Financial planning once more stands at a critical juncture and the route it chooses will be crucial, writes Simon Hoyle.
There was no messing around when Jo-Anne Bloch took the stage to address the Financial Planning Association (FPA) national conference last November.
No “Good morning”.
No “Nice to see you”.
No “Welcome to Sydney”.
Just straight into it with a blunt statement: “Last Saturday marked the start of a new era for Australia.”
“Last Saturday” was the date of the federal election, when a Rudd Labor Government was returned to office. The FPA’s chief executive says the date also marks the dawn of a new era for financial planning.
‘I think planners need a commitment to extend their reach’
“A Labor Government will herald some changes,” Bloch says.
“Financial planning did well under the previous Coalition Government, in terms of financial services regulation and in terms of trying to reduce some of the unfortunate consequences that had occurred.
“But I think that 12 years with one government, and now having a change, will bring changes to us, as well. But it’s all very positive – I think we have a good working relationship with the [new] ministers. They’re all very supportive of advice.”
Bloch says “superannuation will receive an even greater focus, and we expect some of the issues around fees and conflicts of interest to receive a greater focus, as well”.
Financial planning is already the subject of intense regulatory scrutiny. Most recently, a retail investor group was set up by the Australian Securities and Investments Commission (ASIC) to look at and address the risks that individuals face when dealing with the planning industry.
And there’s the ever-present agitation by consumer groups and the media for better disclosure, more transparent remuneration and better access to compensation for investors.
So financial planning stands at what might be a critical juncture in its development – again. The path it chooses to follow will be absolutely critical to its long-term standing and its desire to be taken seriously as a profession.
It can strike out down the road of making tough decisions, setting higher standards and enforcing greater member accountability. Or it can head off down the route of self-interest, inviting more legislation, more regulation and greater government intervention.
And if it chooses the wrong way to go, there’s a danger the vast majority of the Australian public will choose a path of its own – right past the planning industry’s door.
Simply choosing the right road may not be enough, however, for the FPA to carry the industry to where it wants to be. It also has to resist recalcitrant sections of its own membership from leading it down a dead-end.
In the immediate response to Bloch’s address in November there was worrying evidence that not everyone is on board for the journey. Some in the audience disliked what Bloch had to say. A number of planners made their views clear to Professional Planner during subsequent coffee and cocktail sessions at the conference. Others have expressed an opinion in the weeks since the conference.
The FPA has already done a lot of work in defining what constitutes professionalism, and what a member must do to lay claim to being a professional. The unspoken subtext to this work is that members who do not shape up can ship out.
The FPA’s definition of professionalism has three main components: membership, conduct and accountability.
The membership component covers entry standards, and encompasses minimum educational and ongoing practical experience requirements. The conduct component encompasses compliance, conduct, continuing professional development and supervision. And the accountability component covers how investor complaints are handled and how planners are disciplined.
To improve accountability, the FPA established during 2007 the Conduct Review Commission (CRC), designed to investigate potential breaches of the FPA’s rules and codes of conduct, and to take action against FPA members when appropriate.
The CRC is chaired by Professor Dimity Kingsford-Smith, of the University of NSW Faculty of Law. Kingsford-Smith’s standing in the academic and legal communities lends substantial credibility to the CRC, which will play a critical role in making sure that breaching the FPA rules carries consequences.
So on the one hand, barriers to entering the profession are rising, via more onerous membership requirements, while on the other hand the chances are greater that bad behaviour will be sanctioned – the ultimate action available to the FPA being expulsion from the association.
For these steps to have any impact, however, being a member of the FPA must actually mean something. The FPA is the body in Australia empowered to bestow the Certified Financial Planner (CFP) designation – and there’s a push to help the general public understand that when looking for advice it’s best to look for a CFP.
From a broad, top-down perspective, it appears that the key elements are in place for greater professionalism to become a reality: It’s tougher to get into the FPA than it was, it’s harder to stay in it once you’re there, and it’s easier to be thrown out. And not being a member of the FPA carries significant potential commercial disadvantages.
This professionalism framework is all well and good, and has worthy objectives. But for most Australians it remains largely academic. A recent survey by BankWest found that 72 per cent of adult Australians have no financial plan. The FPA itself puts the figure at 80 per cent.
“I do think that financial planners [need] a commitment to extend their reach,” Bloch says.
“That’s not to say our current batch of members need to go out and change their client base. But four out of five Australians do not get advice, and we cannot continue to focus only on those that do.”
And this is where the FPA is charting a potentially tricky course. To attract greater numbers of clients, financial planners must be perceived by the public to be ethical and professional.
For the association’s claims to professionalism to be credible, and to be accepted by government, regulators and the public, all of its members must support the direction it’s taking.
In other words, the top-down promise must be matched by the bottom-up reality – and if the reaction of sections of the industry to Bloch’s November address are anything to go by, 100 per cent support does not yet exist.
