The financial services industry and successive governments all happily agree more people should get financial advice. But what if the financial advice is lousy? What if the result is that many clients would have been better off without it? That rather than being “value adding” as the industry likes to claim, advice can sometimes be value destroying.
This is a much broader problem than outright fraud in cases such as Storm Financial or the latest fiasco of the Commonwealth Bank’s inadequate response to shocking behaviour in its financial advice businesses. It’s about a general culture in the industry that has made it very hard for clients to know whether or not they can trust any particular adviser. Or even be assured of basic competence.
For all the speeches about the end of conflicts of interest and about constantly improving standards of education, behaviour and quality of advice at the annual Financial Services Council conference, it’s still far too easy to get dud advisers. And often hard for many people to realise that until it’s far too late.That has not only been incredibly costly for their clients. The stories and experience of some of the worst examples of bad behaviour has sapped public confidence in the whole industry.
Peter Kell, deputy chair of the Australian Securities and Investments Commission, reminded attendees that ASIC’s most recent survey had showed only 23 per cent of people thought financial advisers acted with integrity – and that was before the latest Commonwealth Bank headlines.
“It’s not a good reflection on any of us,” he noted. Quite.
The best of the industry is now deeply aware of the image problem and maintains its determination to rebuild that trust. But that commitment certainly doesn’t extend to all of the 16,000 to 18,000 or so financial advisers in Australia, many of whom also still benefit from having existing clients on trailing commissions and other conflicted remuneration that characterised the industry for decades. Nor – beyond findings of criminal behaviour – is there any real way to force advisers with a bad record out of the industry if they are not employed by larger institutions willing to impose higher standards and constantly assess the results. Even then, many of those moved on pop up somewhere else.
A taskforce is only now working on how to develop a national register of advisers with more details about their experience and qualifications – and possibly, any judgments against them.
Nor is there any action yet on improving the training and qualifications necessary to be considered a financial adviser.
Mark Rantall of the Financial Planning Association wants a graduate degree and further qualifications to be mandatory.
He describes the current minimum requirement for entry as “hopelessly unacceptable”, telling the conference that the industry should “just get on with it”.
Yet without the right ethics, it’s clear even an adviser with a wall full of qualifications can still do the wrong thing by their clients.
Rantall says it is about creating the right environment to allow professional independence of thought and action no matter what the business model.
“We can do a better job,” he says. But when?
Advice a matter of chance
So while many of the 20 per cent of Australians who seek financial advice do benefit, this remains far more a matter of chance than it should be.
As one senior figure in the industry told me last year, he would have no difficulty recommending any number of advisers for his mother-in-law but he would struggle to find more than a handful to recommend to his mother. (Joe Hockey’s mother would probably agree given her experience.)
Ok, perhaps he shouldn’t have made the joke.
After all, everyone now talks so earnestly and endlessly about the importance of professional behaviour and the improvements to flow from reforms to the new laws governing financial advice. And it’s true many people are relieved and delighted at the long-term results of the advice they are given over years.
But bitter experience for too many others lies at the heart of the arguments about financial advice and the effectiveness of the Labor government’s reforms – as well as whether the Abbott government’s recent changes will dilute that.
In theory, it should never have been necessary, for example, to insist that advisers had a fiduciary duty to act in their client’s best interests – rather than their own. But the history of conflicts of interest and advice that was really just about selling products created a distorted culture that still needs unravelling.
AMP’s Steve Helmich insists the answer lies in what he calls the four E’s – ethics, experience, education and enforcement.
He says the test for the best interest duty really just comes down to the basic requirement to put the client’s interest first and to ensure the client is clearly in a better position as a result of that advice.
His own adviser has been of huge benefit to his family, he insists. If only everyone were so lucky . . .
Shadow treasurer Chris Bowen alarmed the conference by suggesting that Labor in government would reinstate its own version of financial advice reforms. This prospect is not only more of a possibility than it seemed a few months ago. For an industry that has been under constant review and change, it was a reminder financial advice still has a large credibility gap. For too many good reasons.