Sometimes the financial planning industry lives right down to its reputation. It’s just a bad joke, a recurring nightmare of shonky advisers, stupid and greedy licensees and a rapacious, self-first culture. Relatively few financial planners and licensees suffer these shortcomings, but that is cold comfort while clowns and cowboys continue to generate all the headlines.
Bad advisers are like a virus. They spread though the body of the financial planning community, bringing misery to everyone they come into contact with. Recently PGW Financial Services contracted the virus. Was it bad luck, or should the firm have taken better precautions? Reading between the lines of a statement by the Australian Securities and Investments Commission (ASIC), it seems PGW has only got itself to blame.
PGW has entered into an enforceable undertaking with ASIC following surveillance by the regulator that found a range of deficiencies in the advice PGW provides to clients. A number of PGW authorised representatives (ARs) are former ARs of AAA Financial Intelligence and AAA Shares. It was long Professional Planner’s suspicion that this business chose its names so it appeared first in the phone book.
AAA shambles
AAA had its Australian financial services licence (AFSL) cancelled in February last year. In cancelling the licence, ASIC painted a picture of a financial planning business that had as its first priority recruiting as many ARs as it could; that failed to supervise those ARs and in fact in many cases didn’t even know who they were, didn’t know who the ARs’ clients were, nor what advice they were being given or products they were being sold. The list goes on. And on. The business was a shambles – the full list of ASIC’s concerns appears below, and you can read about the complete AAA disaster on ASIC’s website.
Now some of those former AAA advisers are working for another licensee that has caught the eye of the regulator. PGW obtained its AFSL in May, 2011. In hindsight, information published on the company’s website seems pitifully ironic. It says:
The company was established to allow the appointment of advisors, who are experienced industry professionals, have compliant business processes and who wish to retain some control of their business.
Elsewhere, it says:
We will honour the commitment of compliant advisors and will support their development into industry leaders in the provision of financial services. We have no interest in increasing the number of advisors, unless recruits meet and maintain our standards.
And:
The reputation of PGW is only as good as the attitudes, services and conduct of our representatives. We will strive to ensure that clients, industry bodies and regulators have no complaints or other issues with our representatives or the services they provide.
Striking resemblance
Detailing PGW’s EU, ASIC set out its concerns in a list that bore a striking resemblance, in substance, to the reasons it gave for cancelling AAA’s licence – again, the full list appears below.
Perhaps the former AAA representatives spotted a home where they would be free to operate in more or less the same uncontrolled way they had done previously; or perhaps PGW simply found it had authorised a group of representatives that it was manifestly unable to control properly. Or maybe some former AAA representatives are just plain unlucky in finding themselves working for another licensee to catch the regulator’s eye.
ASIC seems to have a view. In its statement, it says it has “previously warned the market about the need to ensure they have robust recruitment processes, especially when appointing representatives who have worked for a business against which ASIC has taken action”.
Onus on licensees
If a licensee cops an EU, then be it on its own head. If it has its AFSL cancelled, fair cop. If authorised representatives are suspended or banned, so be it. Whatever it takes. But all of this action is remedial, and it inevitably happens after consumers have been given poor (or worse) advice.
Inevitably the spotlight falls on advisers, and in many cases that’s appropriate. But what else can be done proactively to pull licensees into line? What will stop licensees continuing to willingly and knowingly employ the representatives of a failed competitor, in full knowledge of the advice practices and culture they’ll bring with them?
What might be needed is a code of practice for licensees, setting out the obligations to consumers and advisers, and setting a mode of behaviour that includes, for example, not hiring advisers who have left other licensees if it’s know those advisers have been engaged in inappropriate conduct.
If it’s good enough that authorised representatives are required to adhere to a code of conduct – through their professional associations – then it’s surely got to be good enough for licensees.
ASIC ON: AAA
Following a surveillance of the business starting in June 2010, ASIC found AAA had breached the majority of its licence obligations.
Specifically, AAA:
• adopted a business model that only allowed it to increase cash flow by increasing the number of advisers it authorised. The fee charged did not maintain sufficient financial resources to comply with its general obligations
• failed to maintain adequate human resources and technological resources to identify who its representatives were, the clients being serviced and the products being sold and to carry out supervisory arrangements
• failed to ensure that representatives had the necessary knowledge and skills prior to appointing them as authorised representatives and after they were appointed, failed to ensure that they were adequately trained and competent to provide financial services under the licence
• failed to implement adequate supervision and compliance measures, including advice audits. AAA outsourced its advice audit program to an external party without adequate supervision, failed act in accordance with its own audit policy and failed to remediate advice and conduct issues when they were identified
• failed to ensure that its representatives complied with relevant financial services laws when providing financial advice to retail clients
• failed to identify and manage conflicts of interest, and
• failed to act efficiently, honestly and fairly in respect of the templates and guidelines it provided to its representatives, representative audit reports, complaints handling and record keeping.
Source: ASIC
ASIC ON: PGW
ASIC’s surveillance followed PGW’s appointment of a number of ex-representatives of AAA Financial Intelligence Limited (AAA FI) and AAA Shares Pty Ltd (AAA Shares) after their Australian financial services (AFS) licences were cancelled by ASIC in February 2013.
ASIC identified numerous instances where financial product advice provided by PGW to clients did not demonstrate:
• a reasonable basis for the recommendations made, and
• compliance with disclosure obligations applying to advice on switching financial products.
ASIC also had concerns regarding the alleged failure of PGW to maintain adequate:
• human and technological resources, and
• records of financial services provided to clients.
• assess the competency of representatives before their appointment
• ensure the adequate training of representatives, and
• respond to failures identified during the licensee’s audit process.
Source: ASIC
Simon whilst I agree with most of the story , the issue is not just the about the quality of Dealers and Representatives but about a system that is broken. Whilst I comment on this as a frustrated adviser every chance I get , the biggest frustration is that a simple change could solve the issue of the past and future.
Firstly all Advisers must be licensed directly !
Product providers can have agents that can only recommend their products.
Now Dealer groups would survive on the quality of service they provide to a group of independent advisers, which would pay for these services based on the value to their adviser businesses.
Product producers would now need to promote their product directly to advisers , I would think this may be better for the journals?
Consumers would clearly understand who they are getting advice from!
ASIC would have a fare simpler job, it may appear more difficult in the beginning but dealer influence would go, incentives to sell a product for gain has already been dealt with. Core for advisers will be building sustainable client focused enterprises.
Nearly all the losses of the past can be traced to sales incentives often promoted by the Dealer Group, and as Simon’s story tells it, the same types of dealer group seems to want to attract a force of sales people for the dealer group gain.
http://psychology.about.com/od/historyofpsychology/a/milgram.htm