokers’ expertise as a customer myself. With 16,000 brokers in Australia it’s potentially going to impact them a lot, if it goes ahead.

Commissions made by financial planners

 This is one of the announcements more relevant to us at Financial Edge Group Retirement Specialists, and it’s that commissions paid to financial planners have been recommended to change. Similar to the way mortgage brokers get paid by banks to set up loans, financial planners sometimes get paid commissions by third party financial organisations – whether that’s super funds, insurance companies or investment firms – to use their products for clients. The Royal Commission has announced that they want to move away from doing this all together.

Financial Edge Group Retirement Specialists operates on a ‘fee for service’ model, which means I get paid by my clients, rather than on a commission structure from product providers I work with. This means there’s no incentive for me to recommend one service over another, because I’m not getting paid to recommend a certain product – I’m getting paid by my clients to recommend what I genuinely think is best for them. This recommendation therefore doesn’t impact me as much as it may impact some other advisors, but it’s worth mentioning as a potential change to our space.

Fee transparency between advisors and customers

 Another announcement is what’s called the ‘opt-in’ system. Historically, advisers would send a one-off ‘opt-in’ statement to each client outlining their fees and asking for confirmation they are happy to continue to pay said fees. For many advisors this may only ever happen once, so clients end up paying the same fee year on year, regardless of the level of service received.

The Royal Commission’s recommendation is that now this ‘opt-in’ should be required to happen every year. At Financial Edge Group Retirement Specialists, we’ve always sat down with each client annually to discuss fees. We look at the fee they paid the previous year, what we did for that fee, what their needs are for the year ahead and whether we need to adjust the fee accordingly.

Selling a product vs. providing advice

 The third area I noticed the Royal Commission focus on is separating the sale of financial products from providing sound financial advice. Their recommendation is for the financial services industry to focus more on giving good advice, before thinking about selling a customer a certain product (which is what I think a lot of consumers assume financial planners do).

Given my background as both an accountant and a financial planner, I’ve always focussed on the advice part. What strategies should we be looking at for each client? What are their goals? Advice is the foundation we need to get right before we worry about which products might suit them. 

What does all this mean for how we operate at Financial Edge Group Retirement Specialists? There’s not much for us to change right now. These recommendations will hopefully achieve better outcomes for consumers and mean that we can keep doing good things for our clients, knowing we’re already on the right track.

If you’ve got any questions on anything you’ve heard about the Banking Royal Commission, reach out and I’ll answer them as best I can.

In the meantime, keep an eye our Facebook and YouTube channel, for all the latest developments in the financial services world.