Recently the highly regarded online financial news website Business Spectator published a blog entry by prominent financial commentator Nick Samios about the importance of professional accreditation in the financial planning industry.
This blog entry generated much debate – debate that is similar to what we need to generate when it comes to turnaround professionals.
Read on to see the initial article and the debate that followed.
Making financial planners professional
ASIC has recommended to a parliamentary inquiry that commissions, volume bonuses and fees based on a percentage of funds under management should be banned.
What grabs me in this AFR front page piece is that in addition to the abolition of commission etc, ASIC also recommends that financial planners be given a fiduciary duty to act in the best interests of a client. I think it would be fair to say that most users of financial planning services would be amazed to find that this is not already the case. Although anybody following the Storm debacle would know that this critical and “taken for granted” principle is certainly not being universally applied.
Financial planners should be trusted advisers in the same way as a doctor, accountant or lawyer. So what is needed then? The professionalisation of the industry.
Now I know many financial planners would be affronted at the suggestion that their industry is not already professional. However until the unsophisticated retiree (living in Townsville?) can walk into his or her financial planner fully confident that his or her financial needs are coming first second and third (and certainly well ahead of the financial needs of the adviser), true professionalisation has not been achieved.
What do lawyers, accountants and doctors have in common that make them eligible for “trusted advisor” status? University level qualifications, some kind of “internship”, and professional affiliation are three things that spring to mind.
And yet, to become a “Certified Financial Planner”, the prerequisites of entry include a relevant university degree, and one year of “appropriate relevant” experience.
So what is the obstacle to financial planners attaining the same “trusted adviser” status of other professionals? It has to be the remuneration system.
FPA CEO Jo-Anne Bloch is quoted in the AFR as saying that the abolition of fees based on “funds under advice” will result in the “profession’s” loss of viability.
How do doctors, lawyers and accountants remain viable I wonder? These professionals bill for their time – a rate that varies according to their level of expertise, specialisation and experience.
Is there any valid argument as to why financial planners should not seek viability for their own profession on a similar basis?
This article drew an immense response. Business Spectator was inundated with feedback from both sides, which resulted in Nick writing the following reply on his blog…
A financial planner hits back
I knew that I would be touching a raw nerve when I raised the issue of professionalism in the financial planning industry yesterday.
I received this very illuminating response via an email from a Senior Financial Planner who’s identity I will preserve. Its insights make it well worthy of sharing with you.
I have read your article posted on the Business Spectator website and would like to give you some feedback if I may.
I read with distress every article bashing financial advisers and while I am the first to say there are many cowboys, there are also many good ones who do not deserve this witch hunt. I would like to point out some issues.
1) Many financial planners do not have any tertiary education at all
2) The current degree prerequisite for those wanting a CFP has only very recently come into play
3) Most advisers do not even have the CFP qualification.
4) The majority of older planners were given the CFP on a platter with minimal requirements – the standards have slowly been lifting only last few years
Doctors (GP’s) charge approx $10 per minute and charge for time facing the patient (that is why most appointments are only 10 minutes so that they can squeeze as much revenue as possible). Financial planners do 80 per cent of the work behind the scenes including compliance, implementation, strategy and due diligence. Other specialist doctors charge exorbitant fees which are certainly not time based.
Lastly, it is scary that ASIC are prescribing what not to do, instead of what to do. Their expertise is not in this area. Off the record, while ASIC has a good reason d’etre, in reality they have next to no expertise, particularly in the financial planning arena and are overtly hostile.
The main issue is not in the charging (although this should be addressed as a separate issue and in particular how it relates to conflict of interest) but, as you alluded to, capability and standard. Add to this integrity and you have a good adviser. The problem in the financial planning space is not fees as this can be manipulated and abused as in any other business but rather having a consistent minimum standard and not such extreme variance in capability.
Would be interested in your feedback.
Senior Financial Planner
OK, so here is my feedback:
Firstly, the comments on ASIC are interesting – and Alan Kohler today has pointed out ASIC’s tardiness on this issue.
Secondly, you have identified the issue of “minimum standards” in the industry. I can only say that it must be extremely frustrating for those financial planners who have taken the time to study at tertiary level and put themselves through an accreditation process to be painted with the same brush as the “many” who have no tertiary education and who have not bothered to become certified.
Thirdly, I note with interest your point that “of older planners were given the CFP on a platter with minimal requirements”. “Grandfathering” is usually done for political and promotional reasons – was it really so poorly handled for CFP’s? If so, that is a shame and just another obstacle the true professionals in the industry obviously have to grapple with.
