Another flurry of debate has broken out about the issue of integrity in financial services with Professional Planner’s recent report of a suggestion made at the SPAA conference, by Professors Ralston and O’Brien, that a “window of opportunity” exists to define integrity, as a step to mending Australia’s financial regulatory system.
No doubt that’s true; but it’s also worthwhile noting the established definitions before seeking to redefine something anew. The ethical principle of integrity has long been included in the FPA Code of Ethics, which already requires FPA members to “Provide professional services with integrity”, stating:
“Integrity requires honesty and candour in all professional matters. Financial planners are placed in positions of trust by clients, and the ultimate source of that trust is the financial planner’s personal integrity. Allowance can be made for legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles. Integrity requires the financial planner to observe both the letter and the spirit of the Code of Ethics.”
So when Professor O’Brien is quoted as saying that we haven’t stopped to define what integrity means in a business context, I beg to differ. The financial planning profession actually has already done that, and it’s set out in the FPA’s Code of Professional Practice.
Integrity means fair client engagements. It means engagements which place the interests of the client ahead of the interests of the financial planner providing the professional service. It means professional bodies mandating client-directed charging models. Integrity means correctly identifying the client’s objectives and developing financial planning strategies to suit those objectives. It means selecting financial products that are in the client’s interests, having regard to the client’s strategy, any existing products held, the cost of the strategy and risks associated with the product being considered.
One of the key tests of planner integrity is contained in Rules 4.1 and Rule 4.6: Professional financial planners must not recommend a financial planning strategy or a product or service unless the planner understands its characteristics, risks and key features. When boiled down, it’s quite a simple principle – if you don’t understand it, don’t recommend it.
I acknowledge though that Professor O’Brien was probably considering the lack of a single view for all the market, and on this we agree wholeheartedly. Without equivalent high, enforceable ethical standards in product design, manufacture, investment, research, and distribution, professional financial planners (and their clients) will continue to struggle to discern financial products and services that are built with integrity.
Professional financial planners must exercise professional judgement about the products they are prepared to recommend. Doing so will place increasing accountability pressure on manufacturers to develop “recommendable” products; on research houses to guarantee the integrity and independence of their recommendations; and on dealer groups and the education sector to offer independent product training and the development of critical thinking skills that enable advice professionals to literally pull products apart, promise by promise.
A desire for overall market efficiency supports the idea of an ethical principle of “integrity in product design”, with appropriate sanction for designers of toxic products. Further, manufacturers should be required to make truthful statements in product disclosure statements about what the product is intended to do, and perhaps the degree of confidence the manufacturer has that the product will meet its stated objectives. Research houses should be empowered to unravel any over-exuberance; and professional financial planners might then have greater confidence that the product they are contemplating recommending is “true to name”.
“True to name” products would increase the capacity of professional financial planners to perform product vigilance with integrity and at a price commensurate with the value they provide to consumers. They would have a sound basis for assessing whether a product is appropriate to their particular client’s financial planning strategy.
After all, integrity shouldn’t only be seen as an advice issue.
John Bacon is compliance manager for the Financial Planning Association of Australia.
