Regulatory reform needs to address fundamental flaws in the industry’s structure if true professionalism is to emerge. Robert MC Brown explains.
Readers of this column will know that I write a lot (far too much for some, I suspect) about ethics in financial planning.
I do this because I believe that as an industry our adoption of genuinely professional ethical standards is our last and, for some industry participants, our most challenging hurdle.
So emotionally and commercially wedded are they to the ways of doing business that prevailed in the 1980s, some planners will never be able to make the leap of faith and logic to become true professionals. This shrinking, yet influential, group of planners (many of whom are of an age and stage similar to this columnist) still view the industry through the prism of a “value chain”, in which ultimately they are distributors of products on behalf of manufacturers, platforms and dealer groups.
Unfortunately, the failure of much of this senior group to grasp the reality of what it really means to be professional and to voluntarily reform their thinking and their practices is holding back the industry’s progress and its ultimate acceptance as a true profession by a sceptical public.
| Financial Planning Association (FPA) Code of Ethics: 1: Place the client’s interests first. 2: Provide professional services with integrity. 3: Provide professional services objectively. 4: Be fair and reasonable in all professional relationships; disclose and manage conflicts of interest. 5: Act in a manner that demonstrates exemplary professional conduct. 6: Maintain the abilities, skills and knowledge necessary to provide professional services competently. 7: Protect the confidentiality of all client information. 8: Provide professional services diligently. Source: Financial Planning Association of Australia |
At the same time, certain industry associations are trying hard to convince the Australian community that their members deserve to be treated as professionals. Recently, we’ve seen the Financial Planning Association’s (FPA) advertising campaign exhorting the public to use the services of financial planners who adopt the “highest professional standards” – namely FPA members (and certified financial planners in particular).
Spending money on advertising is always controversial among association members who will have varying shades of opinion on the value of such outlays. I know this from my days on the board of the Institute of Chartered Accountants. Nevertheless, the FPA board has made a judgment about the use of members’ funds because that’s what they’re elected to do.
So whatever members think about the merits of the campaign, it’s clearly designed to raise the public’s awareness of the value of FPA members who operate pursuant to the “highest professional standards”. That is an objective that is worthy of support.
Fundamental flaws in industry structure
However, the practical problem is that many members of the FPA (and many other financial planners who aren’t members) do not operate pursuant to the highest professional standards, in the sense that they charge percentage-based asset fees (and receive trails) on investments and accept commissions on the sale of life insurance products. This practice will continue post-FoFA.
In saying this, I’m not suggesting that financial planners are dishonest or dishonourable people, any more than I’m saying that the accountants, lawyers and doctors with whom the FPA likes to compare its members are dishonest or dishonourable. The fact is that most individual members of the financial planning community are well-intentioned people doing a particularly difficult job in extremely testing circumstances.
“The system can’t be tidied up by a little more disclosure or a little more transparency” – Lord Turner
Rather, I’m reflecting on the industry’s structure, which is fundamentally flawed, and on an ethical framework that claims to be professional, but isn’t, and can never be while it allows its participants the option of choosing conflicted or un-conflicted remuneration models.
The justification for this (or should that be the political rationalisation?) is that the choice of remuneration models is nothing to do with professional associations and is simply a matter for negotiation between consenting adults in private. That is plain wrong. In fact, remuneration models are central to the operation of any true professional association.
Of course, supporters of the status quo will argue that asset fees and commissions are not conflicted forms of remuneration and are consistent with the highest professional standards. Most supporters of their continuing use recognise the conflicts of interest inherent in these forms of remuneration but claim that the conflicts can be dealt with by a combination of disclosure, the “best interests test” (as proposed by FoFA) and other means of compliance.
The way forward
I disagree with this analysis. An adviser will never be trusted while acting under the influence of a conflict of interest, especially a remuneration conflict of interest. I have pointed this out before in this column, offering examples of doctors charging a “fee for service” based on a percentage of drugs prescribed and auditors rendering accounts for professional services based on a percentage of their valuation of client companies’ assets. The public would never accept such conflicted fee arrangements for these professions, and yet that is exactly the basis of remuneration that some people are suggesting is appropriate for the financial planning industry.
This will not wash. Until our leaders accept that point publicly and act to change the industry’s structure and predominant ethical framework, all the money in the world spent on advertising campaigns, improving the educational levels of financial planners and prosecuting bad apples will not substantially change the poor public perception of the industry. The permanent solution is so near and yet so far.
Looking at the issue internationally, soon after the worst of the global financial crisis in 2008 Lord Turner, chairman of the UK’s Financial Services Authority, offered this opinion while reflecting on the theme of the financial services industry’s fundamental structural flaws:
“What has gone wrong with the world’s financial system are not just a few minor things. The system can’t be tidied up by a little more disclosure or a little more transparency. At an international level we need to work out what went wrong and what are the integrated set of actions to make sure this doesn’t happen in the future.”
The democratic political process being what it is, FoFA is full of compromises
In its own flawed but well-intentioned way, our own FoFA legislation attempts to provide such an integrated set of actions for the discipline of financial planning in Australia (in the absence of comprehensive self-regulated actions by the industry). Unfortunately, the democratic political process being what it is, FoFA is full of compromises that will result in unintended consequences, including allowing the industry substantial scope to avoid the legislation’s spirit and intent.
How much better would it be for planners and consumers alike if the industry’s leaders (including elements of the accounting profession) would publicly accept that the industry is structurally flawed and that FoFA is sending a message to financial planners to not only embrace the proposed minimum legislative standards, but to go beyond them? In this way, we could evolve an advice-based professional approach to planning, rather than one that will inevitably be heavily regulated by Government.
