Enabling customers to make informed decisions should be the aim of all FoFA legislation and to do that, laws must help advisors and clients overcome inherent behavioural biases, says QUT behavioural economist Professor Uwe Dulleck from QUT Business School.
This follows the Senate's rejection of the Federal Government's proposed changes to the financial planning industry this week.
Professor Dulleck has studied the incentives influencing experts, such as financial advisors, doctors or mechanics, when charging for services supplied to non-experts who rely entirely on them to provide the best service for them at the appropriate price.
"It's simply a question most of us ask regularly - 'who should I choose to fix my car properly or invest my life savings profitably, without ripping me off'," Professor Dulleck said.
"My behavioural research found that under experimental condition one third of participants were consistently driven by their own private benefit so they always chose the option that gave them the highest profit.
"But another third of the participants responded in such a way that they would do the best for their client, with the remaining third behaving inconsistently in that they based their judgements on how to behave on the client's perceived wealth relative to theirs.
"However, it is likely that even the most experienced financial advisers are subject to their own biases on issues, such as risk aversion, in their decisions and the advice they provide to a client, even if they have only the best interests of a client at heart."
Professor Dulleck said the previous Labor Government's FoFA regulations were reducing advisors' incentives to sell certain products to a client.
"This was in the hope that once the conflict of interest was reduced, advisors would recommend what is best for the customer.
"But if financial advisors are not paid by commission then they have to be paid by a fee for service component.
"This may be either a direct cost to the client, or it may come with higher account or other banking fees.
"These direct financial costs may keep people from engaging with financial advisors and lead to overall worse economic decision-making in the long run for the consumer."
Professor Dulleck said a way to have good FoFA rules without dropping commissions would be to regulate to ensure financial advisors had to inform their clients about the benefits or commission the advisor gets from selling a certain product to a client.
"While the difference in knowledge between client and advisor would still make it difficult for customers to make a fully informed decision, it would enable them to enquire that little bit more if they are aware that a recommended product comes with a big benefit for the advisor," he said.
"However, if we believe in the innovativeness of our banking and financial advice system, we should expect that providers will find ways to make their service attractive to clients.
"The cost of a reform is mainly the cost that it takes firms, i.e. banks, financial advisors andto adapt to a change in regulation. As long as the rules are simple, the market will adapt."
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