Have you ever wondered why the process of reform is frustratingly slow, tentative and circuitous? It shouldn’t be, you might think, because the need to remove costly and ineffective bureaucracy in financial advice is obvious and urgent, isn’t it? Surely, it’s a “no brainer” that consumers should have the benefit of lower cost advice delivered by well-educated professional financial advisers that make up the profession in 2023.
So why doesn’t it happen? Why is it that government so obviously manages the expectations of the industry on sensible reforms, such as many of those offered in the Quality of Advice Review? We hear encouraging talk of “quick wins” that don’t need legislation, followed by messages about a crowded reform program and the need to hasten slowly.
At one level, warning the industry about the slow processes of government is a sensible and responsible thing to do. However, at another level, government must be cautious because it is aware that the industry has not always supported reforms that are in the best interests of the consumers of financial advice.
It is being reminded of that regularly by those pesky consumer organisations which support reducing the cost of advice by removing the burdensome compliance regime, but only on conditions that there’s a strong best interest duty in place and that all remaining conflicts of interest are removed. Frustrating, isn’t it? Why don’t these consumer organisations understand that the industry has been cleaned up since the Hayne Royal Commission? Surely, they can see that most of the bad apples have left the industry? Why don’t they necessarily accept that the vast majority of the remaining advisers are providing competent and trustworthy advice in their clients’ best interests?
The reason is that the consumer organisations actually observe a different reality and receive troubling feedback from the people they represent (as do I from my work in financial education). They also observe that the financial advice industry sends mixed public messages. On the one hand, the industry talks about the importance of financial advisers adopting the highest ethical standards, while on the other hand, it often promotes the idea that reforms must “balance stakeholders’ interests”. There’s a fundamental contradiction here, although it’s an approach that has been consistently adopted since the industry’s inception some four decades ago.
A relatively recent example of this was the negotiation on the Future of Financial Advice legislation. Initially, government wanted a strong best interests duty in the law. Many in the industry initially opposed this idea, not unreasonably arguing that such a duty already existed in the general law. They then decided to support its inclusion in the statute, so long as it wasn’t really a best interests duty at all (at least not in the sense that most people would understand that term). As a result, we have the “safe harbour” provisions which, if satisfied, enable advisers to demonstrate to the regulator that they have acted in their clients’ best interests by engaging in little more than a box ticking exercise, rather than a principles-based exercise in professional judgement. One could say that the current statute law contains “the best interests duty you have when you’re not having a best interests duty”.
At the time, this was seen to be a good commercial outcome for the industry, however, it has had the effect of reinforcing doubt and mistrust in the minds of consumers, government and the media about whether the industry is genuinely interested in embracing reforms that would create a true profession.
Unfortunately for the industry, this lobbying approach of “balancing stakeholders’ interests” is always inconsistent with the creation of a true profession. That’s because it contradicts the most fundamental requirement of any profession which is to put clients’ best interests first, even to the detriment of an individual practitioner’s personal and commercial interests.
Putting it simply, financial advisers are not running a normal commercial business of selling a product or a service to the public (although they should operate in a business like manner and are entitled to make a healthy profit). Rather, they are operating a professional practice in a privileged position of trust. That is quite a different concept.
Therefore, when the industry claims that it always acts as a true profession and then doesn’t (at least in the minds of observers), it’s hardly surprising that trust from government and others is qualified and the pace of reform becomes slow, tentative and circuitous.