In that regard, the accounting profession’s independent standard setting body, the Accounting Professional and Ethical Standards Board (APESB) has recently shown considerable leadership by issuing a proposed ethical standard for accountants engaged in financial planning (APES 230). That standard, if adopted, will facilitate the structural change that is needed to create genuine reform in the industry and not just the appearance of it. It will do this by comprehensively banning all asset fees, commissions and other forms of conflicted remuneration.
This is exactly where the financial planning industry must be if it is to be accepted as a genuine profession. There is no other solution. It is not negotiable. There can be no compromises, carve-outs or options. We must adopt the highest professional standards outlined in APES 230.
Regrettably, there are many planners who don’t, won’t or can’t accept this point – and probably never will. In so doing they are holding back the substantial growth potential of our industry, particularly from the ranks of idealistic young people whose interests lie in the evolution of financial planning into the proud profession that it deserves to be.
Why stop at financial planning or members in practice, why not state that no CA or CPA can be on a board (or a trustee) of any organisation that charges commissions or asset based fees. Nor can they accept any bonus renumeration based on asset based or commission. It is very easy to put out ethical statements when it doesnt affect you. Place an ethical dilema in there and it becomes harder. If the standards were placed on all CA’s in their work then we would truely get a picture of whether members supported it or not. There is very little arguement for time based billing being a professional way of billing, so why not ban that too? Because the members dont want it banned. It is amazing what issues like education required to start the CA/CPA programs require a member vote yet something like this becomes a toss a coin on who is on a board whether it gets up or not
Lets face it. The profession now knows who the primary drivesr of APES230. Yes MR Robert MC Brown, we know the professional bodies have signed up to APESB and are unable to set their own standards. Rumour has it that either the APES or CPA boards will be rolled.
Reading YOUR standard Mr Brown makes me unprofessional and lacking integrity…..words taken from YOUR standard.
The fact is both CPA and the CA were slow on the FP take up. For considerable time, members were offerred little FP support. Took them both years to understand financial planning and clearly they don’t and will lose membership at their own peril.
As I write this, I am aware of moves within the industry to come up with solutions. More than what can be said about CPA and CA, who offer no solutions or suggestions on how we run our businesses. By the way did everyone know that the 3rd party to APES has an “out” and will likely exercise it.
Members who support APES 230 in it’s current form shouldreally take a look at how Mr Brown charged his clients in years gone by….interesting
What has the method of charging a client got to do with professional standards?Examples of a conflicted form of remuneration is when a bank aligned financial planner recommends that a client only utilise their banks products or an Industry Fund financial planner (call centre operator) suggests that a client roll all of their super into that Industry Fund without consideration for any other fund. Conflicted remuneration is rife in everyday life. Do you think the Terry White Chemist is selling you Terry White cough mixture because it is the best in the market and the most appropriate for you out of the 10 available?
Financial Planners that are not aligned with any institution, that recommend investments or insurance based upon the merits of the product and the appropriateness to the individual client should not be dictated to as to how the client should pay for their services and more importantly the client should have the choice as to how they pay for the service.
Does charging a fee for service automatically raise the integrity of the advice? How do you legislate integrity? oh that’s right, the FPA carves out the ten commandments and suddenly the public considers financial planning a true profession. How many people outside the industry actually know who the FPA are? Do you know which professional body your accountant, lawyer or doctor belongs to?
Raise the standard of education and you will weed out the majority of the unsuitables, but you won’t get rid of them all. You still find unscrupulous doctors in the community and they study harder and longer than anyone, their professional bodies have codes of ethics and they verbally confirm versions of the Hippocratic Oath.
Interesting debate though…how to legislate the “evil” financial planners who “cause” the product and investment failures of Storm, Westpoint, Timbercorp & Great Southern (both accountant recommended with ATO supported tax rulings), etc. Also great to have the ethics/professionalism lecture/insight from someone who owned a FP firm back in the day that charged plenty of commissions. Keep spinning the decks MC Brown, I’m loving the “throwing Rocks now I’m outside the glass House” genre.
In response to your first question Simon, the answer is nothing.
In every profession, where a practitioner charges for their service or advice, there is a conflict between the interests of the practitioner and the client.
The fee debate is a puerile and flawed debate and has dominated the discussion in relation to the professionalisation of the financial planning industry at the cost of meaningful discussion on those elements that actually do define a profession.
There are some good points and more change is needed in this area. What is the way forward? Your bold sub heading seemed to fall short. Yes you continued the criticism, but what is your recommendation for the way to do it from here as distinct from what not to do? Please give us more than 6 minute units where training time, inefficiency and incompetence is rewarded by higher payments for taking longer.
Finally what is your view in the prime time ads run by the Industry Funds? Ironically they claim to only act for (existing) members whilst spending their money to market to non members.
See my article in the Professional Planner Magazine this month that supports this point completely!
‘zactly
Robert you do write too much but please don’t stop. Your argument in favour of what it really means to be a professional is 100% spot on. For this reason my practice does not accept commissions on anything, not aligned to any product sellers and employs an affordable flat fee structure. Moreover, we use an annual opt-in process. I am also a member of FPA and take the view that it’s Code of Ethics is the minimum standard.
Whilst you highlight the downside of FPA, it needs to be pointed out that the APESB had in the past (and may continue) been no better in allowing its financial planners to compromise ethnics. I do hope that the APES 230 is adopted and real leadership is actually achieved and it becomes contagious to the other financial planning bodies.
Yep, what he said.