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| Updating customers about fees was 'administrative burden', says Westpac boss – live | |
| (35 minutes later) | |
| But Brian Hartzer is not entirely married to the idea of getting rid of the service: | |
| We have a alarge number of customers who do - it’s not all customers by any means but we do have a significant number of customers who do look to us as a trusted source of - of advice, and we would like to be able to help them with that. | |
| So to just walk away from it entirely to a certain extent is to abandon our customers in - in an important respect.” | |
| And from these questions we get our first big admission of the day – that in moving away from traditional banking services, and into financial planning, banks didn’t really think through what that model would look like. | |
| Because the end game here, is, profit. | |
| Hodge: Because - and I think one of the points you’re getting at is you - when we talk about this idea of aspiring for a share of a customer’s wallet, what you don’t want is somebody after five years switching from Westpac and going over to one of your competitors? | |
| Hartzer: Correct. | |
| Hodge: You don’t want to lose the, effectively, the profit from that customer? | |
| Hartzer: Correct. | |
| Hodge:... because you are a profit-making business? | |
| Hartzer: Yes. | |
| Hodge: And do you think that from the consumer’s perspective, the way in which Australian banks have gone into wealth management has been a success? | |
| Hartzer: I think at a high level, clearly not. | |
| Hodge: And what does that suggest to you about the bank assurance model? | |
| Hartzer: I don’t think banks fully thought through how the model needed to evolve to be consistent with being part of a service business that focuses on long-term relationships. | |
| Hodge: Is it the case, do you think, that the movement into wealth management assumed a capacity on the part of banks to provide compliant financial products and financial advice - I’m sorry, not financial products, I will say wealth management products and financial advice when, in reality, the expertise of most banks is only in providing compliant deposit accounts and loans? | |
| Hartzer: That’s one way to look at it. I | |
| I think banks just under - underestimated how - how different the models were and how the model needed to evolve to be consistent with the way banks should run themselves.” | |
| Hodge is asking Hartzer lots of questions about the role of financial advice in Westpac’s business. | |
| You can see these questions aren’t really directed towards Hartzer. They’re for the commissioner, Kenneth Hayne. | |
| Remember: this round of hearings, where we’re finally hearing from the bank bosses, is dedicated to understanding policy issues. | |
| The royal commission is trying to figure out what banking practices ought to go in the dustbin of history. | |
| Financial advice, financial planning, the manufacture of worthless wealth products – these things are all in the line of fire for an overhaul or a shredder. | |
| So it doesn’t sound like Brian Hartzer, the boss of the bank, is aware of whether anyone in the bank has looked into whether their customers need to have an ongoing advice service agreement (an Oasa). | |
| That’s important, because Michael Hodge is attempting to get at whether the bank has checked whether it is charging customers for services they don’t actually need. And locking customers into two-year agreements is potentially an issue there. | |
| Hodge: Are you aware of how Westpac evaluates whether or not clients who have gone into an Oasa should have gone into an Oasa? | |
| Hartzer: Well, my understanding is that would be part of the pre-vet process that we go through and the quality assurance process we go through when we look at the files, the statements of advice. | |
| Hodge: Do you know whether Westpac has performed any analysis to try to determine what the characteristics are of customers in a general way for whom an ongoing advice service agreement is appropriate? | |
| Hartzer: No, I don’t. | |
| Hodge: Does that seem surprising to you? | |
| Hartzer: I’m not saying it hasn’t happened. I’m just saying I’m not aware of it. | |
| Hodge: You just don’t know? | |
| Hartzer: No, I just don’t know. | |
| Hodge then asks whether Westpac is considering if it even needs to have its financial planning business: I just wonder when you’re forming a judgment about whether it makes sense for Westpac to continue with a financial planning business, whether, necessarily, part of that is trying to figure out how many of our customers actually genuinely need a – to have an ongoing advice agreement? | |
| Hartzer: Yes. That – that forms a part of it, certainly. | |
| Hodge: And when you say “that forms a part of it, certainly”, is it something then that you’ve taken into account thus far in your thinking? | |
| Hartzer: Well, I – I’ve said publicly recently that we’re thinking through how we make advice available to different segments of customers, and implicit in that statement is that we have to look at the different segments and understand where that sort of an advice relationship makes sense for them, as well as for us. | |
| So back to the two-year contracts, Michael Hodge puts forward that a lot of Australians don’t actually need an ongoing advice relationship with their financial adviser. | |
| The subpoint there being that most people are not hugely wealthy – they are trying to pay off their mortgage or work out their retirement plans. | |
| Brian Hartzer: | |
| Possibly. I’m not sure most Australians have one. But there’s a reasonable portion of Australians that would see value in that. | |
