Robert MC Brown says one profession is leading the way in raising standards and serving the public – and it’s not financial planning.
Should the Government’s well-intentioned financial planning reform legislation ever see the light of day (and much of the industry would prefer that it didn’t), it is unlikely to be effective. This is because the legislation will ban commissions, but it will not adopt a comprehensive approach to remuneration reform, thereby allowing the continuation of conflicts of interest, low levels of trust, and poor behaviour by planners.
In addition, the legislation will be full of transitional measures, carve-outs and political compromises, which will make it lengthy, complex and costly to administer for regulators and AFSL holders alike. Consequently, market distortions will be considerable as advisers hang on to their trailing commission arrangements in perpetuity and the “old and bold” dare to hope for the long-awaited comeback of high-commission life insurance products. Responding to a clear need for comprehensive reform of financial planning, the accounting profession’s independent standard setting body, the Accounting Professional and Ethical Standards Board (APESB), has issued a proposed standard titled APES 230 – Financial Advisory Services (APES 230). This has been issued as an Exposure Draft (ED), meaning that it is open for public comment (in this case until September 15, 2010).
The main principles in APES 230 are that members of the accounting profession who provide financial planning services are acting in a fiduciary relationship (putting their clients’ interests ahead of their own), and that in so doing they must remove conflicts of interest, particularly those conflicts caused by certain types of fees and remuneration. The standard proposes that from July 1, 2011, accountants (in whatever employment capacity they operate) must only charge clients on a fee-for-service basis (as defined in the standard). APES 230 proposes that accountants who provide financial planning services must not adopt practices that cause conflicts of interest (or perceptions of conflicts of interest), such as commissions, percentage-based asset fees, volume bonuses, soft dollar benefits and other forms of fees and remuneration that are calculated by reference to product sales or the accumulation of funds under management.
APES 230 sets a high bar, reflecting the view that accountants are professional people whose obligation is to the public interest (first and foremost), then to our clients’ interests and then to our own interests. Ultimately, it is our undertaking to act in the public interest that distinguishes us as a profession; and that position of trust has traditionally caused the community to allow us to self-regulate (to a greater or lesser extent). If we breach that trusted position, we should expect to be heavily regulated. This is exactly what has happened to the wider financial planning industry over many years, including recently in the Government’s proposed reform agenda.
The key point to understand about APES 230 is the comprehensive definition of fee for service. This will result in a ban not only on the use of commissions, but also on the use of all other sales and asset accumulation-based remuneration models, including asset fees. Much of the wider financial planning industry has masked and avoided this issue for many years by referring to percentage-based asset fees as “fee for service”. APES 230 asserts that asset fees are not an acceptable form of remuneration for a true professional person because, like commissions, they give rise to conflicts of interest and a lack of trust. The principles outlined in APES 230 may be very confronting for the financial planning industry and for some members of the accounting profession who have become financially wedded to the industry’s “status quo”.
However, other accountants (the silent majority) will be impressed by APESB’s decision to take a strong ethical position on financial planning, and they will be more inclined to offer this service to their clients as a legitimate professional activity, rather than as a thinly disguised product distribution network which they have hitherto avoided. Some critics of APES 230 will suggest that it is unnecessary and that the industry’s efforts to lift educational standards of planners, along with more disclosure, transparency, financial literacy programs, and the banning of commissions, will solve the industry’s problems. They won’t. All of these are positive initiatives, but without trust between financial planners and their clients, all the disclosure, transparency and education in the world won’t help. There were many well educated bankers on Wall Street during the global financial crisis. That didn’t make any difference, because the ethical fundamentals were not in place.
APES 230 puts those fundamentals in place. Others will suggest that APESB is imposing hourly rates on accountants who are offering financial planning services. It isn’t. Of course, some people may wish to use that basis of charging, which is often criticised because it is alleged to lead to conflicts of interest in the same way as percentage-based asset fees. This criticism is illogical. There is no doubt that hourly rates may give rise to inefficiencies and inappropriate billing levels, but they do not give rise to the conflict to which APES 230 is referring; that is, the pressure to sell products or to accumulate funds under management.
Many accountants may wish to adopt a flat fee, an annual retainer, or a task-based charging model, all of which will substantially overcome the allegation of inefficiencies inherent in hourly rates. The main issue is that the charging model must not be reliant on the sale of a product or the accumulation of funds under management. Finally, while APES 230 is not retrospective, it does require adherence by the nominated start date. However (and thankfully), there are no transitional provisions, no carve-outs, no political compromises and no exceptions, such as for life insurance commissions. In this way, accountants will not suffer the uncertainties of large market distortions, horrendously complicated legislation and increased compliance costs. And most of all, accountants offering financial planning services will avoid conflicts of interest, leading to unqualified trust, which is the central feature of any professional relationship.
To the best of my knowledge, APES 230 is a world first. Some countries have acknowledged the problems, but have ended up banning commissions, leaving other conflicted remuneration models in place because of commercial pressures (“it’s all too hard”) or because of a lack of understanding of the issues. Adoption of APES 230 is a measure of the Australian accounting profession’s willingness to be truly professional. It is to be hoped that the rest of the financial planning industry will now lift itself to this high standard of practice. So doing is not only in the public interest. It may also lead to a position in which pending legislation becomes unnecessary, and self-regulation becomes a reality, much to the relief of both the industry and our legislators alike.
