During 2015 there will be an interesting real-world test happening in the financial planning profession. It focuses on how effectively financial planning businesses can deliver genuinely non-conflicted advice, irrespective of structure or licensee ownership.
The test is being run by a seemingly unlikely entity: the Australian Defence Force (ADF). The ADF becomes a far move obvious body to be running this test when you realise that a driving force behind it is Robert MC Brown, a long-time critic of structural conflicts in the financial planning business, and one of the leading lights in agitating for the removal of those conflicts and the establishment of an appropriate footing for the development of a true profession.
Brown’s perspective is well placed, having last year been appointed a Member of the Order of Australia for his work in superannuation and financial services. He is also chairman of the ADF Financial Services Consumer Council and a Royal Australian Air Force Specialist Reservist.
At the time of writing, the ADF’s financial service arm had signed up more than 30 financial planners to a financial advice referral program. Each planner has signed a legally binding declaration that they will be paid only by “genuine fees for service” for the advice they provide to ADF members.
ADF Financial Advice Referral Program website
Full list of referral partners as at 9 January 2015
The key term in that phrase is “genuine”. The agreement with the ADF explicitly bans commissions, trailing commissions, asset-based fees, bonuses (“of whatever description”), all forms of conflicted remuneration as defined in part 7.7A, division 4 of the Corporations Act 2001 (Cth) pat 7.7A div 4; and “any other form of remuneration that could reasonably give rise to a conflict between my interests and the interests of my clients”.
Why is this interesting? Because it is happening at a time when policymakers and regulators are closely examining the issue of vertical integration and the conflicts of interest that it fosters.
The ADF exercise may once and for all lay bare the conventional wisdom that financial planning businesses can’t be profitable without forms of remuneration such as asset-based fees. And if it shows that even planning businesses that are authorised representatives of vertically integrated licensees can provide non-conflicted advice profitably, then it also undermines the excuses put forward by institutions, including banks, for why they have to push in-house product and subsidise their licensees.
It’s a small sample size, but it’s a start. And it represents a cross-section of the profession, from self-licensed firms, to boutique firms, to firms whose licensees are owned by the biggest financial institutions in the country.
When the new chair of the Financial Planning Association, Neil Kendall, declared that the business structure of a financial planning practice or licensee was not the key issue in the delivery of high quality advice, it raised a few eyebrows.
Kendall’s own firm, Tupicoff’s, signed a “declaration of independence” last year – before Kendall took of as FPA chair – at which time he said the independent, self-licensed model was the best way to go. But he’s understandably changed his tune somewhat, now that he represents the professional as a whole, whose members operate under a wide range of different structures.
But Kendall’s right, and vertical integration per se is not the issue; the issue is when the vertically integrated structure is co-opted for the wrong reasons. Providing non-conflicted advice is a bedrock of all professions.
Robert MC Brown has his critics, many of whom are misguided or who represent vested interests threatened by Brown’s stance. But with the ADF referral program, Brown is effectively putting his money – or perhaps more accurately, is potentially putting ADF members’ money – where his mouth is.
The year ahead will give us an insight into whether the current structures and ownership of financial planning businesses are a genuine impediment to professionalism. And if they are, it will be further ammunition to those who would like to see the conflicted structures torn down.
Extract from the “Participation in the ADF Financial Advice Referral Program” declaration form:
I declare that, in respect of any financial advice (including financial product advice as defined in of the Corporations Act 2001 (Cth) pt 7.1 div 4) I provide in connection with the Program, I will at no times be under the direct or indirect influence of a financial product manufacturer. For the purposes of this paragraph, I acknowledge that “direct or indirect influence” means any relationship that could in any way compromise the impartiality or quality of advice being given.
I declare that, in respect of all business conducted under the [Australian Financial Services Licence | representative’s authority of an Australian Financial Services Licence holder] described above, the only means by which I will receive remuneration from the provision of financial advice to Australian Defence Force members and their families is through the charging of genuine fees for service. For the purposes of this paragraph, I acknowledge that remuneration that is not by way of genuine fees for service includes:
1. Commissions;
2. Trailing commissions;
3. Asset-based fees for service;
4. Bonuses (of whatever description);
5. Conflicted remuneration as defined in Corporations Act 2001 (Cth) pt 7.7A div 4; and
6. Any other form of remuneration that could reasonably give rise to a conflict between my interests and the interests of my clients.
