It’s understandable at this time of crisis to engage only in short-term thinking – to spend our time dealing with problems relating to our business and to our clients’ circumstances that are pressing in the here and now.
However, if we are in a position to do so, we should also use this time to think about the bigger and longer term issues, such as our profession’s role in society, how we want our profession to be perceived by the community (both individually and collectively) and the impact we want to have in the world.
It is out of this current state of disorientation, amid market disruption, the onset of new regulations and a compulsory Code of Ethics following the Hayne Royal Commission (and the need for many to adapt to new ways of thinking about their own biases and conflicts of interest) that advisers have an important opportunity to reset their identity in the eyes of the public they claim to service.
Many of the views I have expressed through my regular contributions to Professional Planner have been forged since 2006 when I was privileged to be involved in the launch by Australian Defence Force (ADF) of what has become the largest and most comprehensive employer-based independent financial literacy/capability program in the country. The program is designed for members of the and their families, although its public website attracts readers from all over the world.
The program started from nothing, when ‘financial literacy’ was not even on the community’s radar screen (ADF pun unintended). The catalyst for the program was the over-exuberant sales activity observed in the early 2000s of many financial planners, accountants, margin lenders and property spruikers who were promoting products with high levels of gearing (and with concomitant levels of sales commissions) to ADF members and their families. Clearly, this was ‘an accident waiting to happen’.
Fortunately, the ADF took the view that as a caring employer, it should at least draw members’ attention to the risks involved in these arrangements, hence the formation of the ADF Financial Services Consumer Centre. This proved to be a prescient decision as the global financial crisis was only two years away.
Today the Centre presents over 250 educational seminars to its people in various stages of their careers (recruits to retirement), facilitates hundreds of one-on-one financial education sessions, hosts an amazing array of educational material, including videos, checklists and newsletters and fields thousands of questions every year about personal finances. Importantly, we refer many of our people to financial planners, financial counsellors and superannuation providers.
Based on evidence drawn from thousands of our people and their personal stories, I’ve reached what I believe to be some important conclusions about financial planners and their interactions with the community. Some of those conclusions are not pretty, although others are encouraging. Here are my top five conclusions:
- People want access to independent, educational information about personal financial issues, but many people want more than that and they can’t easily get it. The ADF’s public website offers an educational ‘safe haven’ as does ASIC’s outstanding ‘Money Smart’ site with which we closely collaborate. The very fact that people are hungry for independent and trustworthy information doesn’t say much for the financial services industry. It would be far better if the industry were trusted so that people could feel assured that they are being educated and advised “in their best interests”. Sadly, most people don’t feel that way. I know that to be so from my work, not just from what I’ve read in the Hayne Royal Commission report. As a result, in the absence of a trusted profession of financial planning, the community has adopted a workaround of financial capability education to fill the trust gap. Financial education has become an industry in itself, born out of a systemically conflicted culture in the financial services industry, combined with widespread bad behaviour by its participants and a lack of clear resolve by governments to fix the problem (in the face of incessant lobbying). In my ideal world, independent education programs would not be needed. Will that change any time soon? The answer is in the hands of the industry
- The vast majority of financial planners are not dishonest people, but most of them are conflicted people. Perceiving this conflict, the public doesn’t trust the industry. Of course, we’ve all seen the ‘surveys’ concluding that people trust financial planners, that is, until they realise what a conflict of interest is and how it may be impacting upon the advice they are receiving. How sad is that? In fact, it’s tragic because so many people could benefit from genuinely independent advice from a well-educated, trustworthy, conflict-free financial planner. This is the key point behind the mandatory Code of Ethics issued by the Financial Adviser Standards and Ethics Authority. Clearly, the most controversial part of the Code is standard 3 which requires advisers to avoid (not just disclose) conflicts of interest. Astonishingly, much of the industry seems to be deliberately ignoring the crystal clear plain words of English in standard 3 and is continuing to receive life insurance commissions, asset fees, profit shares and other forms of conflicted remuneration. This will end badly for advisers and their AFSL holders alike. Pity the lawyers arguing in court, in contradiction of their own foundational professional ethical standard mandating the avoidance of conflicts of interest, that life insurance commissions, asset fees or profit shares don’t breach standard 3 of the Code. Those same lawyers will also be forced to argue against the clear conclusions of the Hayne Royal Commission. No doubt, the Professional Indemnity insurers will have more than a passing interest in that discussion. Just by way of postscript, it’s worth noting that the Code of Ethics is not just a set of rules with which advisers are forced to comply. FASEA’s hope is that advisers will think deeply about the principles outlined in the Code and will willingly adopt the practices (especially about conflicts of interest) to which the plain English words of the Code should naturally lead them as members of a true profession. And given that we’re talking principles, not just rules, professional advisers should also conclude that commissions from mortgage broking and from the selling of real estate are similarly conflicted, even though technically they are not covered by the Code of Ethics and the licensing regime in the Corporations Act.