There are two ways this can be addressed. Those who oppose or who would white-ant the FPA’s chosen direction can be made to toe the line. Or they can simply be jettisoned. On the face of it, it’s the latter approach that may be the quicker and more effective solution.
Bloch says it’s vital that the FPA establish its credentials as far more than a mere membership association. It must be viewed as a professional association – and there is a very big difference between those two things.
She acknowledges that an issue still hurting the industry, and which remains an obstacle on the road to widespread acceptance as a profession, is remuneration.
However, she says how advisers are paid is “a secondary issue”.
“If you are meeting with our other requirements, which are to do with rules and ethics, then disclosure of your remuneration and the manner in which you undertake to be paid, should be transparent and so forth,” she says.
But while Bloch says there’s nothing wrong with receiving commissions, that is not everyone’s view. The Institute of Chartered Accountants in Australia (ICAA) believes the only proper way for a financial planner to be paid – if they want be seen as professionals – is by time-based fees.
In a document published last year, Reinventing Financial Planning, the institute says there is “a fundamental structural problem in the financial services industry, namely, the dominant remuneration models that rely upon the sale of products (or the existence of assets on which to charge a fee)”.
“These must cease, and until that occurs, financial planning will not be treated as a profession (due to irreconcilable conflicts of interest) and the public interest will not be served,” it says.
The paper says the “offending models”, which are generally based on a percentage of clients’ funds under advice (FUA), must be replaced by fully-disclosed, advice-based fee models.
“These fees must be calculated with reference to time and/or by reference to a published scale of fees that is not based on a percentage or on the existence of assets,” it says.
The ICAA also disputes the idea that commission is the best remuneration structure for “ordinary Australians” who might not otherwise be able to afford advice.
“The real issue is not the affordability of the advice, but the low value placed on that advice due to the industry’s fundamental structural problem,” it says.
The ICAA paper has been used as a stick with which to beat financial planners. After all, accountants – along with lawyers and doctors – are readily and popularly acknowledged as being true professionals.
Originally, the institute’s views were aired in March last year. The institute had a second bite at the cherry in November, when it staged a forum with “experts and stakeholders, to discuss the key findings”.
In many respects, what’s playing out at the moment is a battle for the hearts and minds of retail investors – or, at least, the 80 per cent who do not already use the services of a planner. If the FPA can’t capture the moral high ground on issues like remuneration and professionalism, then other groups are poised to step in. The encroachment of the ICAA into this area is early evidence of this.
But Bloch says the institute is misguided.
“Frankly, I think they’re in the business of increasing membership,” she says.
“I think that underpins what they are doing. I think that some of their own members would have an issue with hourly rates as the only fee model.
“I also think it’s quite limiting [to say that] the only way you can engage us is through an hourly rate.
“There are also some differences between accounting and financial planning.
“When you’re in a financial planning relationship you are talking abut money and investment services and so forth in a much longer-term sense. You’re trying to establish a long-term relationship with a client.
“I’m trying to say that there’s much more of a review and an ongoing, more regular relationship with a financial planner. So I am not sure you can take the accountants’ model and whack it into a financial planning context and say, there you are – see how that goes.”
Even so, Bloch says there needs to be more work done on how financial planners’ remuneration is structured and disclosed. She says the key issue is separating what a client pays for a product from what they pay for advice.
“If [a planner’s] remuneration is buried in a commission or a pre-[fees] return or something like that, it’s very hard for the client to see the value of advice,” she says.
She says “no one is breaking any rules or any regulations at the moment” if they’re remunerated solely by commission. However, “it’s difficult to work out which is the advice bit and which is the product bit”.
Bloch argues that the FPA’s current rules on handling conflicts of interest are sufficient to deal with the main commission issues.
“One of our conflict of interest principles is that the fee must be negotiated between the adviser and the client,” Bloch says.
“The product provider may facilitate the payment for you – that’s fine.”
It’s also critical that the client control the payment of the fee to the adviser, so if they no longer perceive value in the service, or if an adviser simply stops servicing them, they can easily take their business elsewhere.
“If you are no longer getting a service, we question whether you should be paying for it,” Bloch says.
She agrees that “this is one issue that has done us no favours, if I can put it like that”, but stresses that a definition of professionalism has to encompass more than just how someone earns a quid.
While moves towards professionalism will inevitably take time, as new standards begin to bite, there are more immediate issues the industry must face.
Bloch said at the conference in November that the FPA had identified “three very significant issues that each and every one of us involved in financial planning will need to respond to as we work through the next few months”.
• The opportunity to cut red tape and disclosure documentation,
• The need for low-cost advice and access to advice for all Australians, and
• Remuneration, specifically commissions, and conflicts of interest.
