ASIC’s proposal to ban asset-based fees was widely seen as signalling an end to life as we know it. But as Gary Fishlock reports, change can be a force for good too.
When The Australian Financial Review finally reported in August what many in the financial planning industry had seen coming for years namely that the Australian Securities and Investments Commission (ASIC) was recommending the banning of all commission-based remuneration for financial planners you could almost hear the cacophony of collective reaction from across the industry.
Robust and hearty agreement was punctuated by aggrieved invective and quivering lower lips, while anxious water-cooler conversations buzzed across the nation. There
were sighs of relief and guarded optimism as well as the obligatory weeping and gnashing of teeth. In good Shakespearean tradition, the whole gamut of emotions was enthusiastically expressed. And with good reason. The changes being proposed by the regulator will be the biggest and most far-reaching the industry has seen since the introduction of compulsory superannuation almost 20 years ago. And as human beings generally have a love-hate relationship with change of any kind, regarding it with wary caution at best and downright fear at worst, the stage has been well and truly set for some rigorous soul-searching.
This in itself probably isn’t a bad thing. In fact, there seems to be an emerging agreement within the industry so far that open and honest debate around the issue is a positive and much needed thing. And this long-overdue collective hitting of the “refresh” button has already put some of the industry’s most deeply-rooted traditions and cherished creeds many of which have remained previously unquestioned firmly up for grabs. Principally among these is the very question of what a commission is, the appropriateness of financial advisers charging them at all, and what effect this has had on the public’s perception of the financial planning industry as a whole.
Jim Stackpool, managing director of Sydneybased consultancy firm Strategic Consulting and Training, believes the industry’s reliance on commissions has helped to encourage a culture of laziness and greed, where the selling of products has become more important than the giving of advice, regardless of what might be in the best interests of the client.
“I think that commissions have generated the fairly anti-advice environment we’ve got at the moment because commissions are a lazy way of collecting money,” he says.
“I think we’ve lost a lot of the soft skills in our industry because we’ve been able to rely upon this silent, sometimes deadly commission component.”
Joe Grogan, general manager of MCA Financial Planners in Victoria, agrees, describing the commission payment as an easy collection model with some hidden traps, most notably leaving the adviser as a “soft target” whenever something goes wrong.
“The payment is charged because there’s a painless extraction method,” he explains.
“But the adviser becomes the weakest person in the chain and if something goes wrong, they’re the one targeted because they received commissions. But if you’re on a fee basis, I believe you’ll be less of a target if someone else has caused an issue.”
The charging of commissions, often in an underhanded manner and without clear, upfront communication with the client, has been a key component, but by no means the only one, in creating the larger problem now dogging the industry that of its tarnished public image. While undoubtedly there are many financial advisers who work hard and operate at a professional standard, it’s the less professional element that lowers the standing of the entire industry.
Unfair maybe, but not unusual. It’s a quirk of human nature that any group is usually judged as a whole by its least worthy representatives. Certainly in some quarters, financial planners are widely viewed in much the same way as used car salesmen were in the ’70s and ’80s.
“Financial planners are now generally categorised as untrustworthy and only motivated by self-interest,” says Claudia Pritchitt, principal of specialist financial services public relations firm Pritchitt Partners.
“Indeed, the same perceptions apply to most participants in the financial services industry – planners, managers, product developers, and researchers alike – and are not helped by the recent company and fund collapses. Stories about excess, greed and incompetence have also contributed to the loss of confidence in financial services by the community at large.”
Stories such as the former Storm financial planner who, as recently as August this year, had been working as an authorised representative of another financial planning group, providing advice to shell shocked clients regarding the tattered remains of their Storm investments, while charging commissions of up to 6.6 per cent for her advice.
After The Sydney Morning Herald reported this on August 31, the planner’s authority to practise was hastily withdrawn, but there can be little doubt that the Herald ran the story in the first place knowing the fertile ground for outrage and disgust amongst the public, particularly other wounded Storm clients. It seems that in the wake of the global financial crisis, the public has been looking for someone to bear the brunt of the fallout, and the financial planning industry has, to a certain extent, become the sacrificial lamb on the altar of justice.
“The media’s doing a brilliant job of putting it right down the bottom of the pecking order for status and respectability,” says Stackpool.
While it’s almost certainly true that the media has brazenly encouraged the public’s jaundiced perception of the industry, the job of presenting financial planners as necessary scapegoats appears to have been relatively easy, due to the element of selfinterest, greed and incompetence referred to by Pritchitt that has been an entrenched part of the industry for many years. Arguably, it’s the glaring potential for the conflict of interest that exists with commission-based remuneration that has attracted that element of self-interest, greed and incompetence to the profession in the first place.
This in itself begs another important question: How was it possible for this unruly, some might even say sleazy, element to find its way into the industry in the first place? In answer to this, many industry participants now agree that entry-level requirements are too low, and that even some of the terminology, including the very definition of “financial planner” itself, needs to be re-examined, especially in relation to how it’s policed and regulated. Richard Klipin, chief executive officer of the Association of Financial Advisers (AFA), agrees that vagueness and ambiguity surrounding the actual term “financial planner” have been part of the problem and would therefore like to see the bar lifted on adviser education.
“The pathway to professionalism is experience and higher education,” he says.
“At the moment it’s too loose a term, and people who are not licensed can happily use the term financial adviser when they are not. While the minimum barrier of entry, which is a Diploma of Financial Services, obviously has a degree of rigour to it, I think across the industry there’s a fairly wide acceptance that the baseline level of education now needs to rise and that’s about improving standards and improving confidence.”
Andrew Moylan, a consultant with the Sydneybased Encore Group, also believes the financial planning industry’s dearth of substantial entry requirements is partially responsible for its current public image problem and perceived culture of product peddling over advice giving. He refers to the analogy made in the seminal 1999 book The Seven Stages of Money Maturity, by George Kinder, founder of America’s Kinder Institute of Life Planning, where Kinder compares the financial planning industry of today with the medical profession of the late 1800s.
“The medical profession wasn’t a profession, they were the pushers f elixirs,” Moylan explains.
“So what you had was these medicine men pushing these elixirs and there was a lack of distinction between the medicine and the prescribing of it. The skill was in the diagnosis, but they made their money from actually recommending an elixir. I think it’s an absolutely perfect analogy for where we are as an industry. We’ve actually got the peddlers of product being paid by the product producers. And it’s interesting for me that doctors weren’t well regarded when they were peddlers.”
Stackpool agrees, citing the burgeoning computer industry three decades ago as another similar parallel.
“The computer firms in the ’70s and ’80s aid they were all about solutions, but they weren’t. They were just about moving boxes and products,” he says.
Accordingly, there’s already a widespread belief throughout the industry that the banning of all commission-based remuneration will principally affect how planners and advisers engage with their clients, encouraging a more upfront and advice oriented relationship. This frontline position is surely the best and most appropriate place to begin that much-needed repair work to the industry’s reputation.
“I think the way we engage with our clients is going to fundamentally change,” says Stackpool.
“I don’t think clients are going to put up with the old ‘this is my product and look what it can do’ line any more. And I think that’s going to change the way we both engage with and service our clients and the way advisers approach the market. There’s a whole set of clients out there who simply don’t want advice, who never wanted advice. But they’ve been told they’ve bought advice when they’ve really bought a product.”