The FPA’s consultation paper on financial planner remuneration is a great leap forward, but Robert MC Brown says more consideration needs to be given to what it means to be a true profession.
“The lady doth protest too much, methinks”
(William Shakespeare, Hamlet, Act 3, Scene 2)
The words “professional”, “professional ism” and “profession” appear no less than twenty-one times in the brief foreword to the Financial Planning Association’s consultation paper titled, Financial Planner Remuneration (April 2009). I think we get the message!
The FPA would have us believe that it is a professional body, representing people called financial planners whose level of professionalism is such that, as a group, they deserve to be called a profession.
What are we to make of that claim to professional status in light of the proposals in the consultation paper? The principal proposal up for discussion is that commissions should be phased out and replaced by “direct charging” models (ranging from hourly rates to service-based flat fees to asset-based percentage fees for service).
At the outset, it must be said that this proposal is a “great leap forward” for which the Association must be congratulated. The reasons behind the decision are not all that clear, although one could be forgiven for concluding that it has been driven more by the FPA’s desire to regain control of the reform agenda, rather than a fundamental change in thinking about the efficacy of various remuneration models.
In order to assess just how far the proposal about commissions will go in supporting the industry’s claim to be a “profession”, it seems reasonable to define that term (a task that I undertook in considerable detail in the paper titled Reinventing Financial Planning that I wrote in 2007 for the Institute of Chartered Accountants in Australia).
According to psychologist Suzanne Ross of St James Ethics Centre:
“The concept of a profession relates to the contract that professionals make with society. They agree to conscientiously serve the public interest, even when the public interest conflicts with self-interest. Based on this agreement, society in return allows the profession certain privileges.
The idea of self-regulation that most professions enjoy is one of those privileges. The core of this privilege involves accountability to, and sanctioning by, one’s professional peers, a professional web that has agreed to serve the common good.” (Money in Practice, June 2000.)
The idea that a true professional serves the public interest is a recurring theme in the literature on this subject. The American legal scholar and educator, Roscoe Pound (1870-1964), put it this way:
“The term refers to a group pursuing a learned art as a common calling in the spirit of public service – no less a public service because it may incidentally be a means to livelihood. Pursuit of the learned art in the spirit of public service is the primary purpose.” (The Lawyer from Antiquity to Modern Times, West Publishing, 1953.)
Developing this theme, the Australian Council of Professions issued a discussion paper in 1993 seeking to distinguish a profession from “more commercially-minded associations”.
The Council asserted that a “professional” (as distinct from other occupations) “must at all times place the responsibility for the welfare, health and safety of the community before their responsibility to the profession, to sectional or private interests, or to other members of the profession”.
Commenting on Roscoe Pound’s definition above, Simon Longstaff, of St James Ethics Centre, wrote:
“The point should be made that to act ‘in the spirit of public service’ at least implies that one will seek to promote or preserve the public interest.
A person who claimed to move in a spirit of public service while harming the public interest could be open to the charge of insincerity or of failing to comprehend what his or her professional commitments really amounted to in practice…if the idea of a profession is to have any significance, then it must hinge on this notion that professionals make a bargain with society in which they promise conscientiously to serve the public interest – even if to do so may, at times, be at their own expense. In return society allocates certain privileges.
These might include one or more of the following:
- the right to engage in self-regulation;
- the exclusive right to perform particular functions; and
- special status.”
(Public Sector Ethics, QUT, and later published in Fisher’s The Law of Commercial and Professional Relationships, FT Law and Tax, 1996.)
The “public interest” theme was developed by Michael Davis and Frederick Elliston when commenting on the idea of a professional’s obligation to seek the social good:
“One of the tasks of the professional is to seek the social good. It follows from this that one cannot be a professional unless one has some sense of what the social good is. Accordingly, one’s very status as a professional requires that one possess this moral truth.
But it requires more, for each profession seeks the social good in a different form, according to its particular expertise: doctors seek it in the form of health; engineers in the form of safe and efficient buildings; and lawyers seek it in the form of justice. Each profession must seek its own form of social good. Without such knowledge professionals cannot perform their social roles.” (Ethics and the Legal Profession, Prometheus Books, 1986.)
Commenting on Davis and Elliston, Longstaff concludes:
“As noted above, an old idea is at work here. It suggests that professionals might need to develop a particular appreciation and understanding of some defining end, such as justice. It is as much for this and the disinterested pursuit of these ends that the community looks to the professions for assistance.”
In light of this analysis, should the financial planning industry be accepted as a “profession”?
The industry would certainly claim that it has developed its own version of “social good”, in the form of advising its clients on building wealth and the achievement of financial independence. The trouble is that the behaviour of some industry participants and the structures within which they operate (including remuneration structures), send ambiguous signals to society about whether financial planners can be trusted to engage in a sincere commitment to the “disinterested pursuit” of that social good.
The existence of the FPA’s new Financial Planner Remuneration consultation paper could be held up as evidence that even the industry’s leadership might agree with that analysis (although it may not choose to use those words!).
Regrettably, it is an unavoidable conclusion that the financial planning industry’s fundamental structure (particularly its predominant percentage-based remuneration models) has created a transaction-based sales culture, rather than a culture based on independent professional advice. Having observed and experienced this culture of selling, society has decided that it is likely to improperly influence the process of financial planning advice.