Finally, my sincere thanks for taking the time to write and for sharing this perspective and for furthering this important conversation.
From here, I decided to add my opinion as this issue is something that we are currently looking at with relation to Turnaround professionals.
Below you will find the email that I sent to Nick Samios at Business Spectator . . .
I have had some interesting discussions within the profession re the Financial Planners and let me open with the fact that there are some FP’s that I have a lot of respect for. However when issues surrounding the profession are raised many of them make the same comments. May I please respectfully pass on the following observations?
- Prior to the demise of the insurance industry as a result of the introduction of compulsory superannuation there was a fledgling profession of financial advisors which were in the main, if not entirely, independent players.
- When the life insurance trade collapsed (being replaced by super) the significant players i.e. the big institutions were not willing to allow such a loss (as you would expect) to any other party and immediately stepped up a process to become significant players within the new industry.
- In this move they ensured that their many insurance agents and advisors (salesman) would be legitimate and protected players within the new environment. Thus a system was created that essentially critically linked most if not all advisors to the suppliers (the insurance/finance companies) and also grandfathered in many unqualified and inexperienced (in broad financial planning terms) players that your friend refers to. It also ensured that the basis of remuneration would remain in the same manner as their “advisors” had become accustomed to, i.e. commission based.
- The FP profession as it then was, stood back and did nothing; some say they were actually quite happy with the likely ultimate result (a controlled market with high rates of return).
- The major players then ensured that the ability for anyone else in the system to challenge what an FP said was severely curtailed. The most significant industry impacted in this move were the accountants who had no idea what was really going on until it was all too late. Hence the major issues raised about incidental advice. I was even taken on by a FP over advice I gave to someone who was a director of a collapsed company and who was on the verge of bankruptcy. The professional FP’s supported this stance.
- Your friend relates his story to the local doctor, it is a very good analogy. When I am sick I go to the doctor, he/she looks at the situation makes an assessment (including referrals) and provides a solution which is conveyed in plain English in simple terms and I leave with a clear understanding of my predicament and the planned solution and that it was the doctors advice (I do accept there are occasions when this does not happen). When I see a FP I end up with a document that is virtually the size of a phone book, full of disclaimers and saying at the end of the day that its ‘my call.’ I do understand that much of this is legislation but the FP profession did nothing to prevent the situation from getting to the point that it did. After all such a document would clearly support the significant commissions that they were receiving and don’t forget that many of the advisors were actually tied to the vendors of the products that they were recommending. Any question for the need for independence was completely ignored!!
- Around this time some of the other players were now actually concerned that they had actually missed the gravy train and were seeking to try and get back on. This was evidenced at least by CPA Australia’s once desire to establish its own license, something that I fought passionately against.
- We now have a system in turmoil because no one thought the process through at the start.
- To relate this now to our own situation at TMA we must first accept a simple fact: – “Financial Planners are like solicitors and Turnaround specialists are like accountants” What do I mean? In the first case they have legislation in essence protecting their role and name, the latter do not.
- Since the advent of the GFC (or any other buzz title you wish to give it) I have been inundated with an amazing number of approaches from so called ‘turnaround specialists’ who want to link with me or provide additional services clients that pass through my door. Some have been true professionals, but some have also been nothing more than con men seeking to strip all stakeholders of assets by disguising pure phoenixes as turnarounds.
- If the TMA does not seek to grab as many of the true professionals and bond them to the organisation and in the process make significant and constructive noise to the legislators on how our industry must be molded then we will not stand at the forefront of a profession, but merely as semi-legitimate minority amongst a sea of charlatans.
- If you don’t agree then look at the pinnacle status that one financial professional recently took the IPAA to, imagine how the world might be different had the IPAA taken action against this member’s mentors all those years ago when a large part of the profession were actually raising concerns.
- We as the foundation builders of our profession in Australia should seek to welcome and entice the majority and be prepared to set a standard and to remove those that cannot maintain that standard. Failing to do so I suspect will only leave the true and positive development of the profession as an event that will only occur many years into the future.
- We will move out of this cycle sooner than many expect so we have an opportunity to effectively situate the profession well prior to the next market correction, which according to many pundits will be the true and fundamental correction.
As you can see debate is very easily generated when it comes to contentious issues such as industry professionalism.
Blogs are certainly an outlet that can be used to generate much discussion and debate. Therefore be sure to follow my blog here at condon.com.au, as you never know what you’ll discover!
Until next time,