FEATURE: Accountants go back to the future in stunning bid to reclaim the advice space

Simon Hoyle

By

June 8, 2015

Alex Malley, chief executive officer of CPA Australia, says the organisation’s decision to launch its own financial planning licensee isn’t revolutionary. It’s simply back to the future.

CPA Australia is by any measure a significant organisation. It did not have to become a dealer group in its own right, yet it announced on Friday last week that it will launch CPA Australia Advice (CPAAA) a financial planning licensee whose authorised representatives will operate on a pure fee-for-service basis, with no commissions, no asset-based fees and no links to product manufacturing.

Australian Securities and Investments Commission (ASIC) chair Greg Medcraft sat alongside Malley at the announcement. That was more than symbolic: it was the explicit stamp of approval from a regulator that knows first-hand the severity and insidiousness of the conflicts and cultural issues that continue to plague financial planning.

CPA Australia’s move appears to have struck a chord. Its press conference on Friday wound up at about midday; barely three hours later it had received 317 emails expressing formal interest in becoming authorised representatives of a licensee that doesn’t even exist – CPA Australia has not yet applied for an Australian financial services licence (AFSL).

“I think that’s really inspirational,” Malley says.

“We did it on the basis that if we build it, they will come. We believe that; we believe it is in the public interest.

“Having said that, there are many good licensees out there who are conducting themselves well. This isn’t about those people. This is saying we’ll give you an independent choice; you’re going to have to make some decisions yourself to come; but to think that really, in the space of three ours there are 317 registered emails of interest, that’s good news. It’s good news that people are showing that level of interest.”

Malley says there was no pressing commercial reason for CPA Australia to do what it’s proposing.

“We are big enough and ugly enough to have not gone into this market,” he says.

“We have 155,000 members, we’ve got 19 offices globally, we turn over $160 million-plus a year. We’re a significant organisation that could easily have left this alone. But we actually don’t think that’s in the public interest, and so therefore we get up and we go.”

Not a defensive move

Malley denies the move is defensive, even though the next 12 months will be pivotal in determining how a significant number of his members choose to remain involved in the financial planning business when the so-called “accountants’ exemption” from the Corporations Act expires in July next year.

“There’s nothing defensive about this,” he says.

“I believe we will have significant business operations for the next 130 years. But we’d be leaving behind the question that no one is answering: who’s covering the public interest? There are some good organisations out there, but we can do it on a bigger scale, we can do it with a bigger noise, we can do it with a bigger impact.

“What’s the result of that? Everyone will see a reason to improve. And if that’s our value proposition on top of everything else, that’s fantastic.”

CPA Australia’s announcement last week caught many off guard. Malley is unapologetic.

While its move was initially interpreted as a challenge to existing licensees and dealer group – which it is – Malley’s explanation of the organisation’s motives make it clear it will be just as big a challenge to other associations.

“We actually don’t get up in the morning and set a strategy and work out who it’s going to impact,” he says.

“What we do is we get up in the morning and we say, you know what? There’s a problem out there, and much of the principles and practices and professionalism of our organisation could attend to this and raise the bar. I think we need to enter the market.

“The fact is, this is a reclaiming of territory. Particularly when you talk about fee for service, that’s the history of the accounting profession. Fee for service: you tell people what you’re advising them on, how long that’s going to take, the level of advice it is, and here’s the fee. This is back to the future. We’ve had a history of compliance, a history of education, a history of holistic learning, a history of mentoring.

Accountants most qualified

“We’re the most qualified to enter this. Ironically, since we’re entering it later than most, we’re the most qualified to enter. It’s time for us to say look, we can either sit back and continue to be an independent commentator, of we can be an independent commentator and put up or shut up and get in there ourselves, and raise the bar. That’s what we’re doing.

“We’re not doing it for return, were not doing it for grandstanding, we’re doing it because we think the public needs it.”

Malley says the only contact CPA Australia has had with CA was “a courtesy call to let them know we were going to do this”.

“Fundamentally we believe that we’re an organisation that has run very well on its own,” he says.

“We made a decision that this sort of things is a sizeable enough challenge to run as an organisation in and of itself. I think to be talking to two organisations – one in particular that has just merged and has its challenges with that, as you would normally, bringing two organisations together – we thought we know where we are going, we have a vision for the profession, we have a vision for our members.

“I think our cut-through in the past three years as an organisation that acts without fear or favour makes public commentary on issues that corporate Australia won’t talk to, I think it’s consistent that we do this ourselves. We’re decisive, we like to be the first mover, and we’re doing it again.”

CPAAA’s decision to shun both commissions and asset-based fees means its authorised representatives will be operating at a higher standard than APES 230 – the accountants’ existing professional standard for financial planning. CPA Australia opposed the original APES 230, which also sought to ban commissions and asset-based fees, and that was a key reason why the standard was watered down.