As a result, society has not been willing (so far) to make a “contract” with the industry. So that instead of allowing the financial planning industry to self-regulate in the way that most other professions are able to do (to a greater or lesser extent), the financial planning industry is extensively (some say excessively) regulated, with little prospect of that external surveillance and control being significantly reduced in the near future.
That has always been the core of the industry’s problem, both real and perceived; and it appears to be the perception (if not the reality) of certain behaviour that has driven the FPA to go so far as to seek the phasing out of commissions.
It is not suggested that the financial planning industry is the only group with serious problems to address concerning conflicts of interest and independence. We are all familiar with allegations of suspect dealings between doctors and drug companies, and of unacceptable relationships between the auditors and management of public companies.
These problems should not be marginalised, as they go to the core of what it means to be a professional person. They raise serious issues of trust, credibility and the efficacy of the “contract” made between the relevant profession and society as a whole.
However, in the case of the financial services industry, of which financial planning is an important component, the offending structure has been the rule, not the exception. There is a great deal of rhetoric about the importance of independence, honesty, integrity and professionalism; but in the final analysis, due to the controlling influence of the industry’s predominant remuneration structures, the sale of a product (attracting commission) or the accumulation of funds under management (attracting an asset-based percentage fee) is what counts for most financial planners.
During the forthcoming consultation process on the FPA’s paper, many supporters of commissions will take exception to the proposition that their advice could be biased (or even appear to be biased), even though they must sell a product to make a living. It appears that they don’t accept that receipt of commission puts a financial planner in an impossible position of conflict, or even an appearance of conflict.
The reality is that commissions cause conflicts of interest at several levels. The first level is that a third party is paying the remuneration, not the client. The nature of this relationship is best described by the old proverb: “He who pays the piper calls the tune.”
The second level is that a product must be sold to receive remuneration in the first instance.
And the third level of conflict is that advisers may be tempted to recommend the product that pays the highest level of remuneration. As a result, commission must always be inconsistent with being a professional adviser; hence, the FPA’s proposal to phase out this form of remuneration.
As an alternative to commissions, an increasing number of financial planners rebate commissions to their clients, and charge an annual amount pursuant to a so-called asset-based fee-for-service scale that is based on a percentage of funds under management (FUM). This is preferable to a commission, although it still requires that a product be sold, or that a client holds assets on which to apply the percentage fee scale.
Here lies the consultation paper’s fatal flaw. It appears to countenance the possibility that asset-based percentage fee-for-service remuneration models will continue to exist. This must not happen. In the end, the only way to earn genuine and wide recognition as a true profession is to remove the layers of conflict inherent in all remuneration models that encourage the sale of products or the accumulation of FUM.
While the FPA is to be commended for moving in the right direction, if the Association’s leaders truly believe that leaving asset-based percentage fees in place is a reasonable thing to do, I’m afraid they are sadly mistaken. Regrettably, if the FPA chooses that path, the remuneration debate will continue to rage (and the financial tragedies of recent years will continue to occur on a regular basis).
The simple fact is that a financial planner’s commercial behaviour is substantially governed by the manner in which he or she is financially rewarded. Therefore, any remuneration model that is constructed around the sale of products and the accumulation of FUM will result in the sale of products and the accumulation of FUM. This is hardly a surprising outcome. Be it a straightforward commission, or an asset-based percentage fee for service (the “commission you have when you’re not having a commission”), the unacceptable behavioural outcomes arising from irreconcilable conflicts of interest inherent in both models are very similar.
On the other hand, a fee for service that does not rely upon the sale of a product or upon the existence of assets, avoids all the conflicts outlined above. This form of fee does not have to be based purely on an hourly rate. It may be a task-based fee or an annual retainer; although it would certainly be expected that time would be a significant factor in its derivation. The main issues are that the fee is not based on FUM, that it is disclosed, and that its quantum and/or calculation methodology are agreed by the client in advance of the work being performed.
Of course, this form of “fee for service” can be abused. It’s just that the opportunities for doing so are substantially reduced with this remuneration model. Conflicts of interest are minimised and independence is enhanced.
Some will argue that clients should be offered the option to remunerate their financial planner by any one of the above methodologies. This is the “let the client choose” model adopted by most of the industry. It appears that it may be the argument supported by the FPA (with the exception of commission); however, this argument obscures a fundamental point of principle.
That is, if the financial planning industry is seeking recognition as a profession, then a fee-for-service model that does not rely upon the sale of a product or the accumulation of FUM is the only acceptable option.
I fully expect that many people in the industry will not welcome the messages in this article. As usual, I will be accused of being out of touch, biased, ignorant or promoting the interests of accountants.
None of that is true. I believe that the evolution to a truly professional financial planning industry will only happen when the principal sources of conflict of interest, specifically those derived from commissions, asset-based percentage fees for service (and any other product/FUM-related bonuses and incentives), are removed once and for all.
Phasing out commissions is a significant, positive, courageous and controversial move by the FPA; but it is only half the story. The industry must take this historic opportunity to complete the job. Unless it does so, the industry will continue with the ambiguities, the conflicts, the lack of trust and the charges of hypocrisy under which it has laboured since its inception in the 1980s.
Consequently, the vast majority of honest financial planners will never receive the level of professional recognition that they deserve, and the industry’s image and evolution to professionalism will continue to suffe.