Restoring Trust

Where to start? Is certainly a phrase that comes to mind when beginning a critique of the financial services industry at present. An extraordinary few weeks during which we woke to incredulous news headlines almost every other day.  Macquarie Group was writing letters to thousands of customers, Commonwealth Bank of Australia were issued new license conditions, the chairman of the Financial System Inquiry raised concerns about the structure of the industry and now lawyers are describing the FoFA laws as “some of the poorest quality legislative provisions ever seen” (Australian Financial Review, 29th August 2014).

The string of scandals may seem many, but they have served to force some good and we’ve witnessed some big changes to the industry already. We can only hope that this marks the beginning of a long journey towards restoring trust with the Australian public.

Raising the Standard

Last week we witnessed announcements by many of the largest financial planning groups in the country. The central theme was clear – we will see education standards of financial planners raised across the profession.

Click here for an overall summary of the key themes in last week’s announcements.

The industry’s poor standard of education, both an Adviser’s certification and their commitment to ongoing education included, has long troubled us. When you consider the nature of an Adviser’s responsibility (custodians of a client’s wealth), it’s staggering to think it’s taken this long – But a step forward none-the-less.

Australia provides a huge opportunity for households to manage their retirement savings. We have more freedom than any other developed country when it comes to managing this money, but it is a complicated system and requires a high level of financial literacy. An opportunistic system yes, but it does force households to make decisions that most households are not well placed to make – Access to a qualified professional is critical.

The current lack of training in the financial services industry stems from;
i).  A product of political pressure back in the 80’s and 90’s when the life insurance sales sector morphed
into the financial advice sector.
ii). More recently, the fear of creating a potential supply problem. There is a concern that raising the bar on education and training standards, will mean (once the under qualified drop out of the loop) there is not enough advisers to meet the demand that our baby boomers will create.

In short, this lack of training has led in many instances to advisory houses using a set of  ‘cookie-cutter’ solutions for their clients.  An adviser’s primary role becomes the decision of which mould goes with which client. Unfortunately this approach leads to neither strategic nor innovative advice and it certainly doesn’t serve the best interests of the client.

Increasing the knowledge standard, enshrinement of the term financial planner/adviser and allowing ASIC more power to intervene can all be considered essential steps (albeit overdue) in the right direction here.

The ‘non-conflicted’ part to the story is a little more contentious.

The conflicts of interest that continue to stem from Australia’s vertically integrated banking model are not so easily fixed. Although we are of the belief that a structural separation of product manufacturing and advice business is not the answer (the economic consequences and chaos to corporate Australia would be too severe), we do adhere to the value that client centric financial advice is compromised in an integrated product world. This much is simple.

Many advice firms (FinSec Partners included) do successfully manage the support of big business backing without advice conflict, but an open architecture such as ours, is at this point an independent choice.

Like all Australians we look forward to a clearer distinction between what is classified financial advice and what is basic product or sales information. We will watch with interest as David Murray, the chair of the Financial System Inquiry, attempts to find a suitable solution to appease an understandably angry public.

Perhaps in answer to our opening remark, ‘Where to start?’ he’ll take Sally Patten’s advice (Australian Financial Review, 25th Aug 2014) when she stated, “Removing the ability to give incentives to planners to sell products … would be a good start”..