| So why are Fofa and financial advisers becoming a profession important? | |
| This interaction gives some insight: | |
| Hartzer: I would observe that financial advice evolved over the last 20 years, starting very much in the way you characterise it as a distribution channel, and gradually transitioning into more of a profession. | |
| Hodge: And that change is relatively fundamental because for a long time financial advisers were receiving ongoing commissions in relation to the financial products that they were acting as the distribution mechanism for? | |
| Hartzer: Yes. | |
| Hodge: And what then happened was that, particularly with the advent of Fofa, they were, by legislation, no longer permitted to be a distribution mechanism? | |
| Hartzer: That’s a good way to characterise it, yes. | |
| Hodge: They were being forcibly transformed into a profession? | |
| Hartzer: Yes. | |
| Hodge: To provide advice to customers? | |
| Hartzer: I think it was all – the subtlety, I would say, I think it was already moving in that direction but Fofa formalised that. | |
| Hodge: The writing had been on the wall for a few years? | |
| Hartzer: Yes, indeed. | |
| Hodge: And the discussion about whether or not – I’m sorry, I withdraw that. The concerns about the commissions being paid to financial advisers had been known for some time? | |
| Hodge: Yes. | |
| Hartzer: And the possibility of legislative reform had been foreshadowed since probably about 2010? | |
| Hodge: I wasn’t in the country then, so I don’t remember. | |
| Hodge: All right. And at least one institution had moved, in about 2010, to try to switch new arrangements from being commission arrangements over to advice arrangements, but you’re not aware of that? | |
| Hartzer: I’m not – I don’t know. | |
| Hodge: All right. In any event, can I suggest what all of this – what the fees-for-no-service problem suggests is that the switch from commissions to ongoing advice, which was intended to be a profound shift in the nature of the relationship between the adviser and the client, didn’t actually result in that profound shift? | |
| Hodge: I think that’s too broad a statement. | |
| Hartzer: That is, you think in some cases it did result in the shift? | |
| Hodge: Yes … I think in the vast majority of cases, my sense is that the financial advisers are trying to do the right thing. But, clearly, there are cases where that hasn’t happened or people haven’t gotten the memo about the shift that – that you describe. | |
| So much of what we’re seeing in the royal commission goes back to Fofa, the “future of financial advice” laws. | |
| The Fofa laws were introduced by the former Labor government in 2012, and the financial industry hated them. | |
| Why? Because they introduced a duty for financial planners and advisers to put their customers interests first, and ban the payment of sales and trail commissions, among other things. | |
| The Abbott government worked incredibly hard to water them down. Incredibly hard. | |
| After inheriting the Future of Financial Advice Act, which was legislated in 2012 and which came into effect in July 2013 but which didn’t take proper effect until mid-2014 – because that’s when Asic decided to start enforcing it – the Abbott government tried to add significant amendments to the bill. | |
| It didn’t want an overarching requirement for advisers to act the best interests of their customers, and it didn’t want customers to have to “opt in” to having fees deducted from their accounts regularly. | |
| It argued that he laws placed too many restrictions on financial advisers. | |
| Long story short, the government ultimately failed. It only managed to buy the industry two more years before the laws were introduced. | |
| So when you hear about “pre-Fofa” and “post-Fofa,” we’re talking about two very different financial regimes. | |
| So we circle back round to Brian Hartzer saying he is not fundamentally opposed to customers opting in to that agreement with Westpac’s financial advisers every year, so they know what they are paying for, but he still thinks it would be a burden to the financial advisers. | |
| His argument is basically that the more time they spend doing that, the less time they have to advise. | His argument is basically that the more time they spend doing that, the less time they have to advise. |
| Michael Hodge doesn’t seem to be having much of that argument, given that, well, most professions have regular oversight requirements. | Michael Hodge doesn’t seem to be having much of that argument, given that, well, most professions have regular oversight requirements. |
| Hodge: Do you regard financial advisers as a profession? | Hodge: Do you regard financial advisers as a profession? |
| Hartzer: I think it should be. I think it’s moving in that direction. And I think more reform would be helpful to make that happen. | Hartzer: I think it should be. I think it’s moving in that direction. And I think more reform would be helpful to make that happen. |
| Hodge: All right. Can you think of other professional services where it is regarded as too burdensome to ask clients each year if they still agree to pay for and receive an ongoing service? | Hodge: All right. Can you think of other professional services where it is regarded as too burdensome to ask clients each year if they still agree to pay for and receive an ongoing service? |
| Hartzer: I don’t know. | Hartzer: I don’t know. |
| Hodge: I’m sorry? | Hodge: I’m sorry? |
| Hartzer: I don’t know. | Hartzer: I don’t know. |
| Hodge: Does that mean you can’t think of one? | Hodge: Does that mean you can’t think of one? |
