Money is a strange beast. It has held no intrinsic value since the abandonment of the gold standard and is now worth only what it can get for us. A majority of people are unaware of the history of money – let alone understand how it works in an environment where the “rules of the game” are frequently changed. Advice can be of value under such circumstances.
We accept on faith alone that money can be exchanged for goods and services; the rule of law provides significant support to this leap of faith. For the majority, material and spiritual happiness requires the use of money. Finding ways to achieve financial security is the real reason that financial planning exists.
Of course, it has also been used to great effect in the distribution of expensive, and often useless, financial products to consumers. Too much of what continues to go on in the name of financial planning is indefensible and needs to be eliminated.
Much of it, at first glance, also appears to be illegal.
Quality financial planning advice exists, how ever, and can be purchased; in some cases it is also provided pro bono. Such advice requires invest ment management skills (how to make money produce more money) combined with a thorough understanding of a client’s individual circumstances (and I do not refer here merely to “risk tolerance”). It is necessary for the planner to “know the client” in order to provide quality advice. Fortunately, the law requires advice to have a “reasonable basis”, and this requires the adviser to understand the client’s relevant personal circumstances.
Quality advice will be based on a sound, clear/identifiable set of principles (assumptions about the world) and of ethics (what ought to be done). Quality advice will also cost money (an identifiable and reasonable amount).
The “value” of advice is therefore intrinsic to the individual circumstances in which it is provided. This is not an intellectual cop-out, as the concept of fiduciary duty requires the value of the advice to be at least equivalent to its cost. It does, however, still leave room for disagreement and dispute resolution.
The law does not specifically require a fiduciary relationship.
There is enough quality financial planning in existence today to justify a higher level of press cov erage. That is the reason for the Financial Planning Association’s Value of Advice Campaign and our reason for supporting it.
The sort of advice that has real value is advice that answers real questions. It looks and feels more like education than product sales. The client is then placed in a position to make an informed decision.
Many discerning consumers want to purchase advice that is free from conflicts of interest (an important part of a fiduciary relationship) and they will look for evidence of independence.
While the popular interpretation of “inde pendent” may differ widely, the law is quite clear on the use of the terms “independent”, “impartial” or “unbiased”. Section 923A of the Corporations Act specifically excludes advisers who represent large institutions from using these terms. It also specifically excludes any adviser who receives (or whose employer or licensee receives) remuneration or other incentive that is based on the volume of business placed with an issuer of financial products (naturally this includes trail commission). This would tend to exclude a much larger proportion of advisers than the anecdotal evidence suggests is the case.
To allow the public to think of such a person as independent is misrepresentation.
Where there is a clear breach, both the FPA and the Australian Securities and Investments Commission should do more to correct the situa tion than has historically been done. The current public perception of financial planning is partly due to inaction by the regulator and the industry.
Part of the role of magazines such as Profession al Planner is to make the industry less supportive of undesirable practices.
A convincing argument can be mounted that as the client gets older, the long term gets shorter. Nonetheless, valuable advice is usually part of a relationship that extends for a long time and may often be intergenerational.
For advice to be this valuable, it also needs to adapt to changing times. With the categorical repudiation of modern portfolio theory early this century, strategies that worked well for the last 20 years may need to be seriously reconsidered. The likely onset of a secular bear market in equities and the impact of government policy (to avoid or minimise the recession) on inflation expectations cannot be understated.
We have talked for some time at Waterfall Way Associates about the “L”-shaped recovery and the prospect of a long (but hopefully shallow) reces sionary period as the previous debt excesses are worked out of the system.
The global financial crisis does not, however, spell the end of capitalism. With any luck it will spell the end for a style of “free market” that is not remotely in keeping with the original vision of Adam Smith. Remember that he was a moral philosopher more than he was an economist.
Provided the rule of law remains, innovation will continue to be rewarded. Well-run companies will continue to make profits and pay dividends and successive governments will eventually find a new balance between “free markets” and government intervention.
Throughout this time considered, personalised advice can continue to be of value. It should be encouraged and rewarded.
Dacian Moses is a certified financial planner (CFP) and authorised representative of Waterfall Way Associates in Coffs Harbour. www.waterfallfp.com.au
Moses is a winner of the FPA’s 2008 Value of Advice Awards
