Robert MC Brown should certainly be congratulated for his determined campaign over many years to inject some professionalism into the industry. His views on having an hourly rate-charging regime are fine in theory, but there are some structural aspects that must be taken into consideration.

Firstly, we do not have a perfect industry. The ideal environment of independent, educated advisers charging clients an hourly rate then selecting product/services/strategy from a pool of wholesale-priced commodities/products that do not have their own in-house distribution would be great for consumers and regulators. We do not, however, have that.

What we do have is a market dominated by institutionally owned advisers (85 per cent) selling their owners products and then internally cross-subsidising the practice with profits from the internal platform/product sales.

We then have an emerging market of accountants, establishing self-managed superannuation fund (SMSF) structures for clients, who are taking these administration fees away from the institutions and cross-subsidising their financial-advice practices in much the same way as the institutions do.

With all this cross-subsidising going on, it is then easy to start charging an hourly rate or flat fee to clients knowing that all the software, back office, product insurance cover and research is funded from other indirect revenue sources.

Some accountants have been criticised over the years for selling SMSF structures to get fees that may not be in the best interests of the clients. Conflicts do manifest themselves in many different ways.

Unfortunately the Future of Financial Advice (FoFA) reforms are trying to say that independent advisers cannot have a share of the administration profits to subsidise advice, but institutions and accountants can. Is that fair?

The flaws and façades of an hourly rate

I would like to see how profitable institutionally and accountancy-owned advice practices would be if they tried to survive on an hourly rate without cross-subsidisation.

It is a flawed argument trying to compare the accounting and law professions with a product-driven industry like financial services. Regardless of how you cut and dice our industry, in the majority of instances advisers/accountants are selling an administration service or investment product to clients and are accountable for their selections to the Financial Ombudsman Service (FOS), the Australian Securities and Investments Commission (ASIC) and the courts.

Accountants and lawyers have no choice but to charge an hourly rate as they only have their knowledge to sell. Many accountants tried to branch into commission-based product selling a few years ago by becoming agents of managed-investment schemes out of dissatisfaction with charging hourly rates to survive.

In theory, hourly rate charging is a sound strategy but in reality it is totally conflicted and clients (and those using it) hate it. As former chief justice of the New South Wales high court Jim Spigelman pointed out in his paper, the Tyranny of the Billable Hour, charging in this manner is an incentive to be inefficient and not entirely honest with what you charge.

The front page of the Australian Financial Review over the years has carried many stories of young graduate accountants and lawyers getting pressure from partners to ‘invent hours' to meet their budgets.

In short, the ‘noble professions' have maintained this façade of being ‘pursuant to the highest professional standards' for too long. However, hourly rate charging is simply conflicted and most hate it.

Portfolio percentages and political correctness

The other area where Robert MC Brown is off the mark in my view is on charging clients a percentage of their portfolio. This is very distinct from taking a percentage-product commission, which is conflicted and rightfully abolished under FoFA.

Charging clients directly, say 1%, of the portfolio's value aligns the interests of both client and adviser. If the adviser succeeds and increases the portfolio's valuation, they both benefit. If it goes backward they both lose. What can be fairer than that?

Clients actually like this structure, so the government had been wise staying out of this area. Unfortunately the Industry Funds and Choice have far too much to say about this, which is largely based on flawed ideology and hypocrisy.

Finally, the Australian Tax Office, Australian Prudential Regulatory Authority, all service utilities, superannuation funds, industry funds, banks, life companies, councils and state and federal government departments all charge percentages to consumers. So, why can't advisers do so - as long as it is not tied to selling a particular product?

The political correctness and frowning upon advisers who wish to make a profit and succeed in life has gone too far.

Peter Johnston is executive director of the Association of Independently Owned Financial Planners