What a week to rejoin the fray with Professional Planner and Conexus Financial.
After four and a half years working with the leading research and consulting business CoreData, and only a few days back into it, we find ourselves contemplating more regulatory change, earnestly debating the definition of the word “good” and staring at a long-overdue merger of two key professional bodies.
The more things change…
Michelle Levy’s consultation paper for the Quality of Advice Review lobbed on Monday and it’s ironic that even as she proposed a move towards more principles-based regulation for financial advice, the principles set out to achieve that have already seeded uncertainty and debate.
On Thursday the Association of Financial Advisers and the Financial Planning Association of Australia sprang something of a surprise by announcing merger talks. While it’s not a done deal, this move is not before time. For many years the AFA and the FPA have been like those two kids you knew at high school who were clearly at some point going to get together, and they were the only ones who hadn’t figured that out yet.
A merger will create an entity that can truly say it speaks for the advice profession. Sure, there will continue to be splinter groups and vested interests pushing fringe issues, but on important matters the industry will be much better represented, not only in Canberra but in any situation when a voice needs to speak for the profession.
Like on the issue of “good” advice, for example. Next week Levy will be joining Conexus Financial managing editor Julia Newbould on an exclusive webinar, where many of the issues she’s proposed in her paper will be discussed and clarified.
On one reading of Levy’s paper, the proposals it puts forward will lighten the regulatory burden on advisers quite considerably and reinforce the role that professionalism (including the Code of Ethics) plays in the delivery of advice. And so, on this reading, they are welcome. On another reading, the same proposals will open the door to hordes of voracious product salespeople and return us to the bad old days of advice-as-distribution. On this reading, the proposals must be approached with caution.
It’s illuminating two very different interpretations can be derived from a reading of the same set of broad principles. The reality of what they will achieve probably sits somewhere between those extremes, but exactly where isn’t yet clear. These are proposals, and the paper includes a lot of Levy’s impressions and musings on an industry she’s been examining closely for a number of months now.
The financial advice industry is complex, its current regulation isn’t ideal and it’s not surprising that at this stage of things Levy’s thoughts aren’t yet fully formed – at least, she’s not presenting them as such. And even when she makes her final recommendations, the government isn’t duty-bound to adopt them. So there’s still a long way to go.
However, it would be a major error and would run contrary to the broad direction of progress to date if the outcome of Levy’s recommendations was to lower barriers to entry to financial advice and open the possibility of product manufacturers once more treating advisers as mere distributors.
The barriers need to remain high. It should be challenging to become a financial adviser, and the demands made of people wanting to enter the profession should be onerous. Provided the barriers remain significant, it seems unlikely that any financial institution, or other entity, will be able to quickly assemble a large force to go out and sell products.
Besides, if those individuals are giving personal advice (the definition of which would be expanded under Levy’s proposals), they’re going to be subject to the same professional standards, including ethics and placing the client’s interests first, as all other advisers.
Understanding what Levy wants the future regulation of financial advice to look like depends on understanding what she means when she says advisers should be required to deliver “good” advice. We need to know more clearly how “good” is defined and measured, and what happens when advice falls short of these standards.
Levy contends that “good advice can and should be measured objectively in light of all of the relevant circumstances at the time the advice is given”. How it can be measured objectively isn’t clear, but it does mean the definition of “good” will change from one scenario to the next, according to an individual’s circumstances. That seems appropriate where advice is being delivered as a professional service: the more complex an individual’s needs, the more complex the definition of “good”, and the more the individual adviser’s professional judgement comes into play.
Financial advice is on its way to being regarded as a profession. Levy’s proposals do appear to require professional standards – education requirements and the Code of Ethics among them – to do much of the heavy lifting currently done by cumbersome legislation.
Allowing advisers to exercise greater professional judgement, including acting in the interests of clients ahead of their own interests, is a mark of confidence in the professionalism (including the ethics) of advisers.
So, we need to keep a close eye on the concurrent review of professional standards in the hope that they’re not watered down to the potential detriment of consumers and ultimately of advisers themselves. And when the advice profession puts its 10 cents in on this review, it would be ideal if it could present a united front – another reason why the FPA/AFA merger is a good idea.
Politicians and policymakers have long had mixed feelings about the fact that the financial advice profession is fragmented and represented by so many different organisations with different memberships and different views.
On one hand, it meant there would be a convoy of representatives traipsing down to Canberra every time a regulatory change was mooted. But on the other, it meant that no united voice was ever present in Canberra to put the industry’s views.
And, as long as that was the case, policymakers could legitimately say that if the industry itself could not agree on what was right for it, they could just go ahead and do what they wanted anyway, which made the process of “consultation” kind of moot.
Hopefully, this won’t be the situation for much longer.