- Consumers of financial planning services will pay a genuine fee for service. I often hear financial planners mounting the argument that so-called “ordinary Australians” won’t pay flat fees or hourly rates, thereby justifying conflicted remuneration as the only practical alternative. In any event, they argue, all forms of remuneration, including genuine fees for service, are conflicted. This commercially convenient nonsense has gained some traction in the industry and in sections of the media. However, a moment’s thought demonstrates that a genuine fee for service is not inherently conflicted, especially in a financial planning context because it does not lead to product sales or to the imperative to accumulate funds under management which is the principal ill identified by the Hayne Royal Commission that FASEA is seeking to cure through its Code of Ethics. In fact, contrary to the views of the naysayers, well-informed consumers at all levels of wealth, including “ordinary Australians”, will gladly pay for the services of a financial planner where the advice is genuinely conflict-free. In such a relationship, consumers perceive the existence of a “value for money” professional arrangement created by the adviser demonstrably acting in their best interests through the avoidance of conflicts. Having said that, there is no doubt that fees for financial planning services have been driven to an unnecessarily high level due to the cost of compliance with vast amounts of unworkable, complex and ineffective regulation. Ironically, this situation has been caused by the industry’s own actions and conflicted culture. As a result, many advisers understandably search for that elusive species known as “high net worth individuals” or for prospects who are in a position to borrow money to “create” funds-under-management. Instead of driving fees higher through bad behaviour, if the industry were to co-operate with the clear intention of the FASEA Code of Ethics, much of the compliance and regulatory burden about which its participants bitterly complain would recede. Accordingly, the cost of financial planning services would drop substantially and many more members of the Australian public who would benefit from accessing the services of a trustworthy financial planner would enthusiastically do so. In addition, many more financial planners would feel a genuine sense of professional satisfaction, not having to worry about a complex compliance regime and knowing that they are trusted by grateful clients.
- Australia needs many more financial counsellors. Just like financial education programs, the growth of the financial counselling sector was substantially the result of a systemically conflicted culture and widespread bad behaviour in the financial services industry. Counsellors (as distinct from planners/advisers) are precluded from charging for their services, cannot advise on products and are only allowed to help people with ‘financial difficulties’. Financial counsellors perform a valuable and important service on behalf of clients in need. We often refer ADF members and families to them with excellent results. So often we hear stories of relief and gratitude that counsellors have been compassionate, caring and have provided advocacy and counsel in our members’ best interests. The demand for counsellors is increasing, especially at this time of crisis. Counsellors are doing much of the pro bono and un-conflicted work that licensed financial planners should have been doing for decades as a matter of accepted practice in a true professional environment. Of course, I acknowledge that some financial planners do a considerable amount of pro bono work, however, the industry as a whole should do more. That’s because pro bono work is a principal hallmark of commitment to society by a true profession. The credibility of that work is greatly enhanced when it is performed in a conflict-free environment, as in the case of the legal profession where pro bono work is an expectation of membership.
- Financial planning should be a valuable and essential service to society, but it’s only truly so if the industry’s participants as a whole transform themselves into trusted professionals. The need for transformation is especially urgent in this time of such great crisis. The need will continue for years to come as we slowly dig ourselves out of the biggest financial hole since the Great Depression. In that context, a true profession of financial planning has the opportunity to make a major positive contribution to the collective effort that will be required. Wouldn’t it be wonderful if the industry were to be accepted as the principal source of trusted financial advice in these difficult times? As a chartered accountant, I’m sad to acknowledge that my profession of accounting vacated the field in 2013 when it caved-in to powerful commercial interests and repudiated its hitherto most cherished ethical standard on dealing with conflicts. Perhaps, the time has come at this time of greatest need in nearly 100 years for a true profession of financial planning to step up and claim the highest ethical ground in the public interest.