The regulatory framework for financial advice and planning has the same origins as financial advice and planning itself – the sale of life insurance and, later, investment products.

In the past, up-front commissions were high and churning was rife. The increased focus on the disclosure of fees being charged to the client’s account was a reasonable solution to the problem and certainly had the effect of reducing churning (perhaps not so much with life insurance sales).

Back then, the switching of financial products was easy, and the multiple charging of up-front commissions was a genuine problem that needed to be dealt with.

The industry’s solution to the problem of churning was to start to pay a trail commission in the hope that it would disincentivise the constant rolling of products. This change certainly did have the effect of reducing the churning, but the disclosure was a one-time disclosure. It was never intended to be a fee for service, and this is perhaps why the regulator excluded these payments from the FDS requirements for so long.

The Statement of Advice became the primary disclosure document, and we were told to stop calling our financial plan a financial plan and instead use the specified but legalistic term “Statement of Advice”.

As a disclosure document, it was taken over by the lawyers who to this day insist that if something is disclosed, there is no responsibility for it – despite the courts and other lawyers insisting that this is not the case. Hence the document morphed from a simple document that outlined what was being recommended into a legal document that often ran to over 100 pages.

Don’t get me wrong, this is not all the fault of the lawyers. Advisers and planners started charging fees for the preparation of this document, and often these fees were not justified by the value of the recommendations, and so they began to charge based on ‘weight’. A big thick document must be worth at least three or four thousand dollars – right?

And then there is the issue of education. We got it quite right towards the end of the last century when the Diploma of Financial Planning was the pre-eminent qualification. Run by a University (Deakin) and sponsored by the FPA or taught at the Securities Institute of Australia by experienced industry leaders on a face to face basis. It was a full eight-unit program that covered all the main areas of financial planning and advice.

Then the Federal Government opened up the Registered Training Organisation (RTO) debacle, and the free-for-all race to bottom began. Why do an eight-unit two-year diploma when you can do the ‘same’ diploma in 6 months (or four weeks)? Even ASIC got in on the act by introducing RG146 which said that any course was adequate provided that the licensee was satisfied – effectively wiping their hands from any form of quality control. Many still did the full eight-unit diploma, but they were being undermined by the ‘new standard’ of RG146.

So that’s the history lesson – where to from here?

Well – up-front commissions are a thing of the past as they are banned regarding superannuation and investments. Commissions for life insurance recommendations have been standardised and reduced significantly, which overcomes one of the main issues with commissions – the allegation that agency theory suggests where advisers look for the products that pay the highest commission. I realise that there is still an issue of potentially over-selling insurance, but this is much less likely in the era of the best interest duty.

Trailing commissions have all but ended, and many advisers have moved to a ‘fee for service’ method of charging clients. Disclosure of these fees has become either once, twice or thrice-yearly, and there is a definite move towards annual disclosure and engagement.

Education is being substantially increased technically, although the majority of professional advisers will find it difficult to learn anything materially from the current courses on offer as these courses, despite being degree level or equivalent, offer less relevant information than the original DFP from 20 years ago.

Notwithstanding this, at the end of this year or next, we will have all proved that we could act ethically and understand the regulatory framework that we have been working within for the past number of years.

Well, if we have removed the major issues surrounding agency theory, increased the educational standards to a degree level, removed commissions in all but a very limited way and demonstrated that we understand ethics and regulation – surely it is time for financial planning professionals to begin the process of self-regulation.

Where we find ourselves is in the frustrating position of having rules and regulations imposed on financial advisers by people who are fundamentally disconnected from financial planning.

Partially this is our fault – we have never tried to formulate a coordinated approach to regulation. Further, vested interest has been the winner regarding submissions to regulators and legislators, especially as it applies post-hoc to regulatory measures floated. Short time frames for responses, an inability to produce evidence to support requirements and often different needs have all led us to the point where:

  • We operate in a highly regulated environment with rules imposed on financial advisers and planners which bear little relationship to the quality of advice that the end client receives.
  • Whether or not a disclosed fee is re-disclosed every one, two or three years has no impact on the outcome for the client.
  • Whether or not the advice document is legally required to have the title “Statement of Advice” when it is a financial plan, does not change the content therein.
  • Twenty emails and five phone conversations don’t meet the requirements for client service, but a single document called a client review does.

So what next? In two words: operational standards.

‘Safe harbour’ provisions should be judged by peers, based on what is an acceptable practice by other professionals. Only then do practices ‘outside the norm’ require special justification.

Of course, I am not talking about paperwork and forms required or signatures in specific places, or onerous timeframes, or other ‘business practices’ as they may apply to a traditional regulatory environment.

