The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry delivered its final report in February 2019, capping off a process that revealed the unethical and, in some cases, illegal practices of some of Australia’s largest banks, insurance and other financial services companies.

Many of the Royal Commission’s recommendations are aimed squarely at financial services companies, and they should lead to changes in corporate attitudes and practices that will deliver indirect, and hopefully positive changes to many consumers. The Royal Commission also made a number of recommendations that will have a more direct impact on investors. Unfortunately, these may not always be for the better.

Even though the Royal Commission unearthed a wide range of bad behaviours, it’s important to acknowledge the large number of financial advisers who have always adhered to high ethical standards while delivering great outcomes to their clients. Clients of these advisers may see little change in the relationship with their adviser and how their money is managed. So what changes are likely to affect consumers?

A ban on conflicted remuneration

Conflicted remuneration arises when an adviser has an incentive, such as a sales bonus, to recommend an investment product.

Conflicted remuneration was banned some time ago, but existing arrangements were ‘grandfathered’. These grandfathered arrangements will now cease.

An end to trailing commissions

Investment and superannuation products may pay the recommending adviser an ongoing annual or ‘trailing’ commission. The expectation is that the adviser will continue to provide ongoing review of the suitability of the product, and recommend changes when warranted.

Unfortunately, the Royal Commission revealed numerous cases where fees were charged and no advice given. This extended to fees being charged to dead peoples’ accounts. All investment and superannuation trailing commissions will cease from 2021. While this should lead to higher investment returns, many consumers will miss out on proactive follow up from advisers unless they ‘opt-in’ and agree to pay for advice. As the cost of such advice may be uneconomic for investors with smaller portfolios, the end of trailing commissions may deliver mixed outcomes. One prediction is that it may spark an increase in so called ‘robo advice’, where automated systems deliver lower cost, albeit more generic advice.

Increased educational requirements for advisers

New advisers must now hold a relevant, degree level qualification. Existing advisers without such qualifications will need to undertake further study.

While qualifications are important, they overlook the value of the real-world knowledge of experienced advisers. Many older advisers may retire rather than undertake additional study, which may lead to a shortage of advisers.

Incidental outcomes

Another indirect outcome of the Royal Commission is that many of the larger banks and insurance companies have decided to sell off their financial advice businesses. This also has the potential to reduce the number of active advisers, but may see a rise in the number of smaller, independent advisory firms.

The Royal Commission has delivered a major and necessary shake-up of the financial services industry. To find out what the direct, personal impacts may be for you, talk to your financial adviser.