| Hartzer: I haven’t thought about it. I haven’t thought about it. | Hartzer: I haven’t thought about it. I haven’t thought about it. |
| Hodge: Does it seem to you that fundamental to the nature of a profession is if you’re providing a service to a client you will agree on exactly what that service is and agree on how much you’re going to charge for that service? | Hodge: Does it seem to you that fundamental to the nature of a profession is if you’re providing a service to a client you will agree on exactly what that service is and agree on how much you’re going to charge for that service? |
| Hartzer : Yes. | Hartzer : Yes. |
| Hodge: And that in any other profession, it would be very surprising to hear a member of the profession say, “It’s too burdensome to have to have that confirmed even on a yearly basis”? | Hodge: And that in any other profession, it would be very surprising to hear a member of the profession say, “It’s too burdensome to have to have that confirmed even on a yearly basis”? |
| Hartzer: I don’t know. | Hartzer: I don’t know. |
| Hodge: You don’t have a view about that? | Hodge: You don’t have a view about that? |
| Hartzer: I haven’t thought about it. | Hartzer: I haven’t thought about it. |
| Michael Hodge then asks whether or not Brian Hartzer is talking about wealthy clients. | Michael Hodge then asks whether or not Brian Hartzer is talking about wealthy clients. |
| Hodge: I’m going to ask you this and not facetiously, these are very wealthy people you are speaking about? | Hodge: I’m going to ask you this and not facetiously, these are very wealthy people you are speaking about? |
| Hartzer: Relatively speaking, that would be true, yes. | Hartzer: Relatively speaking, that would be true, yes. |
| Hodge: And can I suggest to you that’s quite an important point, because the subset of clients that need to have an ongoing advice relationship and are in a position where they’re happy to just leave somebody to monitor their no doubt very substantial investments, are going to be very wealthy clients? | Hodge: And can I suggest to you that’s quite an important point, because the subset of clients that need to have an ongoing advice relationship and are in a position where they’re happy to just leave somebody to monitor their no doubt very substantial investments, are going to be very wealthy clients? |
| Hartzer: It depends on your definition but broadly, I would say yes. | Hartzer: It depends on your definition but broadly, I would say yes. |
| Michael Hodge, who is still questioning Brian Hartzer, seems a little confused by that explanation: | |
| Hodge: Now, I’m struggling with the idea that it would somehow be a distraction for the planner from working for the client to have to call up the client and actually talk through with the client what the client’s needs were and whether they still needed an ongoing fee agreement? | Hodge: Now, I’m struggling with the idea that it would somehow be a distraction for the planner from working for the client to have to call up the client and actually talk through with the client what the client’s needs were and whether they still needed an ongoing fee agreement? |
| Hartzer: Well, some of these clients are being spoken to on a regular basis by their advisers anyway. So they would view it as an unnecessary administrative burden. The advisers have a – in some cases, reasonably sizeable portfolio and of customers they would have to ring. So I’m just saying it – you know, if you spend time doing that you’re not spending time doing something else. | |
| Hodge: Presumably, though, you need to be contacting your clients anyway and talking with them about what their needs are? | Hodge: Presumably, though, you need to be contacting your clients anyway and talking with them about what their needs are? |
| Hartzer: In some cases. It – largely, yes, but it depends on the nature of the relationship with that adviser and their client. | |
| Hodge: But it must be every case. That’s the entire point of having an ongoing fee agreement is that you are receiving ongoing advice and there’s an ongoing monitoring of your needs? | Hodge: But it must be every case. That’s the entire point of having an ongoing fee agreement is that you are receiving ongoing advice and there’s an ongoing monitoring of your needs? |
| Hartzer: Well, different clients view it differently. Some clients do want an active set of meetings frequently. Some clients view it, as I mentioned earlier, as a bit of a retainer relationship where they can ring up and bounce things off their adviser when they want to, and sometimes they’re quite happy not to do that for quite a long time. But still like to know that the adviser is there. I know people like that. | Hartzer: Well, different clients view it differently. Some clients do want an active set of meetings frequently. Some clients view it, as I mentioned earlier, as a bit of a retainer relationship where they can ring up and bounce things off their adviser when they want to, and sometimes they’re quite happy not to do that for quite a long time. But still like to know that the adviser is there. I know people like that. |
| So why can’t customers opt in to that agreement every year, instead of every two years? | So why can’t customers opt in to that agreement every year, instead of every two years? |
| Brian Hartzer essentially says it’s a paperwork issue. | Brian Hartzer essentially says it’s a paperwork issue. |
