Financial Services Reform (FSR) has resulted in a largely productive regulatory regime for everyone in our industry.
The relative strength of our market in Australia four years on, in spite of market turmoil and product and property-related collapses, demonstrates this. Financial planners are trained to be acutely sensitive to economic cycles, and people with an ongoing relationship with financial planners are more than twice as likely to hold shares or be invested in managed funds than the general population.
Evidence shows that planners are also the single greatest market strength in calming and educating clients, ensuring longer-term strategies are still viable, and that rash decisions are not made. Even so, the spotlight will focus on both advice and product, as planners, clients and product providers come under increasing scrutiny.
The real and necessary debate about “professionalism” will also no doubt be clouded by a misinformed focus on commissions, conflicts and the usual competitive product hype. FSR is largely to blame for “professionalism” in our industry being couched in the shadows of Corporations Law that defines the “financial product adviser”, rather than defining the true intent and nature of a profession, and the duties and responsibilities professionals bind themselves to. FSR, whilst laudable, has made the business of pure advice (and not product-related advice) more than a little confusing.
This may well play out over coming months as products falter, and we come to terms with reduced superannuation portfolios and limited choice in better-performing asset classes. The Australian Securities and Investments Commission (ASIC) regulates Australian Financial Services Licensees (AFSLs), who in turn manage their authorised representatives to ensure they meet with legislative requirements.
A few worrying gaps have emerged: regulation of pure financial advice, unrelated to product; gaps in FSR’s product framework that allow problems to arise (for example, margin loans, mezzanine finance arrangements and other credit linked products); regulation of the use of the terms “authorised representative” and “financial planner” and the very easy minimum entry standards that exist to enable their use; and a potential disconnect between the obligations of an authorised representative to their AFSL (their employer) and to their client – the major beneficiary of advice and service.
Corporations Law focuses on the roles and responsibilities of the AFSL, yet the courts and compensation environments have shown they will hold the obligations of a financial planner to a much higher and individual fiduciary standard.
Professional associations play the sometimes uneasy role of co-regulating standards incumbent upon individual professionals, including obligations to clients.
For example, members of professional associations may be asked to comply with standards higher than the law.
A genuine profession has a code of ethics and rules of professional conduct – and also polices them. It articulates and educates on good practices that ensure appropriate behaviour above and beyond the law, and engages in real policy debate to promote that difference with government and other stakeholders.
But membership of professional associations is voluntary. Associations have limited funds to ensure 100 per cent member compliance. Disciplinary actions are expensive. Promoting an association to potential members and the community can be costly.
If someone can become a financial planner after a three-hour exam, where’s the incentive to meet ongoing requirements by undertaking more education, gaining experience, or completing mandatory studies in ethics?
To advance “professionalism” we offer the following solutions to enshrine advice as a service in itself, unencumbered by product:
1. Define the term “financial planner” in law with criteria relating to minimum levels of education, experience and professional membership.
2. Ensure all who want to call themselves a “financial planner” or “authorised representative” must join a professional association.
3. Establish guidelines as to what a professional association must do to call itself that, compared to the many poor imitators in the marketplace.
4. Establish a standard for “clientadviser” obligations that does not conflict with Corporations Law and AFSL obligations, but does bind adviser to client.
Professional advice is the single most powerful way for Australians to improve their financial circumstances.
The industry must ensure that professional financial planners have well-defined boundaries, and are held accountable to standards of which we can all be proud.