“Celebrity” Financial Advisor Sam Henderson (right) arrives at the Federal Court in Melbourne
This is the second instalment in a two-part series on the professionalisation of the financial planning industry. Read part one here.
For the financial planning industry, there is a simple choice around professionalism: either stop using the word, and give up pretence that the industry can ever be professional — adopt some nomenclature that reflects quality, while avoiding the independence, expertise and focus on clients’ interests that forms the core of professionalism — or make hard decisions to properly professionalise. Those involve:
Individual licensing
Financial planners are not individually licensed — the firms they work for are licensed instead. Imagine going to a legal firm and being told “well the firm’s licensed, but the lawyer who is advising you is not”. Individual licensing has been around as a proposal for a long time but a problem has long been the lack of a credible professional body to carry it out.
That’s changed following the government’s move to impose a bachelor degree requirement for financial planners (a move met with outrage by the industry) and establish a professional standards body, the Financial Adviser Standards and Ethics Authority (FASEA). FASEA could form the basis for a licensing, as well as standards.
Ideally, such a body would be a product of the industry itself, but after hearing about the complaints-handling process of the Financial Planning Association last week, does anyone think industry bodies are yet capable of such a responsibility? It would be FASEA or another independent body that would license planners, and strip them of their licence if found to have engaged in misconduct, ending the practice of planners who are the subject of misconduct finding then simply moving to another firm.
An industry-wide indemnity scheme
If a doctor mistreats you, there’s a medical insurance scheme to fund compensation. If a lawyer rips you off, there’s a Legal Practitioners Fidelity Fund that can compensate you. In neither case can practitioners operate without that kind of back-up. Given the rate of crime, misconduct and incompetence revealed by the royal commission among financial planners linked to both big bank-aligned firms and independents, an indemnity scheme is crucial to establishing the professional nature of financial planning, and all the more so as the big banks withdraw from the industry and remove a warchest of potential compensation.
Replace commissions with fee-for-service
This is inevitable, and there was some discussion of it at the royal commission; smart financial planners have already embraced the fee-for-service model.
Commissions for financial advice — the very antithesis of the idea of professionalism and the independence that entails — have been outlawed since Future of Financial Advice (except for life insurance, although this exemption was narrowed under recent legislation), but existing commissions were grandfathered into the system. The most iniquitous are trailing commissions, which last for years or even the whole time you’re in a particular product or fund that an adviser has recommended.
But there are also huge upfront commissions in life insurance, which often mean policyholders get far less than expected — such commissions should really be paid over the life of a policy, but because so many policies are surrendered early, life companies and their sales people make sure they get all their cut early on.
The objection to fee-for-service — and it’s one that would extend to individual licensing and a compulsory indemnity scheme — is that it would push the cost of financial advice out of the reach of many Australians. This was one of the main arguments the Liberals used to justify gutting Labor’s FOFA reforms. But commissions end up costing clients far more over the long term — fees would be cheaper for clients even if they had to borrow some money on their mortgage redraw to pay for it. And the reputational damage from conflicted remuneration that the industry is now experiencing is likely to deter far more people from seeking financial advice than the high cost of going to an independent, fee-charging planner.
Remember that the majority of financial planners are good people out to do the right thing by their clients. But professionalism is never about the good people in an industry — it’s about how you prevent the bad ones from ever hurting clients, and how you help them if it ever happens, so that people can trust the industry. Financial planning is a long way from both.
Bernie & Glenn, if I can identify a trend in your collaborative writing it seems to be that you both yearn for cake after having devoured it. Your collective (three main) recommendations possess considerable merit. However there is NO assumption that any particular service in a mixed economy ought to be “free” or subsidised.
“The objection to fee-for-service ..[snip]..is that it would push the cost of financial advice out of the reach of many Australians.”
Big deal! The cost of legal advice is beyond the cost of many Australians. Ditto for major dentistry or architectural services. If financial advice is to have a value then (ipso facto) it is going to have a price. A degree in commerce might be a fourth criterion for a financial planner and could, appealing to consistency with lawyers, be added to the list.
What has been suggested is a good first step. But, yes you are correct guys : a clean industry requires NO free lunch.
[I should not have to mention it but someone might mention Medicare. The green card is paid for from taxation. If we are to have a “blue?” finance card then such is another matter.]
It is not a comparable profession, except in the context of ‘professional gambler’ though they have the integrity to use mostly their own money.
These bastards are just corrupt and immoral greedy liars.
Re: ‘Remember that the majority of financial planners are good people out to do the right thing by their clients.’. No, I won’t remember that, because I simply don’t believe it to be true. I will accept that most of them probably try to stay within the law, but that is a different thing.
No surprise that Henderson’s celebrity gave him many hours of free advertising as the financial guru for Chris Smith’s 2GB prog.
Given that he through 2016-17 he had that other paragon of probity, Alex Malley, spruiking his dubious wares in the ironically named “Basket of Deplorables”segment – most of whom have seriously blotted their copy books.
As an outsider, just watching the m.o. of so much big business (from banking down to the BCA – from wages and conditions to our super), I wonder if the case is that the privileged class begrudge us plebs access to the wherewithal to aspire to any level of security or comfort beyond that which they deem acceptable in their eyes, and that when we do achieve the means to achieve those goals, it’s not their duty to try to seperate us from those resources and means?