Achieving true professional status requires an honest and open debate, and a frank acceptance of the issues that need
to be addressed, says Robert MC Brown.
“Come let’s away to prison;
We two alone will sing like birds in the cage”
William Shakespeare’s King Lear, Act V,
Exactly what unlicensed accountants can and can’t say when advising their clients on superannuation continues to be the source of much controversy. The controversy exists because unlicensed accountants have been endowed with a so-called “carve-out” (special exemption) from licensing laws when advising on certain aspects of superannuation.
The introduction of the carve-out was well-intentioned, but it has become a farce because no one is quite sure how, when or whether it works. Its existence has been the subject of much emotional criticism by the mainstream financial planning industry. That criticism is understandable. After all, why should an unlicensed person be able to give advice in an area as technical as superannuation, when mere mortals are required to hold an Australian Financial Services Licence? However, what the financial planning industry doesn’t acknowledge is why the carve-out was given in the first place. It is important to understand this point, because it offers a strong clue as to why the industry is so much on the nose with the Government. The carve-out wasn’t given because accountants have a special entrée into Government that enables them to direct policy changes (the “conspiracy theory” explanation).
And it wasn’t given because Government was convinced that accountants have unique expertise that distinguishes them from the average licensed financial planner (the “elite adviser” explanation). It was given (principally) because Government was convinced, rightly or wrongly, that financial planners could not be relied upon to give independent advice, and that there should be some kind of “gatekeeper” protection available to clients wanting to establish and operate self-managed superannuation funds (SMSFs). Of course, the accounting profession lobbied at the time for recognition with respect to SMSFs; however, this was as much to satisfy emotional members as it was in the hope of any serious expectation of success. So the fact that a carve-out was eventually given was a real surprise, even to many of those accountants who had been involved in the lobbying process with Government.
In its practical application, the SMSF carveout has some serious shortcomings; such as, how can an unlicensed accountant legally and logically advise a client about setting up an SMSF when that accountant cannot legally advise on alternative vehicles for the provision of superannuation savings? The answer seems to be “with considerable care”; or “get a licensed financial planner to do it” (which makes nonsense out f the original purpose of the carve-out); or “get a licence like everyone else” (which puts the accountant in the same boat as the financial planners from whom the clients are supposed to be protected).
Nevertheless, the carve-out is still with us, and remains in place even though there seems to be little enthusiasm for its continuity (at least in its current unsatisfactory form), even from within the accounting profession. The point here is that the existence of the carve-out says a lot more about the community’s attitude to financial planners than it does about the community’s attitude to accountants.
That theme has been continued in the recent “back to the future” decision to allow superannuation fund trustees to give a limited form of financial advice to members. The financial planning industry leadership is redictably scandalised, using intemperate language such as “the decision….represents an ill-conceived case of poor public policy to curry favour with the industry fund movement” (another “conspiracy” perhaps?). The reality is that if financial planners were so well regarded by Government and the community, this decision would have been demonstrably unnecessary and superannuation fund trustees would have had no chance of success.
Regrettably, the assumption of he financial planning industry – with respect to both the accounting profession’s carve-out and the limited advice carve-out for superannuation fund trustees – is that somehow the Government has been “nobbled” by commercial interests; when, in fact, both decisions were taken principally because of perceived needs for the delivery of “consumer friendly” superannuation advice, which the financial planning industry was judged to be not capable of delivering.
Of course, there are commercial winners and losers in every Government decision; but the point here is that the financial planning industry has cried foul when, in truth, it brought these decisions upon itself because of its unwillingness to openly face the facts about the industry, combined with its strategy of defending the indefensible. The very fact that these decisions were at all possible or necessary is a major indictment on the industry and its “modus operandi”. So let’s cut to the core of the problem. The core is not really the fact that receipt of commissions leads to conflicts of interest and bias, although commissions do just that.
It’s not really that the industry as a whole is driven by transactions, leading to the imperative to sell products whether or not clients want or need them. It’s not really that a transaction-based industry will always work against offering strategic advice, which is what the clients usually need more than they need products. It’s not really that rebating commissions and charging a percentage-based fee for service is as bad as commissions, although that is the case, because it requires the sale of a product or the accumulation of funds under management. And it’s not really that the close connection between product manufacturers and distribution networks tends to corrupt the independence of advice that clients are offered, although that’s exactly what it does.
The core of the problem is that much of the industry is in denial. If only the industry would come clean and admit that it has a serious structural problem, then it would have reasonable prospects of reforming itself into the profession to which most of its members aspire. Instead of cloaking the remuneration debate in rhetorical statements about consumer choice, the industry should admit that a genuine “fee-for- service” model cannot be structured around the sale of a product or the accumulation of funds under management; and that a flat fee or a retainer must always be superior and consistent with a genuinely professional approach to financial planning.
The Financial Planning Association’s (FPA’s) recently confirmed discussion paper on remuneration is a welcome step in the right direction; but even the rhetoric around that paper is couched in language that suggests a begrudging acceptance of the need for reform, as though it isn’t really necessary, but that it has been imposed upon them by the “forces of darkness”. Tragically, the FPA’s insistence on allowing financial planners to continue charging a “percentage-based fee” in lieu of commissions will mean that very little will change. In fact, the industry’s conflict of interest problem might worsen because financial planners will be able to promote an appearance of independence, without actually being so (rather like Storm Financial).
This minimalist and conservative “fortress” mentality must cease. Instead, there must be a frank and rhetoric-free conversation about the industry’s shortcomings, so that we might evolve a truly independent financial planning profession that the community wants, needs and trusts; rather than simply maintaining the “sugar-coated” sales force that the financial institutions and product distribution networks, which appear to control the industry, would like us to have.
Robert MC Brown is a chartered accountant with more than 30 years’
experience in accounting, superannuation and financial planning. In 2007 he
authored the landmark industry paper Reinventing Financial Planning.