Australians don’t trust financial advisers. Research shows that public trust in advisers remains low. To date, efforts to solve reputational problems haven’t worked.
In a 2015 survey, only 24 per cent of Australians said they trusted financial planners. Since then, the Australian Securities and Investments Commission has entered into more than 60 enforceable undertakings.
On January 24 this year, the corporate regulator issued a report into how large financial institutions managed conflicts of interest in financial advice between 2015 and 2017, assessing the big four banks and AMP. It showed little had changed, despite the introduction of laws that banned commissions.
The report showed that in three-quarters of the advice files ASIC reviewed, planners “did not demonstrate compliance with” the best-interests duty. It found that, overall, 79 per cent of the financial products on the reviewed firms’ approved products list were external; however, 68 per cent of clients’ funds were invested via in-house products. It seems that institutions and advisers have learnt nothing about conflicts of interest.
Note the key words – financial products. More on that shortly.
Should we be surprised by the Australian Financial Services licence-approved products list issue? In one sense, it a breach of the law, as stated. But in another sense, product manufacturers make money from manufacturing and selling product. If you go to a Toyota dealer on the weekend, there is a fair chance they will try to sell you a Toyota.
“The vast majority of financial planners will need to obtain further qualifications in order to gain the confidence of consumers and meet the requirements to be set by the newly formed Financial Adviser Standards and Ethics authority (FASEA),” read the Australian Financial Review last week, after FASEA chief Deen Sanders addressed the SMSF Association National Conference in Sydney.
Let’s face it, the advice industry has had 12 government reviews in 10 years. We have had the Future of Financial Advice legislation, which included banned commissions, opt-in’s, fee disclosure statements and best-interests duty. There have also been new requirements around Financial Services Guides, Statements of Advice and Records of Advice. ‘Soft dollars’ have been banned and fiduciary standards have been introduced. And now comes the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. About $300 million has been paid in remediation for matters including ‘fees for no service’ over the last two years alone. Has the trust problem been solved? Based on recent surveys, I’d say no.
The elephant in the room
Will higher education standards required by FASEA solve the consumer trust issue once and for all? Well, of course it will help. But, in my view, the elephant in the room is clearly separating product from advice.
Advising on products and investments is not financial planning. That is financial advice or investment advice. As financial planners, that is what we do, if necessary, after we have done proper financial planning. We have to help clients understand that financial products and investments are tools we may use, if required. Sometimes products are needed, sometimes, they are not. Proper financial planners will use them, if necessary, to help implement certain strategies. When all advisers behave this way, that’s when we will have a proper financial planning profession. That is when we will be trusted. That is when consumers will finally come to understand what proper financial planning really is and how they can benefit.
The industry has a strong ally to help it achieve this – the financial media. This incestuous relationship involves creative marketing, news-hungry journalists, seemingly limitless advertising budgets, and product provider sponsorship of so-called financial planning conferences and events, the financial pornography of which causes huge distractions for consumers and advisers alike. With all this noise, it’s not surprising that products and investments become the main focus of an adviser’s service. The industry has a vested interest in making sure this happens.
What people want to know, however, is ‘Am I OK? Am I on track? Know me, know my family, help me, simplify me, de-clutter me, remove my anxiety’. How many people, irrespective of income or net worth, would genuinely know whether they are on track to achieve their goals? If they’re not on track, what are the alternatives to get them there, and if they are, what discipline is required for them to stay that way?
It’s like driving down the highway, it doesn’t matter whether you are travelling at 60, 80 or 100 km an hour, the question is whether you’re heading in the right direction.
Industry Issues are typically product related, and when they are strategy related, it’s because advisers angle the strategy towards product, so they can recoup payment from suboptimal or non-existent ‘above the line’ client value propositions.
As is stands, typically, the advice and strategy make up the cheap part. The real value of financial planning advice is ‘above the line’. Good advice shouldn’t be cheap. We need to educate stakeholders about this. Of course, there is much strategy-specific advice and planning being done, but as an industry we need to do more holistic advice, to land on what our clients really need to know – ‘Am I ok?’
With disruption ‘below the line’, advisers can no longer hide behind an AUM value proposition and charge 100 basis points. The SPIVA (Standard & Poor’s Index versus Active) evidence is crystal clear – circa 70 per cent of active managers detract value from the return to which investors are entitled, and those that do outperform are typically different each year. And the 100 basis points advisers charge certainly doesn’t help matters for clients.
