Imagine you own a financial planning business. It may not be too difficult to do this. Further, imagine that you’re thinking about switching licensees. Perhaps you’re fed up where you are and you don’t care who knows it. Perhaps your existing licensee has told you that it’s bailing out of the self-employed advice space and you need to find a new home.
As you contemplate your options for finding a new Australian Financial Services licensee, and you ponder the merits of obtaining your own licence, let’s say that another licensee, a competitor to your current one, knocks on the door and waves a cheque book in your face.
(Do cheque books even still exist? No matter.)
The licensee on your doorstep is associated with a platform that you’re using extensively, and the payment on offer represents, in effect, an advance on future revenue from that platform. What should you do? The answer to that question depends heavily on what business you think you’re in.
If you’re genuinely in the professional services game, you may face a quandary. However, if you’re in the asset aggregation or product distribution business, the decision might be simpler.
Still not sure what business you’re in? Take a quick look at your firm’s profit and loss statement. Where does most of your revenue come from? That’s the business you’re in.
Define your business carefully
This was a point made by Dan Gregory and Kieren Flanagan from The Impossible Institute at last week’s Conexus Financial Post Retirement Conference. Gregory noted that most optometrists believe they are in the health services industry. But they make most money from selling glasses frames, which means they’re actually in the retail fashion game. They might have studied for years at university to get to where they are, but there they are, nevertheless.
Likewise, financial planners who think they sell advice but actually get paid for selling product, or for fund aggregation, are actually in the product distribution or fund aggregation business. Advice is just some sort of door into the world of “advice”, but they are really imposters in that realm.
Payments to entice financial planning businesses to switch licensees aren’t new, and they’re happening across the industry as we speak.
But in an environment of rising ethical standards, of putting the client’s interests first and of generally higher standards of professionalism, they’re also coming under renewed scrutiny.
If licensees or platform providers making these payments think they’re somehow doing it under cover, or that the details are not being discussed openly between advisers, then they’re badly mistaken.
If a financial planning business takes a payment to join a licensee, and that payment requires the planning business to use the licensee-affiliated platform or investment products, should the firm’s clients be told? Not just new clients, but existing ones as well?
Should payments be disclosed?
Not being an expert in this area, Professional Planner approached several licensees to ask whether a practice should disclose such a payment to clients as one that could reasonably be expected to influence the adviser’s choice of investment product.
And while there was no consistent answer from a legal perspective – as always, “it’s complicated” and more details are required about specific circumstances – one licensee was adamant that, ethically, the payment must be disclosed.
Furthermore, the licensee argued, any consequences or conditions of the payment – including, for example, any lock-in period – should also be disclosed.
After all, if you’re going to force a client to use any product or service, they have a right to know why you’re forcing them to use it. They may not have the strict legal right to know, but so what? That is entirely beside the point.
A professional operates at a level well above the law, remember? Dealing with conflicts of interest is about avoiding them in the first place; but where they cannot be avoided they must be disclosed, and clients must be given all the information they need to be able to determine if the conflict – whether it is perceived or real – is a deal-breaker.
So in the conversations Professional Planner had with six licensees, two things stuck out about payments or inducements to practices to join a particular licensee.
First, there was an observation to the effect that “if they are the sort of adviser who would seek or accept that payment then they’re probably not the sort of adviser we are looking for anyway”.
Second, an obligation to disclose such payments, if it were held to exist, would arise from s. 942C(2)(g) of the Corporations Act, on the basis that it is a payment that “might be reasonably expected to be capable of influencing the advice”.
“Unfortunately, as you know, institutional lawyers are masters at crafting legals around these payments to portray them in a different light,” said one response.
Associations and relationships
The specific section of the Corporations Act says that a financial services guide must include information about any associations or relationships that exist between “the providing entity, or any employer of the providing entity”, and the issuers of any financial products. It must also include information about associations or relationships that exist between “the authorising licensee, or any of the authorising licensees, or any related body corporate of the authorising licensee or any of the authorising licensees”, and the issuers of any financial products.
The reason is that these are “associations or relationships that might reasonably be expected to be capable of influencing the providing entity in providing any of the authorised services”.
But it could be argued that a platform isn’t a financial product so it’s exempt from such disclosures. That certainly seems to be one train of thought. If that’s the basis on which payments aren’t being disclosed, then while it may be OK legally, the issue of whether it’s appropriate, desirable or even ethical is possibly a discussion for another time.
