Call me a dreamer, but my vision is for a financial advice industry quite different to the one we have now… In the future, financial planners will be regarded by the community as true professionals.
Like doctors and lawyers, these financial planners of the future will adhere to a simple and rigorously enforced best interests obligation with no conditions or qualifiers, underpinned by legislation. They will only receive payment from their clients, and would spurn the receipt of any financial incentive from a product provider, be it commission, indefinite ongoing fee, product facilitation fee, volume rebate, or soft dollar reward benefit.
This principled refusal to accept any such payment is because of the potential for bias or perception of bias so damaging to his or her reputation.
The profession will have higher entry and ongoing educational requirements, there will be limitations on the use of the term “financial planner” to those who abide by additional professional conduct and ethical standards. Professional financial planners will only recommend products on the basis of merit and so act as key gatekeepers which drive competition and efficiency in financial services and importantly, ensure maximum return for our heavy public subsidy of the compulsory superannuation system in offsetting age pension outlays for future generations.
There will be, of course, financial planners who fail to live up to their professional expectations, however such instances are less common, and seldom involve large institutional players or entire businesses. While the regulator plays a role in ongoing risk based supervision, they will be far less critical to maintaining high levels of professional conduct
When will this halcyon financial future be achieved? The FoFA reforms passed in 2012 had set the industry towards that future, despite the heavy compromises made to pass the last hung Parliament. Uncontested research by actuarial firm Rice Warner showed that the FoFA reforms will almost halve the cost of advice, double its provision, and increase savings under advice by $144 billion within 15 years.
However, with the ink hardly dry, these positive changes are in jeopardy as the banks, which control around 80% of all planners, have lobbied the new Government to scuttle key aspects of the reforms.
Draft proposals, likely to be introduced into the Federal Parliament next week in the guise of “red tape reduction”, will seriously set back progress.
To provide certainty to industry that they can continue using financial advice to sell their product, the best interests duty will be amended so that a client and adviser can agree on the scope of advice, even if a reasonable adviser would know that that advice is clearly not in the client’s interests. Although illegal in the past, narrowing advice in this way was used by one large institution to sell expensive superannuation products without any comparison to clients’ pre-existing, better value, super products.
In addition, the amendments will mean that a planner can satisfy the legislative duty by ticking off a checklist of 6 steps, handily none of which mention the client’s best interests or require any exercise of professional judgment. The banks and other product manufacturers will also regain their capacity to reward financial planners and other staff based on how much product they sell. Worryingly, many of these proposed concessions to the prohibition on conflicted remuneration will allow incentives to be paid to financial planners in relation to superannuation products (including MySuper) and complex and leveraged products.
Once again, products will be recommended based on receipt of commissions, hiding but significantly increasing the cost of advice, paid for out of the client’s investments. Billions will be eroded from compulsory super due to the charging of fees which exceed the advice services provided, and the massive opportunity cost caused by the recommending of underperforming products. And consumer scepticism about the impartiality of financial planners will negatively impact on demand for advice.
While the FoFA laws as they stand won’t prevent every further instance of mis-selling and financial collapse, the return of commissions and effective repeal of the best interests duty will inevitably increase the likelihood and severity of future collapses. Past experience shows us that regulatory frameworks built on the basis of disclosure and a low conduct requirement of ‘appropriate’ advice just don’t work.
Product providers have thus far avoided being held fully accountable for past collapses, with financial planners and ASIC copping most blame for past wrongs. However, those advocating the current reforms should understand that they will be unlikely to be so lucky in the future, given the detailed scrutiny and interest shown by the media in the dull labyrinth of financial advice regulation over last couple of months.
If the existing proposals become law, it will certainly a be major hiccup in the path to professionalism for financial planners and undoubtedly come at a heavy cost for consumers. Financial planners may eventually opt for structural separation, rather than the uneasy accommodation of product provider control of financial advice. I suppose it is just a question of how many more swings of the regulatory pendulum we need to endure before we arrive at a mature, professional framework for financial advice.
An edited version of this piece was published in The Australian on the 18th of March 2014.