A core objective of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was to identify where the conduct and behaviour of financial services businesses, and their employees and representatives, had failed to meet community expectations.
“Community expectations” is an imprecise benchmark. There’s no absolute standard, and what’s acceptable and what’s not acceptable changes over time. It’s also somewhat in the eye of the beholder. But in any environment where one party’s expectations routinely fail to be met by another, there is invariably an erosion of trust.
During 2018, as the royal commission cast its peculiar spell, CoreData tracked the level of trust in financial planning. A trust score is calculated by asking individuals to rate their trust in an industry or sector on a scale from zero to 10, where zero is complete lack of trust and 10 is total trust. A score of six of higher denotes a degree of trust in an industry or sector.
Trust in financial planning started 2018 at more than 60 per cent and held up well through the second quarter, but went off a cliff in the third quarter, plunging to 35 per cent. It came back somewhat, to just over 41 per cent, at the end of the year, but the latest update has shown it weakening again, to 36.6 per cent. And this was before the royal commission released its final report earlier this month.
|Chart 1: Please rate your trust in the following industries or institutions on a scale of 0-10, where 0 indicates complete distrust and 10 indicates complete trust.|
|Q1 2019||Q4 2018||Q3 2018||Q2 2018||Q1 2018|
|Source: CoreData Research|
A decline in trust is not a massive surprise in the face of an inquiry that by its own admission always ran the risk of painting a distorted picture of the industry, commissioned as it was to focus on cases and causes of misconduct. But it follows that rebuilding trust in the industry will require those involved in it to meet community expectations clearly and consistently and over a considerable period of time.
Research has established what the key elements are in a trustful relationship, and these are reflected clearly in research about what the community expects of financial planners.
How much someone trusts financial advice depends on how much attention they have paid to the royal commission, including how much reportage of the inquiry’s public hearings they have read. In a nutshell, the more they know, the less they trust.
|Chart 2: Please rate your trust in the following industries or institutions on a scale of 0-10, where 0 indicates complete distrust and 10 indicates complete trust.|
|Level of awareness of royal commission|
|Industry:||I didn’t know it existed until now||I saw some headlines about the report||I read an article/watched a segment about the report||I read a few articles/watched a few segments about the report||I have read some of the report|
|Source: CoreData Research|
Trust is unsurprisingly greatest, at 48.6 per cent, among those who didn’t even know there was a royal commission happening until being asked a question about it. And trust is clearly lowest, at about 21 per cent, among those who have read at least some of the inquiry’s interim report.
Elsewhere, the research has found that more than 55 per cent of people believe the financial services industry generally has not met community expectations.
A key element of trust is the concept of benevolence, or the idea of acting in the interests of another. And it is clear that the public expects financial planners to be paid only for the advice they give. There are two key words in that statement: “only” and “advice”. Payments to financial planners should reflect the value of the advice they provide, and should not reflect other issues – like how much money an individual has invested.
In case there’s any dispute about this interpretation, 22.6 per cent of people strongly disagree and 30.7 per cent disagree that financial planners should be paid according to how many products they sell. A group of about 28.5 per cent say they neither agree nor disagree with that proposition; but less than 20 per cent of people think it’s OK for advisers to be paid on a product basis (and only 3 per cent strongly agree with that idea).
In the public’s mind, there is a clear and unambiguous separation of product and advice. And it’s a broadly similar picture when it comes to advisers selling in-house products. Less than a quarter of respondents (22.8 per cent) think it’s OK for advisers to sell in-house products; a larger group of about 36 per cent really don’t care one way or the other; but the largest group, representing 41.5 per cent of the population, disagree or strongly disagree that advisers should sell products manufactured by the same entity that owns (or licenses) the advice business.
More than half of respondents (50.9 per cent) disagree or disagree strongly that banks should be allowed to own financial advice businesses at all.
Lest these results lead one to conclude that the public has it in solely for banks and bank-owned advice firms, CoreData’s research also reveals strong opposition to the idea of industry superannuation funds using members’ funds for marketing purposes. Almost 65 per cent of people oppose members’ money being used this way, including almost 38 per cent who “strongly disagree” with it. Less than 15 per cent agree or strongly agree it’s OK to spend members’ funds to promote a fund.
|Chart 3: To what extent do you agree with the following statements:|
|Strongly agree||Agree||Neither agree nor disagree||Disagree||Strongly disagree|
|Financial advisers should only be paid by the clients for the advice they give.||27.1%||43.2%||20.3%||7.6%||1.8%|
|Banks should be allowed to own financial advice businesses.||3.5%||16.6%||29.0%||26.8%||24.1%|
|I would trust a bank-owned financial advice business more if it was sold by the bank to another entity||3.2%||20.4%||53.2%||15.8%||7.4%|
|Financial advisers should be allowed to be paid according to how many products they sell.||3.0%||15.2%||28.5%||30.7%||22.6%|
|Industry super funds should be allowed to spend fund members’ money on marketing and advertising||2.7%||11.8%||20.6%||27.4%||37.5%|
|Financial advisers should be allowed to sell products manufactured by the same parent entity that owns the advice business||2.5%||20.3%||35.6%||23.6%||17.9%|
|Source: CoreData Research|
The financial literacy of the average Australian has declined over the last two decades. More than a third of consumers strongly agree this has played a role in the failure of the financial services industry, and that reliance on the financial services industry to explain products (and services) and perform comparisons has left them vulnerable to being take advantage of.
Just under 9 per cent say the financial services industry has acted deceptively and poor financial literacy can be blamed in only a few cases; a similar proportion say the industry has acted deceptively and no amount of financial literacy would have saved consumers.
There’s a clear opportunity here for the financial advice industry to step up and to demonstrate that it can and does act in the best interests of consumers, now and in the future.
|Chart 4: Many studies reveal that the financial literacy of the average Australian has declined over the last two decades – to what extent do you agree this trend played a role in the failures of the financial services industry?|
|Strongly agree – our reliance as consumers on the financial services industry to explain products and perform comparisons has left us vulnerable to be taken advantage of||36.5%|
|Agree – our reliance as consumers has left us vulnerable and financial services companies have acted deceptively in only a few cases||26.3%|
|Neither agree nor disagree – poor financial literacy and the practices of the financial services industry bear equal blame||19.3%|
|Disagree – the financial services industry has generally acted deceptively, and poor financial literacy can only be blamed in a few cases||8.8%|
|Strongly disagree – the financial services industry has acted deceptively, and no level of financial literacy could have prevented misconduct||9.0%|
|Source: CoreData Research|