Bloch unveiled a new, vastly simplified statement of advice (SOA) – a document that routinely runs to 50 or 60 pages, or more, at the moment. The document presented by Bloch contained a mere eight pages.
Whether an SOA of just eight pages can work in practice remains to be seen, but even if the document were to double in size under real-life conditions, it would still be a monumental achievement.
And Bloch was confident the revamped SOA would find favour with the new government because it clearly fitted the requirement of being clear, concise and effective.
Bloch said the cost of providing advice has to drop. But delivering good advice costs money, so how can the industry make it affordable?
Bloch suggested five solutions:
1. Establish a new category of advice, called “single-issue” or “basic” advice.
2. Tailor disclosure requirements and regulation to match the simpler advice – here,
there’s a role for the simplified SOA.
3. Train more people to provide simple advice, and establish a mechanism for them to move up the ladder over time, to eventually become CFPs.
4. Explore remuneration alternatives – for example, make the cost of having a financial plan drawn up tax-deductible, or allow people to pay for advice from their superannuation accounts.
5. Explore alternative delivery mechanisms for simple advice, such as the telephone or online.
As things stand, planners are not effectively tapping a significant segment of the market.
“It’s this market that is rejecting commissions and is flocking to industry funds, to government funds and to employer funds, who offer general advice, salaried advice, fee-based advice, or no advice at all,” Bloch said.
So, inevitably, remuneration is an issue that – like it or not – planners will be hearing a lot more about over coming months, she said.
“We are constantly being accused of product flogging, of conflicted advice, of not being professionals, because we earn commissions,” Bloch said.
“How do we move beyond the state of play we find ourselves in? Many of you would be saying that this is nothing new, and that we have been talking about commissions for 20 years now.
“Are we making any progress? Are we increasing the number of people seeking advice? The number of people giving advice?”
Bloch says the issue is not solely about how planners are remunerated. Rather, it’s about making planning services available to as many people as possible, and giving consumers the choice of how planners are paid.
“Let me make it perfectly clear right upfront: I am not about to recommend that we ban commissions. Commission-based financial planners have done nothing wrong, nor are commission-based financial planners giving poor advice.
“This is not about whether good advice follows fee-based advice, and bad advice follows commissions. This is not about interfering with choice. There is a place for commission-based advice.
“This discussion is about how we should position ourselves to attract the 80 per cent of consumers who do not seek advice; it is about positioning ourselves to lead the debate, and it is very much about ensuring that professionalism is not always judged in the context of remuneration, and commission.”
Jennifer O’Donnell, executive director of compliance with ASIC, says the question of what constitutes a profession is a broad one.
She says that for financial planning it means, among other things, operating with the clients’ interests at heart and being committed to high standards of professional qualifications, training and ethics.
In that respect, ASIC views it as positive that the FPA has moved to raise membership requirements, set tougher ongoing professional development and training hurdles and established greater accountability for its members.
However, O’Donnell says ASIC’s job is to enforce the law, which it will continue to do. She says any work the FPA does to raise standards must improve the behaviour and ethics of its practitioners well above the minimum levels of behaviour and ethics prescribed in legislation.
“I would hope [legislative reform] has had a positive impact,” O’Donnell says.
“I think that a number of things have had a positive impact, and there’s no doubt that financial planning has improved, in terms of the services it’s giving to clients, and its compliance with the law.”
But O’Donnell says there are still a few areas where ASIC would like to see more improvement – including better disclosure of remuneration, and access to compensation for investors harmed by shoddy or misleading advice.
ASIC’s retail investor group, led by the commission’s deputy chair Jeremy Cooper, is in the process of examining financial planning and pinpointing the key risks for retail investors, with the aim of addressing them.
ASIC chair, Tony D’Aloisio, told the FPA conference that the commission would “respond with specific projects to help address these risks”.
D’Aloisio said some of the issues the task force would look at included:
• Quality advice and investor education on such things as the importance of diversifying risk through asset allocation and understanding risk and reward premiums for particular asset classes.
• Better disclosure — making it simpler, and better targeted.
• Advertising of complex products targeted at retail investors.
• Early detection and elimination of illegal operators.
“We expect that initiatives such as these will over time translate into a more investment-wise retail sector, with better access to quality advice and better equipped to manage investments and protect wealth,” he said.
“The taskforce will work through a number of issues – those which I outlined – that still need analysis and discussion and resolution.”
D’Aloisio said any proposed solutions will be based on a sound understanding of how the industry works, and put forward “without preconceived ideas of which models of advice are better than others”.
“Ultimately consumer and retail investors should vote with their feet on what models they will favour,” D’Aloisio said.
“ASIC’s role, within the current legislative settings, is to analyse these models and provide information to the market to ensure retail investors can make choices.
“ASIC will be active in pushing disclosure to its limits…so that investors can vote with their feet. While it is not ASIC’s role to try and pick winners, ASIC will be active in this sector and the advice provided.”