When the board of the new Financial Adviser Standards and Ethics Authority (FASEA) meets for the first time, hopefully not too long from now, one of the first items of business will be for each director to introduce himself or herself to the others.
The process of appointing directors to the board was necessarily protracted, given the nature of the authority, the sheer number of nominees put forward for just nine board seats, and the need for secrecy around the appointments until all positions were filled.
This led to the novel situation where the appointees didn’t know who all the other directors were until they read about it on Monday morning. The identity of the chair, Catherine Walter, was known and would have given considerable comfort to nominees. Still, it was a leap of faith, in many respects, for them to accept a position on a board with an uncertain composition.
Even so, the Minister for Revenue and Financial Services, Kelly O’Dwyer, on advice from Treasury and with Cabinet’s imprimatur, has done a masterful job of creating a board with strong and independent personalities and an excellent depth of knowledge and experience. It will be Walter’s job now to meld the board into a functional and cohesive unit to undertake the critical tasks of appointing a chief executive and working through a long to-do list for creating new educational, ethical and professional standards.
The details of the task ahead for FASEA are important, but not as important as keeping an eye on the bigger picture and remembering what FASEA has been created to achieve in the first place. O’Dwyer told Professional Planner this week that the government wants the authority to be a “game changer when it comes to standards for financial advisers”, which clearly signals that the government believes the status quo is not an option and that a bit of tinkering with current standards won’t do. O’Dwyer wants FASEA to have a big impact that will be felt by every single financial planner in the country.
Eliminating conflicts of interest
Central to the impact of FASEA, and inherent in raising ethical and professional standards, should be the elimination – finally, and for all time – of conflicts of interest. The Future of Financial Advice (FoFA) laws made some progress on this issue but there remain some egregious exceptions. Asset-based fees, for example, are conflicted because there’s only one course of action that enables them to be paid, whether or not advice in the client’s best interests involves an investment solution or not.
It’s disingenuous to claim an asset-based fee is simply an efficient mechanism for collection. It still requires assets to be accumulated, and it is still based on a percentage of those assets. It just replaces the commission previously paid from product, which has been outlawed.
What’s more (and what’s insulting to a professional), it does not reflect the value of the advice provided. Advisers who live on asset-based fees have a value proposition based on one thing (advice) but a revenue stream based on something else (accumulating assets). It’s like a car salesman being paid not on the value of the car he sells you but for how much petrol you buy in coming years – and then you wonder why he doesn’t have an electric vehicle in the yard.
It is little wonder so many people undervalue advice when advisers themselves don’t value it. Conflicts remain an issue that the financial planning community doesn’t talk about much, but it should. Meanwhile, accountants might be about to revisit the issue, when the Accounting Professional and Ethical Standards Board (APESB) reviews its financial planning standard, APES230. You may recall that the original version of APES230 banned all forms of conflicted remuneration, including asset-based fees, but financial planning-based accounting groups severely watered down the standard because they lacked the courage to ask clients to value and pay for advice. If APESB has the courage to revise APES230 to something resembling its original form, then it will set a precedent for FASEA to contemplate as it develops its own professional and ethical standards, lest we end up with a two-tier standards situation – a “gold standard” adopted by accountants, a lower standard adopted by everyone else, and another lost opportunity to rid financial planning of conflicts.
Diversity of experience and expertise
Ultimately, the detailed work of FASEA will be undertaken by a series of working groups and board committees. The process of appointing individuals to these groups will take time, but it must be transparent. The make-up of the main board strikes a good balance between the various competing interests in financial planning, and the working groups and committees must likewise reflect a diversity of experience and expertise.
The banks will fund FASEA in its initial stages, but it will be no good if these institutions dominate its committees and working groups. However, nor will it be any good if the institutions are excluded from having input – they do, after all, account for more than 6800 authorised representatives, or about 28 per cent of all ARs on the Australian Securities and Investments Commission’s financial adviser register.
Before January 1, 2019, the board will need to develop the industry-wide exam and determine what degrees are relevant for allowing new entrants into the profession (this will include making a decision on the curriculums of the courses that candidates have already started but will complete before the 2019 deadline). It will also need to sort out the professional year requirements for new entrants, so potential employers can be ready.
A year later, the authority will need to have developed an industry-wide code of ethics. In the meantime, it must work out what is “degree-equivalent”, so existing planners who need to acquire additional qualifications have time to do so before January 1, 2024.
