Robert MC Brown says the right path for the Government is not necessarily the easiest one, but he hopes policymakers have the right stuff.
“The first thing we do. Let’s kill all the lawyers.”
William Shakespeare, Henry IV (Part 2), Act IV, Scene (ii).
Now that sounds like an attractive and simple solution to the problems of the world. However, put in its proper context, Shakespeare’s character, Dick the Butcher, was suggesting this action in order to remove the principal barrier to his political aspirations. So, what’s all that got to do with financial planning? Quite a lot really. Just like Dick the Butcher, defenders of financial planning orthodoxy have regularly chosen to respond to criticism of their industry by trying to “kill off the messengers”. We have heard that critics are insincere, ill-informed, conflicted, defending vested interests, or may even be engaged in a conspiracy to destroy the industry. And recently, we have heard the colourful claim that the adoption of hourly rates for financial planning services would lead to the destruction of the industry and mass unemployment. All of this is very sad.
Instead of accepting that most of the critics are sincerely interested in improving the industry for the betterment of both the planners and the public that they serve, the industry leadership has been quick to damn the motives, understanding and experience of those that hold a different view to theirs. Recently, I was reminded of the prolific American author, Upton Sinclair, who said in 1935: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” Applying those perceptive words to the world of financial services reform in the 21st century, one can begin to understand why the financial planning industry is so resistant to reforms that, to an outsider, would seem to be necessary and reasonable. Right now, the industry is facing the imminent prospect of fundamental change being forced upon it.
These changes are very confronting for the industry’s ownership and leadership “establishment” because they threaten to realign the power structures that have so tightly controlled the industry’s cash flows since its evolution from the life insurance industry in the 1970s. Much of the industry is fighting a political rearguard action to maintain the status quo (while concurrently presenting a public position that it accepts the need for sensible reform). In the key battleground of adviser remuneration, the industry has unenthusiastically accepted that commission is dead; but at the same time, it has announced the continuity of other forms of remuneration which will achieve the same commercial outcome as commissions. Presumably, the industry’s hope is that this will be politically sufficient to keep control of the fast moving game, while causing minimal practical disturbance to the smooth operation of the vertically integrated product distribution networks that form the basic structure of the industry.
Unfortunately for the industry, in August 2009 the Australian Securities and Investments Commission (ASIC) made a very brave submission to the Parliamentary Joint Committee of Inquiry into Financial Products and Services in Australia (PJC). ASIC said (page 53): “While the reforms to clarify the fiduciary-style duty of advisers will have a significant impact on the ability to use commission remuneration, the Government should still assess changing the policy settings of the FSR regime so that advisers cannot be remunerated in a way that has the potential to distort the quality of advice given.” “This would mean that the following forms of remuneration would not be permitted, particularly in relation to personal advice:
a) Up-front commissions;
b) Trail commissions;
c) Soft-dollar incentives;
d) Volume bonuses;
e) Rewards for achieving sales targets;
f) Fees based on a percentage of funds under advice.”
“Commission remuneration can encourage advisers to sell products rather than give strategic advice and to recommend products that may be inappropriate but are linked to higher commissions. Remuneration based on funds under advice also encourages sales and borrowing. Disclosure appears to be an ineffective tool to overcome these conflicts of interest”. The industry has moved into overdrive to discredit ASIC’s proposal, especially arguing for the continuity of fees based on a percentage of funds under advice. Essentially, its justification for retaining percentage-based fees is that “ordinary Australians” will be precluded from receiving advice unless this form of remuneration is allowed to continue. Of course, the reality is that most Australians don’t receive financial planning advice, not because they don’t want it, or can’t afford it, but because the average person doesn’t have much in “investible” funds on which a commission or percentage-based fee can be charged.
As a result, financial planners do not view such people as attractive sales prospects. Margin lending promoters overcame that impediment by gearing up their victims in order to “manufacture” funds under management, giving advisers the opportunity to be remunerated on both the initial and the geared investment. It is to be hoped that the PJC and the Government do not cave in to the industry’s representations. It is only natural that politicians will look for compromises in controversial areas such as this. Superficially, the obvious compromise would be to get rid of commissions and leave other forms of product selling incentives in place (especially percentage fees). This would be an excellent outcome for the industry because it would be the “compromise you have when you’re not having a compromise”; that is, it would not be a compromise at all (and they know it). Right now, the Government can move in one of two mutually exclusive directions to shape the future of the financial planning industry. One direction is the continuation of a highly conflicted and even more regulated industry that will offer its increasingly expensive services to a contracting group of clients.
The other direction is the establishment of a substantially un-conflicted and far less regulated profession of financial planning, the services of which will be offered at an affordable cost to a much wider group of people in the Australian community. It will be a very sad day if the industry manages to use its considerable lobbying power to convince the Government to adopt a position that looks good in the short run, but achieves very little in practice. This is exactly what happened under previous financial services reforms, which involved lots of compliance-based regulation and “box-ticking”, but failed to address the only issue that really counts – namely, conflicts of interest caused by adviser remuneration. I would not be so bold as to predict the way in which the Government will move. The first direction is easier. Basically, it’s “business as usual”. The second direction is right. It will improve the industry permanently by substantially removing the conflicts of interest that control it. My hope is that the Government has the courage and the will to “make a difference”.
