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.
As one of the founding members and directors of the FPA, the government has gone out of it’s way to prevent peer review and education standards which the FPA/IAFP introduced in Australia with the CFP designation in 1986. Mr Brown hasn’t mentioned this. The Government ignored the FPA and introduced the Corps Act in 2001 and created a melting pot for any provider of securities through AFS licensing.
The Government also put product providers in charge of financial planners with training at RG146 level, limited APLs, and a Statement of Advice to recommend products.
There is no FINANCIAL PLANNING in the Chapter 7 of the Corps Act. I do hope Mr Brown turns his attention on what the Government has done introducing 60 steps to give just one piece of advice in Australia since 2001.
I used to have great respect for Robert’s ability to get advisers to see the truth, but I fear he’s been banging this drum for so long, he’s now only doing it out of habit! The flaws in FASEA Standard 3 are pretty obvious. A professional association is duty-bound to promote the issues and concerns of its constituents where that is not to the detriment of the public. If you can tell me how clarifying that Standard so as to making it practically applicable is contrary to public interest, Robert, I would be only to keen to hear your explanation………….but I won’t be holding my breath!
Your publication like some newspaper organisations love generating controversy. That’s why you continue to give Robert Brown a voice. Robert is an Accountant and that profession is now held to a lower standard than he is advocating financial planners be held to! What cheek. Ultimately all professions have a commercial element to them otherwise we’d be all working as charities. So conflicts have to be minimised and can’t be eliminated. The reason the accounting bodies fought so hard against APES 230 in 2013 was because in its pure form the code wasn’t commercial. I firmly believe clients can experience a great outcome from good advice without the need to adopt a holier than thou Code of Ethics. Practitioners who sail too close to the wind are the ones under a more commercial code who’d need to be reined in.
As someone in close contact with Bernie Ripoll during the review that led to FOFA reforms, I can say that Robert MC Brown starts off well enough. The FPA has generally shown itself to be a self-serving bureaucracy that was (unfortunately) smart enough to position itself in a quasi-regulatory role, by which it could dictate terms to members and charge for it. That is so much easier than having to convince members that it was offering benefits worth paying for. But Brown loves arguments around conflicted remunerations and the like. The fact is that the hourly rates he loves so much have been scammed for years by accountants, through seniors delegating work to juniors at the senior fee level, training juniors on the customers dime, billing for dry-gully excursions and incompetence, and making clients sign all manner of disclaimers to avoid responsibility, some of which are enforceable. The fact is that organisations like CPA and CA and the like are powerful lobby groups for the accounting profession. Despite sometimes questionable leadership, they are to be respected because they have been very successful in heir role. As to whether their presence makes a professional of a practitioner, I believe such a transition is beyond rules and associations, and in the domain of the individual.
Bob Brown accurately describes the cycle of regulation, that in part was designed to stop bad behaviour, not stopping bad behaviour, thereby leading to more regulation that still didn’t work, leading to a Royal Commission, leading to much more regulation that is already showing signs of not working etc.
Everything else in this article feels like it has been written by Lewis Carroll.
The issue is that product providers can employ or license advisers, something that in this form doesn’t happen in other professions. Licensee-based licensing is useful for Snoopy’s likeness and other trademarks, and for pubs, but not for financial advisers.