It’s often claimed that the discipline of financial planning has made considerable progress since its inception about 50 years ago. That may well be true, depending on your definition of the word ‘progress’. If progress is defined as an exponential increase in complex legislation and costly compliance requirements, the industry has made plenty of it. In an industry renowned for its emotional arguments, this conclusion is uncontested.
If, however, progress is defined as change for the better in fundamental culture and ethics, little has been achieved. Of course, there have been some outstanding individual examples of cultural and ethical progress, but as an industry, the systemic imperative for product sales and the accumulation of funds under management is substantially unaltered and continues to direct most of the industry’s actions, attitudes and embarrassing scandals.
The reason for the existence of this intractable problem lies in the industry’s origins during the 1970s. In those days, financial planners (a term unheard of at the time) were mainly engaged in the booming industry of selling property trusts to retirees. For some strange political reason lost in the annals of time, direct ownership of investment property was counted towards the assets test in assessing a person’s entitlement to
a government-funded age pension but investment in a property trust was not. There were also financial incentives for advisers to sell property trusts. These were in the form of undisclosed commissions, typically about 8 per cent upfront. Not that pension applicants cared all that much about a salesperson’s commission. Their main objective was to qualify for a government benefit, including the legendary Pensioner’s Gold Card, which covered pharmaceuticals and offered all manner of freebies and discounts on goods and services.
A rose by any other name
Alongside the property trust industry, there existed a flourishing life insurance industry. This was based on the selling of whole-of-life and endowment contracts, known as permanent policies, as distinct from temporary or term insurance policies. Permanent policies attracted undisclosed commissions of up to 250 per cent, depending on volumes sold. Many of the successful permanent policy salespeople became legends (aka big producers) and very wealthy in the process. Their wealth accumulation was often boosted with the assistance (pre-fringe benefits tax) of multimillion-dollar, interest-free, unsecured agency development loans (ADLs) from insurance companies. Sensibly, most of these loans were not invested in agency development, but in real estate. I recall attending colourful product sales conferences (sorry, professional development activities) at which these ‘legends’ would be feted by management and awarded tacky trophies, wall plaques and overseas holidays (sorry, educational study tours) as a reward for their exemplary sales volumes (sorry, professional advice).
Meanwhile, members of the accounting profession observed these developments with emotions ranging from disdain to envy. Those who expressed the latter sentiment were identified by the product salespeople as ‘centres of influence’, worthy of handsome kickbacks (sorry, referral fees). Some of the more entrepreneurial members of the accounting profession went a step further. They became life insurance agents in their own right. Some even accepted ADLs in return for promises of permanent insurance product sales to clients within their practices.
These actions were clearly in breach of the profession’s ethical standards. This analysis wasn’t even controversial. Therefore, one might have expected the professional bodies to act against offending members. Sadly, however, the professional bodies did what professional bodies usually do in the face of protests from noisy members – nothing. Some years later, this inaction led to dealer groups enthusiastically recruiting practising accountants as financial planners.
Those members were, in effect, authorised to act with impunity in contradiction of the profession’s most basic ethical standard; namely, the imperative to avoid conflicts of interest (not just to disclose them).
The rest is history. The accounting profession is still grappling with this problem in its current review of financial planning standard APES230, which is often mockingly described as ‘optional ethics’. This should be an open-and-shut case study in Ethics 101. Instead, it has become a controversial argument in which certain influential members expect the accounting bodies to protect their conflicted commercial interests.
Unsurprisingly, the developments outlined above have acted to set in stone the financial planning industry’s foundational culture of product selling over professional advice. It’s hardly surprising that changing that culture is proving to be quite a challenge. The industry’s evolution may well have been quite different if the accounting bodies had acted when presented with the opportunity to nip in the bud unethical practices by some of their members.
Beyond rhetorical flourishes
Heaven knows there have been many failed attempts since the industry’s inception to change its product selling/FUM culture. The latest effort is the establishment by government of the Financial Adviser Standards and Ethics Authority (FASEA). This ominously named body’s principal roles are approving tertiary education courses and mandating a code of ethics for the industry. While compulsory tertiary education for financial planners cannot be a bad thing, if it is not accompanied by a meaningful and comprehensive code of ethics, the danger is that all FASEA will do is inflict on the public an industry of well-educated product salespeople (Wall Street style). My point here is that FASEA’s mandatory code of ethics must be a lot more than a rhetorical flourish of general ethical principles (although that’s what much of the industry would prefer). If that’s all it is, the industry can be expected to substantially ignore the code in its day-to-day behaviour, while claiming undying adherence to its principles, just as it has done on every other occasion when well-intentioned attempts have been made to eliminate the culture of product selling.
Even the Future of Financial Advice laws (FoFA), which started out with such promise, were so ethically compromised during the political consultation process that they have achieved little in practice. Let me illustrate this point. FoFA bans commissions paid by third parties on investment products (a positive initiative), but does not ban commissions paid by clients, except on gearing.
As a result, percentage-based asset fees, which the industry insists on misleadingly calling ‘fees for service’, are now the remuneration of choice for much of the industry. It’s business as usual.
So, what are we to conclude about progress towards professionalism in the industry over the last 50 years? I would like to be able to report that progress has been substantial and that the financial planning industry will soon be worthy of the title ‘profession’. Unfortunately, I can’t do that. There’s still a long way to go. Certainly, there has been much high-profile and well-intentioned action in the form of inquiries, complex legislation and costly compliance rules, all apparently designed to create a profession to which the public can turn for trusted financial advice. None of this has worked, at least to the extent supporters have promoted. That’s because these initiatives were not directed at the obvious solution to the problem – comprehensively removing all (not just some) forms of conflicted remuneration – but were carefully designed to avoid it and the unpalatable political consequences of doing the job properly.
We’re often told by industry leaders that we’re on a journey. The trouble is that there’s no generally agreed-upon destination. Worse still, some industry leaders know in their hearts what the destination should be, but will do whatever it takes to avoid it.
As insignificant as it might seem, an agreement industry-wide on that issue alone would result in more progress towards professionalism than we’ve seen in generations. It’s to be hoped that FASEA will understand this and (in the absence of a preferred self-regulatory approach by the industry) will have the courage to act to bring about comprehensive reform of conflicted remuneration practices.
Failing that, financial planning will be consigned to a bleak and regressive future, encircled by an ever-growing and intrusive regulatory burden.
In effect, the industry will have been nationalised. This will be combined with the continuation of a corrosive and deeply embedded culture that won’t have progressed in decades.
These outcomes are so unnecessary and their avoidance is completely in our hands.
Hope springs eternal!
TOPICS: APES230, commissions, culture, ethics, Financial Adviser Standards and Ethics Authority, history of financial planning, kickbacks, life insurance industry, property trust industry, referral fees, unsecured agency development loans