It’s reassuring to hear from industry leaders that the financial advice industry has moved on from the bad old days of product selling. Even in the light of disasters such as First Guardian and Shield master funds, we’re told the “rotten apples” (well, at least most of them) have been discarded from the barrel, so the public can be confident that the industry’s culture has been reformed to create an ethical and trustworthy profession.
However, if media coverage is to be believed, the Australian community isn’t convinced. Of course, it’s easy to blame ill-informed journalists, consumer groups and other pesky commentators for mischievously misleading the public into believing that the industry has learned little from the findings of the Hayne royal commission.
The reality is that there is still a deficit of trust. I observe its existence every day in my consumer financial education work. Whether it’s a fair assessment by the public is another matter. What really matters is that the problem should be acknowledged by the industry and dealt with constructively. We shouldn’t just dismiss the public’s negative perception and tell ourselves within the industry echo chamber that it’s about time financial advisers were treated properly.
In saying this, I’m not suggesting the industry is full of dishonest people. Clearly, it isn’t. However, I am suggesting the industry is full of conflicted people. As a result, the industry as a whole is not trusted. This is a regrettable outcome because my observations have shown that the majority of advisers actually do strive to act in their clients’ best interests. It’s just that the public doesn’t believe this to be so.
The way to remove the trust deficit does not lie in industry protestations about unfair treatment, vague claims that the industry has improved and rhetoric about removal of “bad apples”. Rather, it lies in genuine adherence to the professional principles in the mandatory financial advisers Code of Ethics. Problem solved. Yes, it is that simple.
Given that the financial advice industry has a Code of Ethics and a regulator (ASIC) that is charged with administering it, why is it that so many members of the public still don’t trust financial advisers and report bad experiences with them? And why is it that many advisers with whom I speak are so keen to distinguish themselves professionally and ethically from the rest of the industry?
No doubt, the answer is complicated and includes the likelihood that some advisers are misunderstood or unfairly judged by their clients and their peers. However, it’s simply not plausible to conclude that “others” are responsible for creating the trust deficit. There must be more to it than that, as convenient as it might be to blame ill-informed third parties.
Many industry leaders privately understand the ethical vulnerability of most financial advisers, however, publicly stating what they know to be true is unthinkable. Thankfully, governments offer diversions from time to time which enable the industry to talk about other subjects.
One such diversion is the well-intentioned Quality of Advice Review and its legislative response, Delivering Better Financial Outcomes. This has consumed years of the industry’s attention (a whole parliamentary term no less) with minimal outcomes for consumers and advisers alike. Recently, I noted comments from industry leaders who are suggesting that the key cost-reduction reform, namely the replacement of Statements of Advice with simpler Client Advice Records, has achieved very little other than a name change!
A better and much simpler approach to achieving lower cost delivery of advice and widespread public trust is to concentrate on the meaning and consequences of the mandatory Code of Ethics. The principles in the Code are plainly set out on one page. Genuine adherence to those principles would soon make redundant most of costly and ineffective compliance rules that the industry and governments spend so much time stressing over.
I am not suggesting that we should meticulously prescribe how financial advisers should interpret and apply each ethical principle. That’s a matter for the professional judgement of individual advisers. So, for example, if an adviser believes that receiving a commission from a third party or a percentage-based asset-based fee from a client is consistent with the requirement in standard three of the Code that mandates the avoidance of conflicts of interest (not just their disclosure), so be it. That’s the adviser’s professional judgement. Down the track, the adviser may be required to defend that opinion.
Personally, I find it difficult to accept how third-party commissions and percentage-based asset fees paid by clients could ever be consistent with the mandatory Code of Ethics. But that’s just my opinion. It’s pretty obvious that the writers of the Code (the Financial Advisers Standards and Ethics Authority) had similar views, even noting in their guide that advisers “should remain open to the possibility that certain forms of remuneration will always fail to meet the requirements of the Code of Ethics” (page 17, October 2020).
Nevertheless, the key point here is that the Code is not prescriptive. What counts are the many professional judgements made by individual financial advisers based on the unique circumstances of each client.
The assumption underpinning this approach is that the industry must act in good faith, like a true profession, rather than as a lobby group defending its participants’ commercial interests. This means it must be willing to accept certain commercially inconvenient outcomes.
If the industry fails to genuinely adopt this principles-based approach to ethics, the chances of removing the trust deficit and achieving major simplification of the advice process is negligible (probably non-existent actually). This is a sad situation when the solution to the problem of creating a genuinely ethical, publicly-trusted and growing profession of financial advice is so simple and obvious.
