Defending the status quo in the financial planning industry has become well-nigh ‘mission impossible’.
Regrettably, instead of accepting that reality and taking the opportunity created by revelations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to come clean and demonstrate genuine leadership, many in the industry doggedly persist with the promotion of diversions.
This is the antithesis of leadership, designed to avoid comprehensive self-regulatory or legislative reform, especially around conflicted remuneration, which leaders gauge will be unpopular with their constituencies. Such an approach demonstrates a misunderstanding of the role of a true profession, which must never be to defend members’ commercial interests to the detriment of the public interest, but to articulate, defend and regulate ethical and professional standards to which members must adhere.
THE ‘BAD APPLES’ ARGUMENT
There are three principal diversionary tactics in play. The first is that all will be well if we get rid of the ‘bad apples’. The story goes that the industry’s problems are not systemic, but that there are a handful of dishonest participants (as in any profession) whose poor behaviour unfairly brings into disrepute the rest of the hardworking and honest industry participants.
The fault, it is said, lies not with the profession’s structure and leadership, but with poor oversight by incompetent dealer groups or by regulators who are ‘asleep at the wheel’.
Given the revelations of the royal commission, it is hard to believe that the ‘bad apples’ diversion continues to be used, but continue it does. In fact, with some of its supporters, it has morphed into the deluded proposition that much of the bad behaviour the royal commission revealed will not recur because all the bad apples have now been removed. Therefore, it is suggested, while there might be an occasional break-out, the problem has been substantially dealt with by proactive actions within the industry.
THE TERTIARY-DEGREE ARGUMENT
The second diversion is the need for tertiary education of planners. This is a powerful and superficially attractive idea. Who could possibly argue that the higher education of planners could be a bad thing? No one but that’s not the point. Tertiary education may improve planners’ technical skills, but it won’t make them ethical. In fact, the risk of mandating degrees is that we will produce an industry of well-educated salespeople, Wall Street-style.
Such an outcome may make the industry an even more hazardous place than it is now, because consumers may be lulled into believing that a university-educated financial planner is more likely to be ethical than a planner without such a degree. In that regard, I do have some sympathy for the older cohort of planners with long experience but no tertiary qualifications – some of whom have made just this point.
The academic development of the accounting profession, on which this tertiary education arrangement for financial planners appears to have been modelled, offers an instructive precedent. I was one of those aspiring young chartered accountants who were required in the 1970s to complete a university degree followed by an intensive professional year of postgraduate study (the infamous PY). There’s no doubt that the PY destroyed my social life for 12 months, but did these requirements make me and my colleagues academically better chartered accountants? Probably. Did they make us more ethical? I suggest not, as the chequered history of the profession since that time amply demonstrates. My point is that tertiary qualifications are worthy of support but we must understand what they will and won’t achieve. We should be under no illusions that university degrees will necessarily improve the ethical behaviour of planners. Any such suggestion is a diversion from the imperative to lift the industry’s ethical standards by removing all forms of conflicted remuneration.
THE ‘CAVEAT EMPTOR’ ARGUMENT
The third diversion is that financial literacy education for consumers will ensure that they are so well-informed that they will make sensible decisions and will not succumb to the dishonest practices of the few ‘bad apples’ in the industry.
This argument suggests that it is the responsibility of consumers to inform and educate themselves, so that should they get ripped-off, it’s their fault for being unable to spot the bad advice in the first place. Taken to its extreme, this diversion submits that financial planning practitioners are participants in a free market and may act and advise as they wish, so long as they comply with the minimum requirements of the law. As a result, consumers have the personal responsibility to give informed consent to their advisers’ voluminous disclosures and complex conflicts. If they don’t, that’s their problem. Caveat emptor.
This argument relies on the unrealistic proposition that the free market works properly to ensure that there is a reasonable balance of power and knowledge between planners and their clients; however, the royal commission has demonstrated that the financial planning market fails regularly.
As a result, clients are left worse off due to their inability to detect that advisers are acting improperly. Is this failure the fault of clients? Surely not, especially in circumstances where a group of people claiming to be professionals seek to gain the trust of the public by purporting to act in the best interests of their clients.
In order to attempt to redress this imbalance in the market, governments and others have engaged in the design and delivery of independent financial education to consumers. This activity, often referred to as financial literacy or capability, is funded through government, philanthropy, enlightened employers and grants to not-for-profit organisations sourced via the proceeds of fines arising from enforceable undertakings made by financial institutions that misbehave.
Given all of this well-intentioned effort, the awkward question must be whether financial literacy and capability education is merely scratching the surface, with limited capacity to improve the literacy and capability of consumers.
Given the size and unlimited resources of the industry to craft marketing messages, sell products and influence the public it claims to serve, the answer must be a qualified yes. This does not mean the effort to educate consumers should be abandoned but the effectiveness of the education would be vastly increased if the financial planning industry would voluntarily lift its ethical and professional standards to the highest level, especially around the removal of conflicted remuneration.
If the industry were to do that, diversions would no longer be necessary. The industry would become the true profession it wishes to be, its members would be welcomed as key participants in the education process and a profession of financial planning would flourish as a trusted source of independent advice to the wider Australian community.