While FASEA’s Code of Ethics is largely appropriate, world-renowned ethicist and Princeton University professor Peter Singer reckons the education authority fell short on conflicts of interest, which they “didn’t quite get right”.

Delivering a keynote speech at the Professional Planner Best Practice Forum in Sydney this morning, Singer brought up the Financial Adviser Standards and Ethics Authority’s treatment of vertically integration, and said its interplay with conflicted adviser remuneration remains a “grey area”.

Singer compared FASEA’s third ethics standard­ – which says advisers cannot “advise, refer or act” if a conflict exists – to the standards’ explanatory note, which says that while you won’t breach the standard for merely recommending products your employer offers, you will breach it if a variable part of your remuneration depends on it.

“So, no volume bonus and no commission for putting products in – that’s pretty clear,” Singer said. “But what if recommending those products puts you in the good books with your employer? Isn’t that relevant to your future success in the company, and possibly to your pay rises in future years which are not volume bonuses?”

Singer warned FASEA was trying to draw “a pretty fine line” between the code and the explanatory statement. The education authority nailed most of the ethics standards, he believes, but not this one.

“Perhaps this was an area they didn’t get right, or perhaps they didn’t dare to push hard enough to get it right, because there seems to be a bit of a clash with what they’re saying about conflicts of interest, [and] this line between volume bonuses and remuneration,” he explained.

The ethicist suggested FASEA should have either banned financial advisers from working for institutions that offered products or, if that wasn’t feasible, putting up barriers that stopped advisers from advising people to invest in those products.

“One of those two things would have been more consistent with what they’re saying about avoiding conflicts of interest,” he said.

The disclosure misconception

Singer also identified gaps in advisers’ understanding of the code, and highlighted the misconception some still have that disclosure is a cure-all for conflicted advice provision.

The explanatory statement clearly states that explaining a conflict does not absolve advisers of the duty to abide by standard three, Singer said. “It seems like not all of you necessarily know that,” he added.

“I find the juxtaposition interesting because the explanatory statement explicitly says that [disclosure is] not enough,” he said. “If you have a conflict of interest you must not act; exposing it to the client and getting their consent is not sufficient.”

That some advisers aren’t aware of this justifies the ethics portion of exam, he noted.

“Maybe that’s the point of requiring people to take exams – so that you know where you are in this situation,” Singer said.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
2 comments on “Ethicist highlights where FASEA falls short”
  1. Avatar Ralph Morgan

    The main tension seems to be between the use of commissions to remunerate advisers indirectly (which benefits clients by making the ‘up front’ fees for advice less of a barrier to gaining access professional financial advice) and the real bias (conscious), potential bias (unconsious), or a perception of bias by the planner that results when some ‘products’ providing greater remuneration via commissions than others. Rather than banning commissions completely (which logically includes life insurance commissions and also AUM fees) a fixed commission rate applied to all financial products would eliminate the conflict of interest when recommending one product over another.

    However, that would still leave a couple of problems:
    1. Paying a commission for all products would not be possible for very low-yield investments such as term deposits, and would mean be a greater drag on overall client portfolio return for conservative clients vs. risk-tolerant clients.
    2. It would still encourage (bias) advisers towards recommending investing in products (that generate a commission) over reducing debts, investing in cash accounts etc.

    i.e. Eliminating ‘conflicted’ advice does not by itself ensure ‘best interest’ advice.

    On the other hand, complete elimination of any commissions or AUM based fees (which are a form of progressive fee scale, similar to tax rates, rather than a ‘flat rate’ fee scale that is punitive for financially disadvantaged/low NW clients, and also have aspects of a ‘time payment plan’ approach to paying for the initial SOA process) and is a more holistic fee basis with the cost of advice spread over the entire investing lifecycle, and hence proportioanl to NW and ability to pay), might achieve the nirvana of ‘unconflicted advice’ but would also make advice unaffordable for many clients (hence inequitable).

    I think that overall, many considerations of potential conflict of interest in the field of financial advice have yet to adequately address the key difference between this field and most other professions. That being, there will always be an inherent conflict between remuneration paid for provision of professional financial advice and the goal of such advice (the financial well-being of the client). After all, ANY fee will have some immediate adverse impact on the client’s finances, and must be evaluated against not only the immediate benefits (eg. cost savings by consolidation of super, identifying the most cost-effective insurance product that provides the required features etc) and the long term financial benefits of having been provided with professional financial advice (eg. benefits of diversification, matching portfolio risk to client risk tolerance, education of clients), rather than being left to ‘do it yourself’. Hayne appears to have taken a very transactional approach to fees for financial advice, and ignored not only the fact that ongoing fees can be a form of time payments for the initial service provided, but also the long term vs. immediate value provided by advice.

    The financial advice ‘profession’ is fundamentally different to other professions, where the fees paid by a client do not directly impact the benefit of the advice provided – paying a doctor does not directly reduce a patient’s health (although it could be argued that paying high medical fees can be detrimental to health if it reduces funds available for health insurance cover, healthier fresh produce at the supermarket, gym fees etc.), and paying a lawyer does not reduce the quality of the legal advice or affect the outcome of a court case etc.

    There is also, of course, a disconnect between what education, codes of conduct, and review processes can aspire to in terms of increasing ethical and unconflicted behavior by financial advisers, and the actual outcomes that can be achieved for clients when an adviser chooses to act in an unethical or illegal manner. Many of the worst examples of financial planner misbehavior revealed by the Royal Commission were in breach of existing rules and regulations, often to the extent of being criminal. Would being in breach of an enhanced ‘ethical code’ as well have prevented such actions?

    Having the perfect ‘code of ethics’ is a wonderful aspiration, but it isn’t a panacea.

  2. Avatar Christoph Schnelle

    I agree with Peter Singer. FASEA is probably hamstrung and has to contradict itself because the Royal Commission report explicitly allowed this conflict to continue and FASEA may simply not have the power to follow Peter Singer’s recommendation:

    “The ethicist suggested FASEA should have either banned financial advisers from working for institutions that offered products or, if that wasn’t feasible, putting up barriers that stopped advisers from advising people to invest in those products.”

    I wonder if this conflict will have us back with a new Royal Commission in 5-10 years time.

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