I am proposing the following:

  • Really practical things like a standard risk tolerance process (or perhaps even ‘authorised’ risk tolerance processes).
  • Standards regarding what information is required to be collected and stored regarding the client and their goals and objectives (standard data collection).
  • Standardised risk classifications for assets/investments with uniform categories so we can identify what, for example, a ‘balanced’ investment portfolio might consist of.
  • An agreed-upon formula or formulas for calculating personal insurance needs.
  • Standardised assumptions for financial modelling reflect existing market and economic conditions.
  • Standardised definitions of what constitutes independence.

I am particularly proposing that practising, experienced financial advisers develop these standards, along with academic support, in a true partnership where the results are accepted by the regulator, the courts, the complaint bodies and government. Maybe even the professional indemnity insurers.

Before I go on, I want to make it clear I strongly believe that standards cannot be too prescriptive. They need to allow enough flexibility to allow for differences in the delivery of any advice provided, but there should be boundaries. If an adviser or planner wants to move outside these boundaries, that is when the justifications are needed and the grey area should exist. If the grey area can be justified – great. If not, well, you should know the risks.

Only when we move to a position where a group of educated peers can reasonably evaluate the advice will the regulatory burden be relaxed. We need to collectively work towards this so we can lead, rather than follow, the regulators.

So how can we get there?

If we take a leaf out of the medical profession here, organisations like the AMA have special interest groups that inform the policy of the organisation and Government. Experts in the fields become a part of these groups, and they have clout. They are resourced with research grants and funding to produce evidence-based recommendations for the betterment of the community, and they also produce spokespeople who can talk with expertise in their fields – something we lack in our profession.

Of course, it also means that the way ‘I’ have always been doing things may need to be modified to meet the standards, and this can be challenging in the ego-driven world of financial planning and advice.

I’m up for it – are you?

Paul Moran will appear as a panellist at the Best Practice Forum on August 4 in a session entitled ‘How to regulate advice: A collaborative approach’ alongside ASIC commissioner Danielle Press in which practitioners will propose ways they think the profession should be regulated. Secure your digital access for this event here.

Paul Moran is principal of Moran Partners Financial Planning and is currently completing a doctorate in behavioural finance.
9 comments on “What does self-regulation look like?”
  1. Avatar Jason McFadden

    100% agree that we need a new industry association/body to truly represent and advocate for planners and provide national standards. The existing associations, particular the FPA, have been too self serving and too conflicted and have put their own needs first to be any type of over sight, national standard setting body. That failure is clearly evident by the amount of over regulation advisers have faced and un-affordability of advice for Australians. Advisers are un professional and just crazy to be shelling out membership fees expecting things to change. Happy to assist in establishing a new standard setting body.

  2. Avatar John Fletcher

    This is absolutely the best explanation and solution to the problem I have seen. Well done Paul.
    The old DFP was a great introduction to Financial Planning. The rest of our knowledge comes from experience, ongoing reading/ study and dealing with real people from all walks of life with different situations.

    We left our old licencee (ultimately bank owned) because we got sick of being told our advice and SOAs were amongst the best they’d seen, only to be told we weren’t compliant because we hadn’t ticked an irrelevant box. It was all about them not getting sued rather than giving good advice.
    Good luck with the best practice forum. I really hope you can convince the regulators that your ideas are the best way forward. I’m up for it too.

  3. “this can be challenging in the ego-driven world of financial planning and advice”

    Good article Paul. you have nailed the psychology which is the real change barrier in our industry (amongst many others).

  4. Avatar Cathrine Greven

    Excellent history lesson and self-regulation is the natural order. So when can we start – yesterday????
    More importantly how can we start today?
    I already have those 4 points (and more) implemented in my processes.
    How can we get collectively involved – who can we turn too (FPA or AFA? where were they in 2012 when this all came crashing down, they chose to take different sides of the fence on the remuneration model and couldn’t agree – have we seen a change in leadership there (because I was unimpressed and walked away from both associations at that time and haven’t re-engaged) , that they can at least agree on principals to collaborate.
    In the accounting world (of which i am also apart of) there are accounting standards globally – no ego’s and personal bias to influence there. This is as good a place to start, Financial Planning Standards (oh wait we got those now!).
    I would love to see the associations step up and adopt and lead from the front on this, in the interest of their members (some of whom have taken their lives due to lack of leadership in 2012). I hear some noise from FPA but nothing from AFA at this time? They should be our advocates and making LOTS and LOTS of noise, followed by ACTION ACTION ACTION.

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