Robert MC Brown explains why the industry will never attract a mass market of consumers while it remans conflicted.
“The grand old Duke of York, he had ten thousand men.
He marched them up to the top of the hill,
and then he marched them down again.
And when they were up they were up, and
when they were down they were down.
And when they were only halfway up, they
were neither up nor down.”
Anonymous satirical verse, 1642
“Some people on Wall Street still don’t get it.” Thus spoke a frustrated US President Barack Obama, responding recently to what he saw as the hubris of US bankers who have taken billions of dollars in taxpayer-funded “bail-out” money (thereby protecting their handsome salaries and bonuses) and yet “are fighting tooth and nail with their lobbyists…against financial regulatory controls” that have been designed to solve the problems that the bankers caused in the first place. It’s no wonder that former President Andrew Jackson referred to Wall Street bankers as “a den of vipers and thieves”, dividing the profits amongst themselves and charging the losses to their shareholders. That methodology (privatising the gains and socialising the losses) is a tried and tested technique to ensure that someone else (in 2008, the taxpayer) picks up the tab in the event of excessive losses by institutions that are so large and powerful that they are “too big to fail”.
While the financial position of Australian institutions is somewhat different from that of their American counterparts (or so we are told), there are some significant parallels. This is particularly so in the conflicted remuneration practices that continue to drive the “pointy end” of the industry, where it connects with the public through financial advisers and planners. In the US, this was tragically demonstrated in the selling of mortgages (the so-called “sub-prime” crisis). In Australia, it was demonstrated in the collapses of Opes Prime and Storm Financial. The financial services industry is keen to promote the line that these problems were aberrations caused by a few rogues. The reality is quite different. In fact, they are symptomatic of a deeply flawed industry that is in urgent need of fundamental reform if it is ever to be trusted by an increasingly cynical public.
Over the past 12 months, regulators and governments around the world have been scratching their collective heads about how to introduce reforms that will actually make a positive difference, rather than simply regulating the cost of financial advisory services even further out of the reach of the group of people that politicians in this country like to call “ordinary working Australians”. Throughout this process of examination, the financial planning industry has continued to strongly defend what many observers (including it appears, the Australian Securities and Investments Commission) now accept as the root cause of the industry’s problems – namely, conflicts of interest created by percentage-based remuneration models. It’s disappointing that while their approaches differ, the industry’s main lobby groups agree on one point: they are adamant that these models must stay in place.
Given the revelations of 2009, it might have been expected that the industry would decide to find a better way to deliver its services to the limited section of the population that it serves, rather than persisting with its widely discredited and conflicted practices. Unfortunately, the industry’s response is to change very little, other than some “window dressing” in which commissions will be replaced by other forms of remuneration that will result in the same poor behaviour. So why would the industry persist with this response when it knows that little will change as a result? Simply because it has calculated that the status quo is better than the alternative. It perceives that the alternative will result in (inter alia) the removal of controls over planners by product manufacturers; the demise of unearned percentage trail commissions/fees; and the introduction of direct, transparent and constant accountability of planners by their clients, in the same manner as other professionals, such as doctors, lawyers and accountants.
For much of the industry these outcomes are unthinkable. The industry’s principal political response to the idea of removing percentage-based remuneration models is to argue that “ordinary working Australians” will be precluded from receiving financial planning services because they will not pay flat fees or hourly rates. This nonsensical argument is designed to disturb nervous politicians, many of whom don’t really understand the industry, but do understand upset constituents. The argument is flawed on four grounds. First, it conveniently overlooks the fact that under the current percentage-based remuneration regime “ordinary working Australians” are avoided by the majority of financial planners because they are not attractive sales prospects. Even the industry admits that at least 70 per cent of Australians do not use the services of a financial planner.
During the recent sharemarket boom years, margin lending to “ordinary working Australians” overcame this impediment to product sales; hence the Parliamentary Joint Committee of Inquiry of 2009 (the Ripoll Committee). Secondly, it fails to recognise that much of the remuneration of financial planners is unearned, excessive and undeserved – particularly the receipt of “drip feed” trails/fees based on a percentage of funds under management (the “Holy Grail” of financial planners). Thirdly, it does not acknowledge that flat fees, retainers and hourly rates (unrelated to the sale of products and the accumulation of funds under management) will encourage widespread community trust of the financial planning industry – a situation that will never exist under the current deeply flawed structure. And fourthly, it does not accept that by removing conflicts of interest caused by flawed remuneration models, the cost of compliance will recede and many more people, especially “ordinary working Australians”, will be inclined to retain the services of a financial planner.
In recent years, I have done a considerable amount of work in financial literacy education. I have found a healthy appetite for financial planning services amongst “ordinary working Australians”, provided that planners are trustworthy (not conflicted), their services are reasonably priced and they are perceived to “add value”. Removal of percentage-based remuneration models will lead to all three. Until policymakers come to the realisation that the “ordinary working Australians will not pay fees” argument (which the industry has trotted out successfully for decades) is simply a mechanism for deflecting them from the truth, I regret to say that nothing will change. The community will be consigned to more of the same, indefinitely. The events of 2009 have delivered a unique opportunity to reformist policymakers. It will be interesting to see whether the current Federal Government has the courage to carry the rhetoric through into reality. History says that it won’t – such is the power and influence of the financial services industry. 2010 promises to be an interesting year.