Above the line is where the client value proposition (CVP) of the future lies, not in crystal ball gazing and dart throwing ‘below the line’. Any remuneration needs to be aligned with this idea. No longer can our industry subsidise upfront fees for ongoing AUM.
What annoys me is that the industry and regulators allow for a confusion in terminology among different types of advisers. Consumers have the right to know what type of practitioner they’re hiring.
For example, if I have a sore back, I want to know if I am seeking the help of a massage therapist or an orthopedic specialist. If I’m seeking help with my taxes, I want to know if I’m dealing with a registered tax agent, or a chartered accountant. If I’m looking to buy an apartment, I want to know if I’m dealing with an independent real-estate agent/buyers advocate, or a sales representative of the building.
I don’t mean to disparage those who deliver basic services, but if my expectation is that I’m dealing with a professional who must adhere to certain standards, then I’d like evidence of that in their disclosures and their relationship with me. If the consumer wants to be transactional in their relationship, this should also be clear to the service provider as well.
There is, for example, a clear separation between architects and builders. The legal profession receives fees for service, lawyers have nothing to sell other than advice. The medical profession has a clear separation from the pharmaceutical industry. But could the financial planning industry survive without product? Until the value is seen as being in advice and strategy, advisers will continue to position themselves below the line product.
Regardless of the business model, financial professionals of all types need to be clear on who their optimal client is, what their client experience will be, how they are structured to support this experience and how they manage profitability. If I were running a licence today, I would try to answer the key strategic questions around why I exist in financial services, regardless of which regulatory structure I operate under. As our industry continues to evolve, I think more advisers will view themselves as financial planning professionals, not product distribution companies. I certainly hope they will.
There have been some steps in the right direction.
There is a growing trend towards independence, with perceived or actual pressure from consumers to seek out advisers genuinely sitting on their side of the table.
Enshrining the term ‘financial planner’ is a step in the right direction – something the FPA has been pushing for many many years. Before that, anyone could call themselves a financial planner or adviser, whether they were licensed or not. Until this was done, any scandal in the financial industry was simply the fault of a financial planner. Now the media and public need to be educated to understand there are qualified, licensed, ethical, financial planners, many of whom are Certified Financial Planners, and there are also other people in the industry. Not every scandal, in fact fewer and fewer, are caused by real financial planners. Strong industry associations such as the Financial Planning Association, and professional designations such as CFP, are steps in the right direction.
This all helps advisers move away from being investment-forward product salespeople and towards being planning-forward client advocates.
In a world where advisers are trying to become less product-centric and add more value for clients, there does appear to be a trend of advisers trying to create more customised portfolios for clients. Though this idea isn’t exactly new (it has occurred for decades in the form of selecting stocks and managed funds for clients and adapting at every client review meeting), the rise of rebalancing software (or model-management software tools more broadly), has made it easier to systematise the process of customising individual client portfolios, while still being able to monitor and manage them centrally. But it’s still money management, below the line, not financial planning.
There are many compelling reasons to seek financial planning advice, not only once off, but ongoing. But less than 15 per cent of Australian’s do. If our industry doesn’t change, then the take-up of the industry’s services won’t change either. People will still retire, and buy houses, and put their kids through private school, and deal with the deaths of loved ones, and handle life’s financial challenges, and they’ll do it just like they’ve always done it – by and large, without financial planners.
There are many very good financial planners. There is much great advice provided to clients in so many ways. But more often than not, the great advice and strategies provided need to be complemented by a product sale or for AUM, to enable the adviser to be remunerated. In many cases, tremendously valuable initial strategic advice for relatively low fees is subsidised by ongoing AUM-based fees.
I believe there must be a clear separation of advice from product if the advice industry is to become a true profession. And I believe the overdue separation is coming.
If we had clear separation of advice and strategy from product, there would be no need for the legacy structure of dealer groups / licencees, and associated approved product lists.
Accordingly, it would be a short leap from there to supporting individual professional registration or accreditation for financial planners.
The FPA stands for the financial planning association. In CFP, the FP stands for financial planning.
The time is here to remove product from advice. Doctors prescribe medicine, they don’t sell it.