When it comes to ethical and professional behaviour, it’s walking the walk that matters, rather than just talking the talk. Robert MC Brown explains.
Readers of this column will know that I write a lot (far too much for some, I suspect) about ethics in financial planning. I do this because I believe that as an industry our adoption of genuinely professional ethical standards is our last and (for some industry participants) our most challenging hurdle. Some planners will never be able to make the leap of faith and logic to become true professionals, so emotionally and commercially wedded are they to the “old ways” of doing business that we all grew up with in the 1980s. This shrinking, yet influential group of planners (many of whom are of an age and stage similar to this columnist) still view the industry through the prism of a “value chain” in which ultimately they are distributors of products on behalf of manufacturers, platforms and dealer groups. Unfortunately, the failure of much of this senior group to grasp the reality of what it really means to be professional and to voluntarily reform their thinking and their practices is holding back the industry’s progress and its ultimate acceptance as a true profession by a sceptical public. At the same time, certain industry associations are trying hard to convince the Australian community that their members deserve to be treated as professionals.
Recently, we’ve seen the Financial Planning Association’s advertising campaign exhorting the public to use the services of financial planners who adopt the “highest professional standards” – namely FPA members (and CFPs in particular). Spending money on advertising is always controversial amongst association members who will have varying shades of opinion on the value of such outlays. I know this from my days on the board of the Institute of Chartered Accountants. Nevertheless, the FPA board has made a judgment about the use of members’ funds because that’s what they’re elected to do. So whatever members think about the merits of the campaign, it’s clearly designed to raise the public’s awareness of the value of FPA members who operate pursuant to the “highest professional standards”. That is an objective which is worthy of support. However, the practical problem is that many members of the FPA (and many other financial planners who aren’t members of the FPA) do not operate pursuant to the “highest professional standards”, in the sense that they charge percentage-based asset fees (and receive trails) on investments and accept commissions on the sale of life insurance products.
That will substantially continue post-Future of Financial Advice. In saying this, I’m not suggesting that financial planners are dishonest or dishonourable people, any more than I’m saying that accountants, lawyers and doctors with whom the FPA likes to compare its members are dishonest and dishonourable. The fact is that most individual members of the financial planning community are fine, well-intentioned people doing a particularly difficult job in extremely testing circumstances. Rather, I’m reflecting on the industry’s structure which is fundamentally flawed and on an ethical framework which claims to be professional, but isn’t, and can never be while it allows its participants the option of choosing conflicted or un-conflicted remuneration models. The justification for this (or should that be the political rationalisation?) is that the choice of remuneration models is nothing to do with professional associations and is simply a matter for negotiation between consenting adults in private. That is plain wrong. In fact, remuneration models are central to the operation of any true professional association. Of course, supporters of the status quo will argue that asset fees and commissions are not conflicted forms of remuneration and are consistent with the “highest professional standards”. I recognise that such a view exists, but at this stage in the debate the voices expressing it are few and far between.
Most supporters of the continuing use of asset fees and commissions recognise the conflicts of interest inherent in these forms of remuneration, but claim that the conflicts can be dealt with by a combination of disclosure, the “best interests test” (as proposed by FoFA) and other means of compliance. I disagree with this analysis. An adviser will never be trusted while acting under the influence of a conflict of interest, especially a remuneration conflict of interest. I have pointed this out before in this very column offering examples of doctors charging a “fee for service” based on a percentage of drugs prescribed and auditors rendering accounts for professional services based on a percentage of their valuation of client companies’ assets. The public would never accept such conflicted fee arrangements for these professions, and yet that is exactly the basis of remuneration some people are suggesting is appropriate for the financial planning industry. I’m sorry, but this will not wash. Until our leaders accept that point publicly and act to change the industry’s structure and predominant ethical framework, all the money in the world spent on advertising campaigns, improving the educational levels of financial planners and prosecuting “bad apples” will not substantially change the poor public perception of the industry.
The permanent solution is so near and yet so far. Looking at the issue internationally, soon after the worst of the global financial crisis in 2008, Lord Turner (Chairman of the UK’s Financial Services Authority) offered this opinion while reflecting on the theme of the financial services industry’s fundamental structural flaws: “What has gone wrong with the world’s financial system are not just a few minor things. The system can’t be tidied up by a little more disclosure or a little more transparency. At an international level we need to work out what went wrong and what are the integrated set of actions to make sure this doesn’t happen in the future.” In its own flawed but well-intentioned way, our own FoFA legislation attempts to provide such an integrated set of actions for the discipline of financial planning in Australia (in the absence of comprehensive self-regulated actions by the industry).