Change of heart on standards

CPA Australia has now apparently had a change of heart.

“We just think that ultimately that’s were the market is going to have to go,” Malley says.

“We’ve got an increasing population of people that are going to require advice, and only 20 per cent of them are probably seeking that advice. My own personal view is…they have heard a lot of bad news, they’re wondering is this systemic or is it not – and let me say, there’s a lot of good advice out there but lost in all the noise – so for us it was a decision to say if we’re going to stand above the parapet we’re going to have to set the standard, and set the standard we have. We’ve called it out, upfront, long before we start operations and we’re going to take the public with us on the journey of bringing this into operation.

“The APES Board makes its own decisions, and is independent of the accounting bodies. We certainly had a view and we shared it at the time. But fundamentally, it doesn’t get much better than saying it’s a fee-for-service, no-commissions, no-asset-based pricing and, basically, no conflicts. Remember, we are saying here that we are the ultimate independent advice, and we are not attached to product. Most of the problems that arise are the inability to detach product from advice.”

There are still some significant issues to be finalised, including what the cost will be to authorised representatives, and how that cost might be subsidised. Non-subsidised dealer fees can currently range up to $100,000 a year or more.

“As a not-for-profit organisation professionally membership-based, much of what we do is subsidised, much of what we do is to absorb heavy costs at the front of building anything,” he says.

“We could conduct activities with a much more focused approach on profit making; we never have, we never will. I believe this will be significantly economical for future members, it will be built on the fact that we will incur significant costs, what we consider as investment rather than costs, and I don’t believe we will be in any way shape or from at a level that will be prohibitive to our members at all.”

A ‘really significantly fair’ model

Malley says the ultimate approach will be “a really significantly fair model for our members, a user-pay model”.

“It will be supportive of them, it will give them higher levels of education than would be required in the market, it will give them high levels of support, and fundamentally allow them to be competitive in their fee-for-service model,” he says.

“We don’t open our organisation for profit-making purposes. We’re doing this in the public interest. We have a significant investment we’re making into this into the future. We’re here for the long run and quite honestly, nirvana for me, at a personal level and even in my role, is that all young people who are about to enter the market see this as the beacon…to aim for, and that we create a sustainable new generation that sees independence as their core credibility in the market.”

Malley says there will be no vertical integration of product, platform and advice in the CPAAA model.

“That has, I think, been part of the problem of some other models,” he says.

“So we won’t be producing any product; we will have an independent investment committee that will search the market and select worthy product; but ultimately the advice might be that as a client you do not need a product. This is what makes it really different.

“We’ve almost created a world that says it’s not good advice unless it’s got a product – our view is you may require good advice that involves no product. We will not manufacture product, we will simply have an independent investment committee that will independently through appropriate research come up with a mix of products that are available to market that are worthy investments; but then it’s up to the adviser to determine whether any or all of those are worthy or not for their client, in their client’s interest.”

Malley says CPA Australia has a clear plan for how it wants to build its financial planning model, but will remain pragmatic as to the final structure.

“The one thing I’ve learned in my life, personally and professionally, is that you work through things as you go, and you have an open mind,” he says.

“There are some things we think we’re going to right now that we might vary as we go through this process, but we are going to take our members on this journey. But you can be assured that when we open the doors to this business it will be the best business it can be, and it will be independent, and we wouldn’t put 130 years of experience into this if we didn’t think we could do it and have a beacon, a benchmark, that I think will improve the market all up.”

Big impact on big banks

On the day of the announcement Malley wrote to the chief executive officers and chairmen of the big banks, in a move he describes as a courtesy. Clearly, CPA Australia sees its move having a significant impact on this cohort.

“It’s not their business, but it’s simply saying we respect the fact that there’s a whole lot of people in this market and as a professional body, because we’re transparent and because we’re happy to tell people what we’re about to do, they’re in that market, and this model in and of itself will have an impact in that market,” he says.

“So as a courtesy, we’re entering this market and if you want to know what we’re doing, feel free to talk to us. We’ll tell you what we’re doing.”

The issue of professional, education and ethical standards remains at the forefront of policy debate around financial planning. Malley says CPA Australia’s newly-forged commercial interest in the sector should not disqualify it from having a substantive say in how those standards are formulated.

“Our recommendations to the PJC were all about professionalism – building the right education programs, holistic programs, compulsory mentoring, all of which have been in the profession a long time,” he says.

“Let’s be clear on this: much of whatever comes out of the PJC and other initiatives will still fall short of what the accounting profession has been doing for 50 years. The fact is we are over-compensating, we always have; and 30 years ago tall of this whole advice area was the domain of the accountants.

“Fundamentally we’re simply reclaiming an independent model, and I think in the long run more and more people will see that as the beacon, and they will come the to the beacon and that will build.

“We’re not in there for profit, were there for the public interest. The best way we can achieve that is to give members an independent platform.”