| Just administrative burden, in short. Not sure that it would add a lot of extra value. I don’t profoundly object to it, just think that it would be an extra administrative exercise that clients wouldn’t necessarily welcome. They would add cost, that would ultimately be borne by customers and would distract time that clients could be spending with their clients giving them advice. | Just administrative burden, in short. Not sure that it would add a lot of extra value. I don’t profoundly object to it, just think that it would be an extra administrative exercise that clients wouldn’t necessarily welcome. They would add cost, that would ultimately be borne by customers and would distract time that clients could be spending with their clients giving them advice. |
| Michael Hodge is straight into it. | Michael Hodge is straight into it. |
| He asks Brian Hartzer about an internal review undertaken by Westpac in January. | He asks Brian Hartzer about an internal review undertaken by Westpac in January. |
| Westpac called it an “ongoing advice service and consequence management thematic review”. | Westpac called it an “ongoing advice service and consequence management thematic review”. |
| In plain English, that means Westpac conducted a review of financial advisers employed by Westpac, to see what “ongoing advice” they were providing customers. | In plain English, that means Westpac conducted a review of financial advisers employed by Westpac, to see what “ongoing advice” they were providing customers. |
| Ongoing advice is a big problem in the industry, because the banks have been claiming they’re providing “ongoing advice” and charging fees for that advice when they haven’t been providing any advice. | Ongoing advice is a big problem in the industry, because the banks have been claiming they’re providing “ongoing advice” and charging fees for that advice when they haven’t been providing any advice. |
| Hodge asks: “The review found 50% of the samples tested had no appropriate supporting documentation on file to match the review status recorded in the fee disclosure statement and ongoing advice delivery report?” | Hodge asks: “The review found 50% of the samples tested had no appropriate supporting documentation on file to match the review status recorded in the fee disclosure statement and ongoing advice delivery report?” |
| Hartzer replies: “That’s possible. You might need to show me which report you’re referring to.” | Hartzer replies: “That’s possible. You might need to show me which report you’re referring to.” |
| Hodge shows him the report. It’s from BT Risk (BT Financial is Westpac’s wealth arm). | Hodge shows him the report. It’s from BT Risk (BT Financial is Westpac’s wealth arm). |
| Hodge: “What I want to ask you to consider and help us with first is, why do you think it had reached the point that these problems, very significant problems, persisted all the way until the beginning of this year before active steps were being taken to address them?” | Hodge: “What I want to ask you to consider and help us with first is, why do you think it had reached the point that these problems, very significant problems, persisted all the way until the beginning of this year before active steps were being taken to address them?” |
| Hartzer: | Hartzer: |
| Well, I think one of the bits of background to this is there had been an over-reliance on the fact that customers had – were opting into – an advice relationship every two years. | Well, I think one of the bits of background to this is there had been an over-reliance on the fact that customers had – were opting into – an advice relationship every two years. |
| So every two years customers were signing a contract saying, ‘I want an ongoing advice relationship and I’m agreeing to this set of fees.’ And then every year we were providing a fee disclosure statement that reminded customers what they were paying and what they were entitled to. | So every two years customers were signing a contract saying, ‘I want an ongoing advice relationship and I’m agreeing to this set of fees.’ And then every year we were providing a fee disclosure statement that reminded customers what they were paying and what they were entitled to. |
| So I think the business, and perhaps the planners themselves, were overly reliant on that as being sufficient to demonstrate that they were providing the service that customers were paying for. | So I think the business, and perhaps the planners themselves, were overly reliant on that as being sufficient to demonstrate that they were providing the service that customers were paying for. |
| And – and that clearly was insufficient. | And – and that clearly was insufficient. |
| It’s the fourth day of the final block of hearings and Brian Hartzer is back in the chair after a shocking day for the Commonwealth Bank. | It’s the fourth day of the final block of hearings and Brian Hartzer is back in the chair after a shocking day for the Commonwealth Bank. |
| You can read some of the revelations from yesterday’s hearings, from Gareth Hutchens, here. | You can read some of the revelations from yesterday’s hearings, from Gareth Hutchens, here. |
| But now it’s Westpac’s turn in the chair and Hartzer, who began his testimony yesterday, is back, being pressed on the bank’s advice services. | But now it’s Westpac’s turn in the chair and Hartzer, who began his testimony yesterday, is back, being pressed on the bank’s advice services. |
| Gareth Hutchens and I will be watching and blogging the day’s events, live, so make sure you check back. | Gareth Hutchens and I will be watching and blogging the day’s events, live, so make sure you check back. |
| The senior counsel assisting, Michael Hodge QC, is back on the case, so let’s get into it. | The senior counsel assisting, Michael Hodge QC, is back on the case, so let’s get into it. |