In the parlance of economists, the financial advice industry is a textbook case of market failure. What an extraordinary outcome for an industry whose participants are (generally speaking) strong supporters of free and properly functioning markets.
The clearest example of market failure is the undisputed fact that so few Australians seek financial advice from licensed advisers. The industry regularly acknowledges this and somewhat lamely calls for Australians to recognise the value of advice.
This situation is exacerbated by a lack of guidance and direction from the industry’s leaders. Most of them seem unwilling or unable to accept the sometimes uncomfortable ethical and practical consequences of what needs to be done to transform a shrinking industry into a growing profession. Some say nothing, at least publicly. Others choose to defend the commercial interests of their noisiest constituents, whilst others obfuscate about the “journey to professionalism” and the need to “take members with us” towards a vague, unspecified and increasingly distant destination.
The so-called ‘advice deficit’ is especially evident amongst younger people requiring simple advice on buying a home, taking on debt or starting a share portfolio (hardly the highly prized ‘high net worth individuals’). Given the age of this cohort, there is a wonderful opportunity for them to build financial independence and to establish long term professional relationships. And yet, most advisers have little interest in servicing this group, arguing that the cost of doing so makes no commercial sense due to prohibitively high compliance and regulatory costs. I see this frustrating problem every day in my work in financial capability education.
It should be acknowledged that ASIC is currently engaged in consultations to find solutions, but only the within the current framework of the Corporations Act. This will be a challenging task because the political compromises and deficiencies in the current law caused the problem in the first place and until they are resolved, there can be no permanent solutions, only workarounds.
Many industry participants are inclined to blame ASIC and the government for the advice deficit when, in fact, the blame lies squarely at the feet of the industry. Its poor behaviour over many decades has led to numerous well-intentioned regulatory interventions which the industry has managed to dilute through fierce lobbying. More poor behaviour has followed, leading to calls for more regulatory interventions, followed by more fierce lobbying and even more political compromises designed to appease influential commercial interests.
So far, it’s been a never-ending cycle of increasing compliance costs and compromised, ineffective legislative responses to bad behaviour. Is it any wonder the cost of delivering financial advice has increased so much, or that consumer trust is wanting?
A prominent example of this process is the Future of Financial Advice (FOFA) laws. That legislative intervention, which showed so much promise at the outset, is notable for its political compromises, its complexity, its resultant compliance costs and (most of all), its inability to noticeably improve the industry’s behaviour and the lot of consumers. The failure of FOFA was a significant factor in the establishment of the Hayne Royal Commission.
It’s to be hoped that the FASEA Code of Ethics doesn’t suffer the same fate, although some of the industry’s commentators seem determined to make sure that it does. Notably, in certain key areas (such as standard 3), the Code’s plain English meaning has already been ignored by much of the industry, even though it has been the law of the land since 1 January 2020. We’ve heard the usual language of delay and avoidance from industry apologists. Words like “uncertainty” and “lack of clarity” have yet again been posited as reasons for widespread lack of compliance, but in truth most of the industry’s leaders understand perfectly well the intention of the Code. They just don’t like what they have concluded.
This raises the issue of trust. Trust must be the aspiration of every successful and growing market, especially a professional one like financial advice in which participants are expected to act in their clients’ best interests. And yet, the unwillingness of consumers to trust the industry has been raised constantly over the decades, most recently within the mountain of evidence offered to Hayne in which lack of trust and systemic conflicts of interest were central themes (importantly, not just the bad behaviour of a few bad apples).
This does not mean to suggest that all financial advisers are dishonest. On the contrary, most of them are fine people who do their best for their clients within the constraints, conditions, influences and expectations of their licensees. The problem is not dishonesty. It’s the pervasive influence of conflicts of interest on culture and behaviour. Until the industry is willing to accept this and take seriously the behavioural changes that are necessary, compromised regulatory interventions will continue and compliance costs will rise.
Let’s be honest here. This problem will never be solved by disclosing conflicts, as the industry has done and defended for decades. It can only be solved by removing them, as acknowledged by Hayne and required by the FASEA Code of Ethics.
If the industry were to take this approach, trust would be created, the regulatory burden would be lifted, compliance costs would be reduced, more young people would enter a new profession of financial advice and many more Australians would seek financial advice.
It is the industry’s leaders who are misleading their members into believing that retention of the status quo is a serious long term option. It isn’t. So why not show some leadership and make the necessary reforms voluntarily on the industry’s terms, rather than being forced to do so by political processes beyond its control?
Then the industry could get on with the positive and constructive process of creating a profession of financial advice, rather than fighting negative and destructive rear guard actions to defend the indefensible. And market failure would be reversed in the interests of all Australians, especially the growing number of people who would enthusiastically seek reasonably priced and trusted financial advice.