…and never the twain shall meet – or so said Rudyard Kipling, in “The Ballad of East and West”. Robert MC Brown explains why the accounting profession has never really treated financial planning seriously.
Why is it that since the inception of financial planning as a discrete discipline some 40 years ago, most practising accountants have chosen to avoid any direct involvement in it? Surely, given their training, professional education and ethical standards, they should be an “ideal fit”. Logically, the accounting profession should be the dominant force in a true profession of financial planning. So why hasn’t that happened?
One response I’ve often heard is that “accountants are no good at financial planning because they can’t sell”.
This response explains a great deal. It exemplifies the clash of cultures between accountants who see themselves as “selling advice” and financial planners who are encouraged to “sell products” (and are paid accordingly).
As a result, most accountants have come to view financial planning as a link in a financial product manufacturing and selling chain, rather than as a legitimate and independent professional advisory service. Quite frankly, this is a reasonable conclusion for those accountants to have reached because it is still the way in which the industry is viewed by most of its participants.
‘It is as though financial planning has been given an exemption from ethical standards’
Another factor in this analysis is that the accounting profession’s leadership has never treated financial planning seriously as a core professional activity (as it has treated auditing and tax). One of the consequences of that attitude is that the profession’s fundamental ethical standards (such as independence and conflict avoidance) have not been applied rigorously to members engaged in financial planning.
Therefore, while much of the accounting profession has continued to treat financial planning as a flawed and unethical activity, the relatively small group of accountants who have become commercially successful financial planners have never been required to formally comply with the profession’s fundamental ethical standards concerning independence and conflict avoidance. It is as though financial planning has been given a special exemption from the accounting profession’s ethical standards. Indeed, some accountants have come to expect that is exactly how it should be.
This is not to suggest that these accountants are dishonest or unethical people. However, many of them have been paid through commissions, asset fees, volume bonuses and other forms of conflicted remuneration for many years – a situation which would never have been possible if the professional bodies had acted earlier to enforce their time-honoured standards.
The closest the accounting profession has come to applying its professional and ethical standards to financial planning was the publication in 2005 by the joint accounting bodies of a “guidance only” standard (APS12) which timidly recommended that members should voluntarily adopt an undefined “fee for service” remuneration model. APS12 is best described as “the standard you have when you’re not having a standard”. Needless to say, it was ignored.
In 2007, the Institute of Chartered Accountants in Australia published an analysis of the industry in its landmark paper, Reinventing Financial Planning. This paper called for the adoption of a true (un-conflicted) fee for service as the way to achieve the unqualified trust of planners by their clients. It was not well received by the mainstream financial planning industry – not to mention by many accountants, who by that time had become well entrenched in the culture of product distribution, accumulation of funds under management and trailing income.
Then, in July 2010, the Accounting Professional and Ethical Standards Board (APESB) proposed a mandatory financial planning standard for accountants (APES230), reflecting the independence and conflict avoidance principles contained in both of the above documents. APES230 is still under consideration by the APESB, having received a record number of submissions, both negative and positive. If this standard is mandated, it promises to transform financial planning (at least in the accounting profession) in a way that the Government’s proposed Future of Financial Advice (FoFA) legislation will not do. This is because APES230 (unlike the highly politically compromised proposed FoFA legislation) will require the removal of all forms of conflicted remuneration (not just some of them) including commissions, asset fees and volume bonuses.
Interestingly, some critics of the standard claim that professional bodies should not tell members how they should charge clients. Their view is that this is an unwelcome and inappropriate intrusion into members’ commercial lives.
The contrary view (held by this columnist) is that membership of a professional body ought to be conditional upon members complying with a set of the highest ethical standards that support the public interest, distinguish them as true professionals and support the worth of their designation as an unqualified source of trusted advice.
Indeed, a professional body has a duty to protect the public, its designation and the reputation of the profession in general by prescribing what members should and should not do ethically and then disciplining them when they cross the “ethical line”. That includes prescribing how (but not how much) they must charge their clients.
If that were not so, an otherwise valuable designation would become worthless very quickly and the role of a professional body would simply become that of a lobby group to protect the multitude of contradictory and competing commercial interests of its members. It seems that some members of professional bodies erroneously believe that protection of their commercial interests should be their association’s main priority.
