The mostly laudable proposals of the Quality of Advice Review in which the current prescriptive, complex and costly regulatory regime would be replaced by a shorter principles-based one offer some guidance as to where the discipline of financial advice might be headed.
However, the industry can’t have its cake and eat it too. If the industry is to be substantially deregulated and offered the freedoms, advantages and privileges proposed in the review, then it has an important decision to make. It must decide whether or not it is willing to act as a genuine and trusted profession with all the responsibilities, consequences, hard decisions and personal judgments that follow.
If the industry isn’t willing to do that, preferring instead to languish in a grey area, claiming professional status, but treated with doubt, even suspicion, by much of the public it claims to serve, then the review’s generous proposals must never be implemented.
However, if the industry is willing to commit to behaving as a genuine and trusted profession, including adherence to the principles in the mandatory Code of Ethics, I would be more than happy to support implementation of the proposals because the industry would have signalled that it has come of age. Even the controversial proposal establishing what amounts to a two-tiered industry (relevant and non-relevant providers) might then be worthy of further careful consideration.
Of course, it’s easy for the industry to make such a commitment, but it will be considerably harder, both commercially and culturally, for many of its participants to acknowledge and accept what needs to be done in practice. The principal point here is that the financial advice industry must accept the spirit, substance and plain English meaning of the professional and ethical principles in the mandatory Code of Ethics, especially the controversial Standard 3 covering conflicts of interest.
The industry must then voluntarily remove all remaining forms of conflicted remuneration and incentives, including asset-based fees, commissions (including on life insurance policies), profit shares on white label/in-house products and platforms and other forms of sales incentives, targets and budgets designed to encourage the sale of financial products or the accumulation of funds under management.
Do this and the implementation of the advice review’s proposals becomes logical, sensible and eminently supportable. That’s because the new regulatory regime will be aligned with the public interest, being the provision of more advice to more people at a much lower cost, without compromising quality, while concurrently creating trust in the industry’s participants. That is, we will have created a true profession.
Failure to comprehensively deal with this issue in the context of the implementation of the review’s proposals will undoubtedly lead to more advice being sold to more people at a much lower cost. But therein lies the rub. It will also lead to the distribution of a much greater amount of conflicted, poor and low quality advice. That would be a disaster for the public interest, thereby setting up the Australian community for more tragic scandals in years to come.
The question for the industry becomes just how enthusiastically would it support the proposals of the review were a condition of their implementation be genuine, in good faith, adherence to the mandatory Code of Ethics with all of its consequences, including those with respect to the removal of conflicts of interest?
I can already anticipate negative reaction from industry participants who will claim that going this far is unnecessary and unfair because most of the industry’s “bad apples” have been removed and that the vast majority of advisers are honest people offering financial advice in their clients’ best interests. That claim may well be true, but it misses the point.
I’m not suggesting that the industry is full of bad or unethical people (clearly it isn’t), but I am suggesting that it contains a large proportion of conflicted people, due to the ongoing impact of the many remaining forms of remuneration and incentives that encourage poor behaviour or create the perception of it.
Until that fundamental issue is addressed, worthy proposals such as those contained in the review must remain aspirational rather than reality. How sad is that, especially when the review’s proposals are so positive and the solution to the problem is simple, obvious, desirable and clearly in the public interest?
You are right. If conflicts are removed, then reducing the complexity and compliance of giving advice is great. In the current environment, implementing the proposals could bring back the dark days and move us further away from professionalism.
Long term, it is everyone’s interest that conflicts of interest are removed. We will be more trusted and business will grow as more people will want advice from trusted professionals.
Robert, you make some valid points. However, you are completely wrong when you make the statement that Life Insurance Commissions should be removed.
You either have not been following what has occurred and is still occurring with the Advised Life Insurance / Wealth Protection area, or you are choosing to stick to an outdated ideology that NEVER made sense when it was first mooted and still makes NO sense now.
The theory based “experts” who live in a world of their own utopian vision, with LITTLE TO ZERO ACTUAL ability or experience, to see the real-world impacts of stupid decisions and who were too lazy or arrogant to even bother asking Australians what they want, or understand that their arguments were impractical and had the opposite effect of their stated goals, has cost Australian Taxpayers and Australians, multi-billions of dollars, not including the devastation caused to people’s lives and budgets, with just one example being, premiums doubling due to the red tape and utopian brigades vision, that turned a good system which only required tweaking, into a maze of complexity and unworkable / unprofitable chaos.
Anyone who has the audacity to question commissions around Wealth Protection advice, after what has happened, needs to be grilled and shown they are completely out of touch.
I am yet to be convinced that FUM based remuneration is a conflict of interest in every case.
Isn’t the client and the advisers’ interest in line in that, where the portfolio rises, the fees rise and the converse in a down market? Both the client and the adviser want the same outcome.
Likewise, the basis for insurance advice fees being commissions does seem to be the best way to ensure the advice is able to be given outside of a full financial planning engagement (which is a preferred model given the specialisation that insurance advice entails). Dis-incentivisation of churning could be achieved by mandating that switch advice in the first X years is only permitted in a limit range of circumstances. This would provide a barrier to advisers promoting their own interest over the clients. (Seems an easy enough “fix” to the commissions rankle.)
The real barrier here is not the way advisers are paid it is the mindset that is preventing a move to professionalism.
We have seen that the industry is not wholeheartedly prepared for operating under a principles-based regime. The outcry when the Code was published was evidence enough.
What is really needed is for the lawyers to be reined in, including those in ASIC. Instead of the regulation and compliance regime be based on the demonstration of the best lawyering skills, it should be based on consumer protection. If, for example, ASIC started any review from the consequences for the client and then worked backed, the purpose of Chapter 7, (and any new law) would be satisfied. Process deficiencies are not an indicator of consumer harm but certainly ensure that lawyers are in complete control of the industry and thereby preventing the move to professionalism.
You are in a position of influence…yet you voice your opinion without real knowledge and thus add to negative consumer sentiment of planners. SHAME! Doctors you’d agree have for many years accepted government funded (third party) payments to treat their clients (medicare) they also in many cases and over many years have accepted commission payments from Pharma companies. If these are not both conflicted…what is??oooh yes what we accept as planners…wait on…commissions are actually paid by the client in the form or ammoratised payments added to the premium…the government doesnt pay..
So even though its passed on through a third party it has less a flavour of “conflicted”. Doctors need the system to make healthcare affordable for everyone…we need tjis system in risk to ensure underinsurance does not create a societial dependent disabled mass…
Well done Mr Brown. Like Gough Whitlam suggested you have kept up the rage and for a very long time. The industry is at a very large crossroad: does it have the courage to take the correct path?
Well said Robert.