“It’s a free market.”
This is an assertion regularly made, often aggressively, by financial planning practitioners about the environment in which they believe their services should be offered. The subtext is that financial planners should be allowed to set the rules of commercial engagement with their clients, especially when it comes to matters of remuneration. After all, they say, ‘It’s a free market and government should stay out of my professional life.’ Typically, this assertion is used to justify conflicts of interest, which are acceptable – so the free-marketeers say – provided they are disclosed. After that, it’s up to clients to inform themselves properly and to exercise their ‘freedom of choice’, as all responsible adults should do in a free market.
There are several problems with this analysis. First, the financial planning market is anything but free. In fact, that might be the last word one should choose to describe it. It’s one of the most complex, rigid, regulated, confusing, impenetrable and opaque markets imaginable. In fact, it’s almost not a market at all, at least in the sense that the average person understands the term. It’s hard enough for practitioners to understand it, let alone clients – most of whom have no chance at all.
Second, it may be about to get a whole lot worse with the introduction of the ominously named Financial Adviser Standards and Ethics Authority. No doubt, the government that introduced FASEA (the self-appointed champion of the free market and red-tape removal) was well-intentioned in visiting it upon the industry, but it’s a vain hope to believe that the complexity and cost of operating as a financial planner will not increase substantially as a result.
Third, it is doubtful that FASEA’s pronouncements will substantially improve the industry’s behaviour and elevate its low level of trust within the community. The key question is: Will FASEA’s mandated code of ethics merely satisfy stakeholders or will it seek to lift the industry’s ethical standards to where they need to be? Time will tell.
Yes, I know, we’re on a journey to professionalism! Trouble is that much of the industry doesn’t want to reach the necessary destination, at least not at the price they perceive may be required (namely the removal of all forms of conflicted remuneration).
I do accept the proposition that more technical education for financial planners is desirable – who could possibly object? But unless education is accompanied by adoption of the highest ethical standards, financial planners will simply become a group of well-educated salespeople.
Fourth, by definition, financial planning’s professional practitioners should not, as a matter of principle, operate in a free market. Instead, their fundamental obligation is to act in their clients’ best interests at all times, even to their own financial detriment when those interests conflict with their own. Conventional free markets don’t work that way. Financial planning practitioners must never “balance stakeholders’ interests”, which is so often a euphemism for making sure the industry’s commercial interests are carefully protected. We’ve seen this phenomenon with the so-called “balanced scorecard” method of remuneration in financial institutions, which is sadly doomed to failure as soon as a criterion exists in a scorecard that involves a product sales
target or incentive (which they invariably do).
The price of professionalism
Let’s be clear about this. Financial product manufacturers may quite properly favour their own commercial interests, but a true professional person must never do so, at least not to the detriment of a client’s best interests. That’s the price one pays for being trusted and respected as a professional. An adviser who doesn’t accept that price is not a professional at all and should not be offering financial planning services to the public.
Fifth, as practitioners, we know that most clients do not have the education, knowledge or ability to make fully informed financial decisions in a free market. That doesn’t make them stupid. It’s just that they don’t necessarily have the skills and experience required to make decisions without the input of a trusted professional. It’s why they come to us. That’s true of any complex decision. For example, it would be imprudent to make a life-changing legal decision without the advice of a trusted lawyer.
In reality, the so-called free market is heavily skewed in favour of professional advisers who have the education, knowledge, selling skills and (ultimately) the power to influence outcomes in their clients’ best interests or not. This is a position of immense personal responsibility, in which the financial planning industry has failed on multiple occasions (while brazenly claiming that it’s not a cultural problem and that all will be well after a few bad apples are removed and disclosure and transparency rules are improved).
Self-inflicted wounds
At least for the time being, the accounting profession is still allowed to develop, control and monitor its own professional and ethical standards. The discipline of financial planning, on the other hand, has its cradle-to-grave licensing, its professional, ethical and education standards, and even its name, governed by complex legislation, government regulators and, more recently, a ministerially appointed standards-setting body. It may not be too much of a stretch to say that it’s reminiscent of a nationalised industry, rather than operating in a free market. The so-called professional associations have an as yet unclear, but nevertheless subsidiary, role as compliance reviewers to ensure adherence to the complex government-mandated rules of engagement.
So how did it come to this? In essence, it’s due to a widespread, longstanding and persistent misunderstanding in the financial planning industry of the meaning and consequences of the word ‘profession’. Far from operating in a free market, a profession has fundamental obligations in terms of the actions and behaviour of its participants, including the imperative to remove, not just disclose, conflicts of interest. The industry has stubbornly refused to accept these consequences over many decades.
The story isn’t finished yet. The industry can still redeem itself. However, based on its failure so far to adopt the highest possible ethical standards and self-regulate (the hallmark of a true profession), the outlook for redemption appears to be rather bleak.
