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. Spot on Paul, the regulatory requirements incumbent upon us now to ensure we tick the necessary boxes I fear will force us to commoditize the service that is ultimately provided. There is a lot of good that has come out of the recent overhaul, but if the major issues are not addressed, financial planning will be restricted to the HNW sector.

  2. Avatar Jeremy Wright

    Paul makes some very valid points.
    He is right in that the current regime has been set by people who have little or no experience in the real world of advice, yet the maze of complexity and regulations that advisers live under, is carried over to and makes the assumption that potential and existing clients, are prepared to follow and also abide by these rules, to make the world so much better, a Utopian world which unfortunately does not exist in reality.
    People, all of whom, who have different expectations, skill sets, biases, time limitations and a willingness to open up, creates many shades of grey that set rules can never cover off on in every scenario.
    The world has turned to a system that in the history of mankind, has never worked, which is Government and Public servants thinking they can lead, guide or bully the Private sector.
    Vested interest groups like the big end of town lobbyists, whose sole objective is to push their own agenda, is always a threat and can derail good progress in making improvements.
    The purpose of Government, is to listen, understand and make decisions, based on correct data and analysis.
    This is where the process falls down, as Government employees are out of their depth and the Government allows Lobbyists to bend the truth to suit their objectives.
    The solution is simple.
    Lobbyists are to be held accountable for their advice.
    You would find a marked decline in Lobbying if Lobbyists had to abide by the same Best Interest Duties we live under.

  3. Avatar Karthik Ganapathy CFP®

    Great article Paul. You have pointed out the exact pain points that I feel and I’m sure lot of us would agree. Good luck for best practice forum and I hope the positive changes happen soon. Thanks

  4. Avatar Daniel Molesworth

    You’ve nailed it Paul, well articulated. I agree with your comments 100%. My Ba Finance did little to prepare me to be a Financial Planner verses the 8 unit Diploma I did in 2002.

  5. Avatar Todd Walters

    The problem with the level of some of the degree courses on offer at the moment is the low base from which they’re assessed against. It’s part owed to FASEA using a national curriculum, gifted from the Financial Planning Education Council, that is YEARS out of date. Many of the current programs are indistinguishable from the older diploma programs that were being offered in the early 00’s as a consequence.

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