What would enshrined terms deliver?

We’re entering dangerous territory with the terms “financial planner” and “financial adviser” set to be enshrined in legislation. This week, legislation entered Parliament that will enshrine both terms and thereby restrict their usage. In a nutshell, only people who are properly licensed to provide personal financial advice to retail clients, or who operate with the proper authority of a licensee, will be legally allowed to use either term.

The AFA and the FPA hailed the move as, respectively, a win for consumers and a step towards professionalising an industry. But it may not actually be either of those things.

What if, in fact, enshrining the terms only serves to give an unscrupulous operator an opportunity to promote the idea that they’re some how “endorsed” by the government?

There are still some practices in the financial planning space that need closer attention. The Future of Financial Advice (FoFA) reforms are a good start in sorting out the most egregious issues, no doubt; and codes of professional practice that build upon the legal minimums are to be welcomed as another good step.

Action stations

But there’s nothing in law, nor in any existing codes of practice, that prevents a financial planner from charging asset-based fees (or continuing to receive trails on books of grandfathered business), or receiving commission on insurance and lending business.

These are conflicted forms of remuneration. They’re conflicted for one very clear reason: they require a particular action by the planner.

For example, if planners are paid asset-based fees, then they must aggregate client funds in such a way that enables such “fees” to be applied. (Let’s set aside for a moment the semantic distinctions between “asset-based fee” and “commission”.)

If planners are paid by commission for selling life insurance or mortgages, then they must sell life insurance or mortgage products in order to be paid.

In either case, the planner is paid only if they do a specific thing. Neither structure contemplates a situation where the best advice might be to do nothing, or to do something that does not involve buying insurance, a mortgage or aggregating funds for investment.

Winners or losers?

It’s already illegal for a financial planner or a financial adviser – however defined – to use the terms “impartial”, “independent” or “unbiased” if they receive:

• commissions, apart from commissions that are rebated in full to the client;

• forms of remuneration calculated on the basis of the volume of business placed with an issuer of a financial product; or

• “other gifts or benefits” from an issuer of a financial product which may reasonably be expected to influence the person.

Without doubt the best interests of consumers and professionals would be served if no “financial planner” or “financial adviser” were anything but impartial, unbiased and independent.

None of this will change under FoFA. Enshrining the terms “financial planner” and “financial adviser” in legislation won’t change it, and may only serve to give consumers misleading impression.

Enshrining the terms in legislation isn’t necessarily a win for consumers, because people with the FoFA “seal of approval”, as it were, can still receive conflicted remuneration; and it’s not a win for professionalism, for exactly the same reason.