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.
Well said Simon. You’re spot on about what being impartial, unbiased and independent is without doubt in the best interests of consumers.
This is a win for the old school industry, not for the profession, but it’s a short-term win. Consumers want unbiased advice, they’re becoming more and more savvy so are turning their backs on asset based fees and commissions.
Very low chance of consumers visiting this website so little point debating what’s right and what’s wrong. Key message for younger advisers is to start moving away from asset based fees because it will secure your own future and you will start the relationship with your clients off on the right foot.
Simon – every form of remuneration is conflicted. To earn any fee requires an action by a planner. Fixed dollar fees and hourly rates are as potentially conflicted as asset-based or insurance commissions – they are just different potential conflicts.
Asset-based fees do not require investments to be grouped in a particular way to charge them. If a planner’s business model is such that their value proposition in based on increasing the material wealth of their client, then it may be wholly appropriate that their remuneration be based in this manner. The matter of that planner’s professional capacity is a separate issue.
And, in terms of insurance, as long as the completion of an insurance contract remains the decision of a party independent to the proposer and the adviser ( the underwriter) and as long as the majority of the market is not prepared to remunerate an adviser for unsuccessfully placed insurance, commission is an entirely appropriate means of remunerating this work. This manner of payment has no correlation to the professionalism of the adviser. Replacement of product rules, underwriting & medical limits and simple premium costs act as an economic barrier to any real abuse of this approach (heaven help us that someone might actually be adequately insured!)
And finally, the mere fact that both these forms of remuneration continue to exist (arguably, ad valorem is a cornerstone of capitalism) suggest that there are many, many sectors of the marketplace for whom these are not only appropriate, but indeed preferred by some clients.
I agree with you Simon and believe financial advice must be independent. It must be conflict free. It simply cannot be given any other way. I cannot believe this is still a debate. It’s obvious – it’s what clients want, it makes sense and it is something we deliver every day
Great article Simon!!! No-one likes being tarred with the same brush!