As long as advisers continue to charge asset fees, the argument over conflicted remuneration will continue, says Robert MC Brown.
Try as it may, the financial planning industry is simply unable to put the remuneration debate behind it.
Frustrated industry leaders continue to deflect the issue by using rhetorical lines such as “the debate is over” or by suggesting that there are many more important initiatives to consider in the industry’s drive to professionalism (such as educational standards). However, remuneration continues to be raised by uncooperative commentators who are often accused of being anti-advice, ideologically driven or unable to understand the need to be “commercially practical”.
Of course, it’s hardly surprising that this issue remains at the centre of the debate about industry reform, given that remuneration-driven conflicts of interest are the principal target of the controversial Future of Financial Advice (FoFA) legislation.
Unfortunately for the industry, even after FoFA has been passed by parliament (assuming that it’s passed at all), remuneration conflicts will continue to be debated. That’s because the proposed legislation is not principles-based. It is a political document, which compromises on principles. Consequently, it is not comprehensive, banning only some forms of conflicted remuneration.
Therefore, the inconvenient reality for the industry’s leaders is that self-regulated professional and ethical standards must go further than FoFA before the remuneration debate finishes once and for all.
‘Yes, it is commercially inconvenient, but it is professionally mandatory’
Indeed, remuneration goes to the heart of what it means to be a trusted professional adviser. So the problem of conflicts inherent in remuneration models must not be rationalised, deflected, explained away or avoided by removing some forms of conflicted remuneration (commissions) and allowing the continuity of others (asset fees).
Therefore, it was disappointing to see in a recent series of articles written by financial planners that asset fees were generally accepted as a conflicted form of remuneration, but were then justified by those same planners on two main grounds:
1. Financial planning services are provided in a free market. Therefore, financial planners and their clients should have the choice to negotiate any form of remuneration that they desire; and
2. Even if asset fees are conflicted, so are hourly rates. Therefore, asset fees should be allowed.
In response to the first justification, as financial planners we do not provide our services in a free market. We operate in a highly regulated professional services market and many of us choose to be in that market by virtue of our membership of a professional association.
That membership (not to mention the law) comes with some serious and complex legal and professional obligations. Our academic qualifications and designation should not be treated as just a few letters that we put after our name to help us gain commercial credibility or to assist in the promotion of our marketing agenda.
If we were operating in an Adam Smith-style “free market”, financial planners would be expected to act in their own interests and they would be absolutely free to do so within the constraints of competition laws (like any rational non-professional business person does).
However, in a professional market we have a higher duty to the public whom we serve. We are obliged to act in someone else’s interests, which is the opposite of a free market. Essentially, we are obliged to do something that is not commercially rational, at least from a short-term, self-interest perspective.
Thus, the role of our professional association is to deliberately control the market by articulating and enforcing a range of professional and ethical standards to which members are required to adhere in order to maintain their membership and professional standing. True professional associations do not exist to protect our commercial interests and our “brand” at any cost – although some leaders and members of associations seem to think that is what they should be doing.
Included in those professional and ethical standards (implicitly or explicitly) is a requirement to act in the public interest, to act in our clients’ interests when those interests are consistent with the public interest, but not to act in our own interests unless they happen to be in accord with the public interest and the interests of our clients. And we must demonstrate and reinforce those actions by removing or avoiding remuneration-driven conflicts and other fundamental conflicts of interest. Mere disclosure of those conflicts is not enough.
These points are central to the code of ethics of any true profession. It is why true professionals are an unambiguously trusted source of advice. And it is why a professional designation is so highly valued by the members on whom it is endowed and by the public in whose interests the members are required to act.
Members who misbehave or act with conflicts are abusing their membership of the profession and are watering down the trust and value of their designation. In these cases, professional bodies should take self-regulatory action against the perpetrators in order to protect the public interest and the good name of the profession.
In the worst cases of abuse and conflicts in the financial services industry, legislators have been forced to step in – for example, in the US, the Sarbanes Oxley Act against conflicts of interest in the big audit firms, post-Enron and WorldCom; and in Australia, the FoFA legislation, post-Storm and the global financial crisis. FoFA is a classic case of an “own goal”, scored through our inability or unwillingness to comprehensively regulate ourselves.
