The financial advice industry’s objective of achieving the status of a profession remains frustratingly distant and inaccessible, principally because of the inability or unwillingness of the industry’s associations to understand the true nature of a profession and to accept the behavioural consequences that necessarily follow.
In order to reach that understanding, the associations must answer a fundamental question. That is, are they representing their members’ commercial interests or are they professional bodies defending the public interest?
They cannot be both because the commercial interests of members inevitably conflict with the public interest, putting leaders of associations under immense pressure to compromise professional and ethical standards. When those standards are compromised the aspiring profession’s public interest duty is also compromised, leading to a lack of trust in members and a consequent depreciation in the value of designations and reputations which members have worked so hard to achieve.
The failure of associations to resolve this key issue of principle has enabled systemically bad behaviour in the industry over many decades. This vacuum of leadership has lead to political responses in the form of complex and costly regulations about which the industry complains loudly.
Typically, these regulatory responses are compromised before they commence, due to fierce industry lobbying designed to protect certain commercial interests and practices. As a result, the regulations prove to be ineffective, leading to more bad behaviour, followed by another round of complex, costly and compromised regulations, more bad behaviour and so on.
The process constantly repeats itself, causing the cost of financial advice to increase, creating mistrust in advisers and discouraging people from seeking advice in the first place.
Clearly, it is a poor outcome for demoralised financial advisers and it achieves no discernible win for the public interest.
One of the most conspicuous examples of this flawed process is in accounting, where industry associations yielded in 2013 to pressure to allow licensed members offering financial advice to receive commissions, asset fees and other forms of conflicted remuneration. Members were then given the ludicrous option of choosing the highest ethical standards (genuine fee for service and avoidance of conflicted remuneration) or a lower standard (percentage-based remuneration and disclosure of its receipt).
This compromise of ethical standards has done considerable damage to the designations and reputations of a group of people who had hitherto been seen by the public as a safe harbour of unqualified trust and professionalism.
Other examples over the decades include:
1) The legislative requirement, introduced some thirty years ago, to disclose receipt of commissions. This was greeted with outrage by industry associations whose members could see the end of their lucrative commercial arrangements. As it turned out, these arrangements didn’t end (far from it). Disclosure was eventually accepted as necessary, but has not proven to be enough to protect consumers from conflicted remuneration and systemic poor behaviour;
2) The Future of Financial Advice laws (FOFA) in which conflicted remuneration was legislatively defined to ban some third party commissions, but carved out certain kinds of product sales incentives such as asset fees/commissions and life insurance commissions. This led to the industry’s oft-repeated claim that conflicted remuneration has ended. Nothing could be further from the truth;
3) The (FASEA) principles-based Code of Ethics which has been unfairly condemned for its uncertainty when the complainants know well what the plain words mean and don’t like the outcome. As a result, many industry leaders are calling for delay and more consultation in the hope that the Code can be diluted in the interests of those members whose business models rely on retaining the status quo.
Until the industry associations understand the nature of a true profession and accept the behavioural consequences that follow, financial advisers will never achieve the professional status that they seek.
The considerable benefit of reaching the understanding and acceptance outlined herein is that the industry associations would then be in a strong position to argue from the high moral ground for removal of much of the increasingly burdensome and ineffective regulatory regime.
Clearly, government is looking for ways to remove the ‘red tape’. They’ve said it often enough. The industry’s leadership is in a position to create the circumstances in which it can be done. Advisers, consumers and government often disagree, but on this matter, there is a ‘unity ticket’ in support of its achievement.
Right now is the perfect opportunity and it should be taken enthusiastically.
That achieved, trust will be created, costs will reduce, adviser morale will increase, more consumers will seek out financial advice that is both trustworthy and reasonably priced and the new profession will grow as more young people enter its ranks.
Not only is this the right thing to do, it’s realistic and deliverable, whereas believing that all will be well by continuing to defend the indefensible is a road to more regulation, rising costs, on-going negativity and a shrinking, demoralised industry.