How many times have we heard the hackneyed assertion that “the financial planning industry is on a journey towards professionalism”?
While I can’t say exactly what it means, I can say that it is invariably offered as a somewhat impatient response to querulous commentators who suggest that the latest round of reforms may not achieve the results that consumers deserve.
The beauty of the assertion lies in its very uncertainty. No-one knows how long the journey will take, nor its ultimate destination, nor the cost of getting there; but we can be certain about one thing. The cost of the journey is considerable, both in lost reputation and dollars.
Take, for example, the current reforms mandating a university degree, a professional year, an exam, continuing professional development and the adoption of a code of ethics for all financial planners. Surely no sensible person could object to these reforms in principle; but their (admitted) cost to the industry is noteworthy, particularly where the declared objective of the government proposing them is to cut regulation and red tape imposed on the private sector.
According to the explanatory memorandum attached to the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015, “a draft regulatory costing for the reform package has been prepared, consistent with the government’s Regulatory Burden Measurement Framework … it is estimated that the increase in annual compliance costs for the industry as a whole will amount to $165,089,720”. I’m impressed, if only by the precision of this costing.
An example of good regulation
So presumably, just as financial planners talk about “good debt” and “bad debt”, this new regime is an example of “good regulation”. As a result, consumers, who are likely to end up paying for most of the increase in costs (one way or another), should expect that the proposals will make a significant and positive difference to their experiences in dealing with financial planners. Will that happen?
Perhaps. However, it won’t happen just because financial planners will be required to lift their academic standards. This was demonstrated not long ago in the accounting profession when large numbers of its grey-suited university-educated “professionals” were transformed overnight into enthusiastic sellers of agri-business schemes in return for monetary rewards that were so substantial that timeless ethical principles around conflict avoidance were temporarily set aside.
This doesn’t mean that university degrees should not be mandated. They should be, but government and the industry must be careful not to overstate their benefits to consumers of financial planning services. Of course, it is reasonable to assume that as a general rule a financial planner with a relevant university degree will be more technically competent than a financial planner without such a degree, although there will surely be many exceptions to this rule.
Misses the point
However, this misses the point. The key to genuine consumer-friendly reform lies not in academic achievements, as desirable as they are, but in the adoption of ethical principles that remove or avoid (and don’t just disclose) remuneration conflicts. The fact is that the only thing separating a profession from a conventional occupation is its ethics. A profession must always serve the public interest above the commercial interests of its members.
Therefore, it will be the principles adopted in the mandated code of ethics that will determine how directly and how soon the industry completes its hitherto tortuous journey to true professionalism.
Ironically, most of the regulatory red tape about which financial planners have complained for decades, including Future of Financial Advice (FoFA), could have been avoided if only the industry had adopted and enforced its own self-regulated code of ethics, which eliminated all forms of conflicted remuneration and product sales incentives. Instead, the industry has obfuscated and deflected throughout the “journey” in the futile hope of achieving the best of both worlds.
This has created and sustained a hypocritical and conflicted culture that has caused widespread (and often unwarranted) mistrust of the industry’s participants. And in the worst cases, it has led to highly publicised scandals, some of which have been so tragic and widespread that governments have been forced to act in the only way they know how, that is, through the imposition of intrusive, complex and costly regulations.
Political pressures to compromise
Sadly, every legislative attempt to solve the problem has proved to be inadequate because it has failed to address comprehensively the remuneration issues, principally due to political pressures on legislators to compromise them. FoFA is a clear example. However, in 2016, with the advent of a legislatively endorsed standards body with a responsibility to create a compulsory code of ethics for the industry, it’s hard to see how the point can be missed or avoided any longer.
The risk is that the standards body will not prove to be independent of the industry’s culture and influence, a problem that was recently demonstrated in the valiant (but failed) attempt by the accounting profession’s independent standard setter to mandate conflict-free remuneration principles for accountants offering financial planning services.
I trust that the new standards body will take heed of this case study in flawed and ineffective self-regulation.
It’s regrettable that the journey of the industry has been so directed and controlled by government; and it’s hard to reconcile such complex legislative intrusions with the industry’s advertised desire to be a truly self-regulated profession. Nevertheless, the signs are promising that within the next five years the financial planning industry may reach the ultimate destination in its long professional journey. This will be a wonderful outcome for the next generation of planners and, more importantly, for the public interest that it will serve.
