Along with attempting to write thought-provoking articles in this learned professional journal, I spend a considerable amount of time reading history. The latter helps me with the former because the story of the human race is full of amazing parallels and repetition.

Take the story of the philosopher’s stone. Its discovery has been the dream of many people over the centuries, including no less a scientist than Sir Isaac Newton, whose attempts to do so prompted economist John Maynard Keynes (as an ardent Newton fan) to refer to him as “the last alchemist”.

The philosopher’s stone is the elusive alchemical substance that is said to turn base metals into gold. Newton’s search for it was not driven by a desire to be wealthy but by a desire to understand God’s universe. He believed that to achieve such an understanding was his destiny and public duty.

Frustratingly eluded

While he achieved many amazing things, including the discovery of the laws of motion (as described in his famous book, The Principia) and an explanation of the nature of light, the philosopher’s stone frustratingly eluded Newton. His fruitless efforts are reminiscent of the financial planning industry’s search for its own version of the philosopher’s stone, an alchemical formulation that promises to transform the industry into a profession.

The industry’s most recent attempt to accomplish transformation is the Financial Planning Association’s 10-point plan.

It contains a series of recommendations to achieve legislative separation of product selling from holistic advice. That sounds good; rather like motherhood. Overall, the plan is positive and constructive and much of it is worthy of strong support.

Fatal flaw

However, its fatal flaw is a proposal to narrowly define commission by legislation and then to ban it. As a result, the plan fails in its intention to create a profession because it continues to allow the receipt of certain forms of conflicted remuneration, especially investment commissions paid by clients (aka asset fees) and life insurance commissions paid by product manufacturers. How is this justified?

It isn’t and it can’t be justified with any intellectual or ethical rigour. In short, it simply won’t work.

Building on that flawed proposal, the 10-point plan also contains a recommendation to legislatively restrict the terms “financial planner” and “financial adviser” to those individuals who comply (inter alia) with the terms of the proposed commission ban (as defined). This is a disturbing proposal because, if implemented, it would lead the public to believe (incorrectly) that individuals who are allowed to use these legislatively restricted terms will not receive conflicted remuneration and may therefore be trusted to act in their clients’ best interests.

As a result, there would be a tiered financial planning industry, the highest tier of which would improperly represent itself as a trustworthy and holistic minority that the public should trust as true professionals. I hasten to add this does not mean that planners and advisers in this elite group would necessarily be dishonest or unethical. Most would not be. However, most would be highly conflicted. This is a situation that is never acceptable for a true professional whose ethical obligation must be to avoid conflicts, not simply to disclose them.

Practical and reasonable

In response to this analysis, I will be counselled that I must not be so unyielding and uncompromising on matters of ethical principles. I’ll be told that I should be practical and reasonable so as to achieve an “appropriate balance” between the interests of consumers and the interests of the industry, thereby allowing access to affordable advice. But the problem is not (and never has been) about access to affordable advice. It’s about access to trusted advice. As soon as advice is trusted, its value will rise, and it will become affordable. Until we accept that fact and the consequences that flow from it, we will never achieve the desired transformation of the industry into a true profession.

However, if we were to accept it, the industry would transform overnight. Planners/advisers and clients’ interests would automatically be aligned without conflict; the incidence of scandals would reduce; compliance-based regulation would decrease in volume, complexity and cost; government interference would recede in favour of self-regulation (the hallmark of a profession); planners/advisers would be trusted; and the industry would no longer be the object of trenchant criticism from all quarters. We would have discovered the formula to turn base metal into gold.

2 comments on “Abandoning conflicted remuneration a formula to turn base metal into gold”
  1. Avatar
    Michael Summers

    Robert, why is the solution to this problem so simple for you and me and so difficult for others to grasp? All thinking participants in financial planning acknowledge that our profession cannot advance until conflicted remuneration is completely eliminated – and then dance around avoiding the necessary actions. There is no suggestion that financial planners should not be well rewarded – and good ones very well rewarded! – but the reward must be a simple payment from client to practitioner in return for a valuable service. When everybody comes to grips with this principle, all the hocus pocus surrounding general advice, grandfathering and so on will go away and we can get on with building a respected profession.

  2. Avatar
    Grahame Evans

    Robert, the same old lines. All industries have conflicts. Manage within them and survive. If you really are serious about this issue you would go back to the major accounting firms and stop them charging asset based success fees for sales of businesses, IPO’s etc. But unfortunately they don’t give you the oxygen , this industry does. It is your opinion that asset based fees conflict. I don’t agree as don’t many others. The way advisers are often measured are on the success of the outcomes and as holistic as you might like to think the industry is, the clients, through how they are educated buy the media don’t value strategy just outcomes. So lets move on and have that many years of your valuable experience focussing on the big challenge for the industry, the financial literacy of the public.

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