During the last week, the cost of implementing reform in financial planning has come under the spotlight. It’s been suggested that it “feels excessive”, and might even harm consumers by having the opposite effect of what is intended.
The broad aims of recent reforms have been twofold: to make advice more accessible to more people; and to improve public trust and confidence in the industry and its practitioners.
On the issue of access, Investment Trends reckons 2.3 million people used a financial planner in 2016. By “people”, they mean “adults”, and there were 18.2 million of them in Australia in 2016 – which means that 15.9 million adults, or about 87 per cent of them, didn’t use a planner, and only 13 per cent did.
This figure rather weakens an argument that reform could price advice out of the reach of the average Australian, because by and large, average Australians are already not using it. And they didn’t use financial planners in 2016 in greater numbers than they didn’t use them when Investment Trends did the same analysis in 2011.
The level of financial planning use hardly suggests a high level of public trust and confidence. This is borne out in surveys by organisations like Roy Morgan Research, which show the sector has a relatively low ranking on the trustworthiness scale.
Building trust is not helped by well-documented situations where ‘advice’ has destroyed clients’ financial wellbeing.
Another argument against reform is that Australia is underinsured, and denying access to advice will make this situation worse. But the underinsurance problem happened even while advisers were paid to sell life insurance while it appeared to be free to consumers. So that argument’s a fail, too.
The traditional way of doing things, at least when measured by how many people access financial planning and success in reducing underinsurance, hasn’t worked as well as many would like, which is why we still hear calls to raise the number of people who use advice from 2 in 10 (even though that figure is already an overestimate).
It’s time to do things differently, surely?
Necessary to create a profession
It’s hardly newsworthy to say that reform takes time, costs money and can be difficult to implement. But that is kind of the point – it requires things be done differently. People deal with change in different ways and no doubt some do not deal with it well. But that’s not a good reason to avoid reform where it’s necessary.
True, calls for reform should not be accepted unquestioningly. Benefits must be weighed against costs and judged accordingly. But there’s often just as great a cost in doing nothing as there is in doing something – and sometimes an even greater cost.
If we go back, say, 10 years, we see there were clear and well-recognised reasons to change things in financial planning. It was necessary to eliminate the kinds of conflicts that not only enabled planners to put their own interests ahead of their clients’ but actively encouraged it. It was necessary to lift education, professional and ethical standards, hence raising barriers to entry to an industry with aspirations of becoming a profession and a deep-rooted desire to be trusted and respected.
After goodness knows how long of nothing happening on these fronts from within, the government stepped in. First came the Future of Financial Advice legislation, then came the Life Insurance Framework, and now the industry is preparing for legislated professional, education and ethical standards.
Different things to different people
The creation of a financial planning profession simply could not take place without reform. There’s not much debate about whether financial planning should aspire to be a profession. And if that proposition is generally accepted, then the need for reform should be, too. Otherwise it’s all lip service and hollow promises.
It’s fair to say some advisers feel the cost of reform is excessive, depending on how they and their businesses are positioned. For some, it is an existential threat.
Some advisers view the cost grudgingly and perceive little benefit in it. Some see it as pointless, because they’ll have left the industry by the time it comes into effect.
Others see it as a personal affront to how they’ve conducted themselves in the past. All of those views, and others, will shape individual responses. But none of them is an argument against reform, per se.
Some see a cost as acceptable if it lifts the industry – and with it, their own businesses – to a different level. No change means financial planning will remain a fringe activity. It means underinsurance will continue. And it means financial planners will continue to be viewed as untrustworthy and not due the respect they deserve.
While there is undoubtedly a cost associated with reform, the greater cost is no reform at all.