Post the Royal Commission
One would be naive to think change will not come quickly.
You can hear the policy makers typing as we speak, with little time between Hayne’s final report, and the Federal Election. “The financial planning community in Australia effects 3.6 million active and passive clients” (Investment Trends). There’s a few votes.
The outcomes of the Royal Commission (RC) to date have already seen devastating effects across industry wide stakeholders. Consumer loss and emotional stress, institutional axings, sales of divisions, removal of dealer group licences, and advisers banned, fined and jailed. Not to mention the millions of shareholders in financial service companies (including investments/super of mums and dads), as the Financial Index (XFJ) is back to 2013 levels.
The year that was 2018 will not be forgotten.
And it shouldn’t be.
Despite the media, this is not isolated to banks. The RC addresses banking, superannuation and financial services. Let’s remember, not all licencees were under the spot light. Whilst this may be for good reason, no one is perfect.
The change will be universal and forced upon all willing to remain in the industry.
Yet, the outcomes of the RC to date are unprecedented. How do we do this?
That is the key question – who is willing, and able, to adopt change?
I aim to address this below.
Setting aside breaches of law, the RC has reignited debate of trust, confidence and quality of advice within financial planning. The RC has proven culture amongst some is immoral. Power has been abused, personal gain and greed prioritised, and penalties deemed inadequate to stem deterrence.
To be a profession, advisers need to demonstrate concerns for the consumer, and be seen serving the public interest. Otherwise, we remain an occupation.
Change involves adoption of ethical culture, a change in attitudes and creating pillars of professionalism with raised standards, including education.
This comes at a time when “trust in financial services and banking advisers is an all-time low” (Money Management). Yet trustworthiness is essential to the reputation of the industry, reducing uncertainty and restoring consumer confidence.
We will not be without challenges. Detecting current failures and validating options to overcome hurdles in conceptualising professionalism, with need to universally adopted.
Conflicted versus independent advice
Conflicted products harm the quality of the advice. Professionalism will focus on independent advice, not influenced by conflict. Fixed fee structures, for example, provides transparency, working within the definition of ASIC’s independent advice model. Independent advice removes links to product sales, as there is no correlation between the complexity of advice and the quantum of the conflicted revenue.
What about commissions?
We all know grandfathered commissions will go. Simply disclosing a commission is not a moral licence to provide biased advice.
Are consumers willing to pay for insurance advice?
Let’s look at the UK’s Retail Distribution Review. The UK prohibited commissions to increase consumer trust, transparency and confidence. The market experienced an increase in professionalism, however the realignment of fees showed an overall increase to the cost and complexity of advice. This lead to the consumer showing an unwillingness to pay upfront for advice, with demand for advice falling.
Although affordability of advice may be effected, the broader community benefits from removing harmful, conflicted advice, hence such consequences will be absorbed.
The question is will ASIC assess insurance under the same category as conflicted advice?
Despite the restrictions of general outbound sales and reduction in commission rates to advisers, the industry is formally on notice, as ASIC will be building on their 2014 REP 413 report. ASIC concluded – “96% of the poor advice was given by advisers paid under upfront commission models”, shown below:
This is considerably important, as ASIC have stated – “if no significant improvement has been made on the findings reported in ASIC REP 413, there would be a compelling case to remove the exemption from the ban on conflicted remuneration currently afforded to the sale of life insurance products altogether”.
This assessment will be made in 2021.
The need for insurance will not fade. In fact, with less advisers offering the service, the simple lack of supply will alone keep the offering alive.
Again, it stresses the need to move towards a trusted industry, where a fee for such advice may flower.
Improving Education
We all know the FASEA changes. If you wish to disagree, that’s fine. I don’t. And for good reason.
Professionalism includes being accountable. This extends to education. Advisers need to be accountable for their own learnings.
The rules that govern the way we advise have changed so dramatically, only formal education will achieve setting a benchmark that most professional industries, already have in place.
Such new learnings, require new education, especially when this knowledge needs to be transformed into learnings that effect their career and client outcomes. The education process also creates reassessment of culture – a way of doing things for the better.
Education levels must go beyond RG146 guidelines, and financial literacy of the consumer needs to improve to reduce information asymmetry. Without change, structural issues such as vertically integrated advice models and moral hazards will persist.
Advisers not prepared to undertake mandated requirements, will be removed by 2024. The argument of experience has been tabled in several adviser forums. Whilst to an extent, I sympathise with some, I struggle to understand this overall. The benefits of our industry being professional are significant, and long lasting.
Why should further education, in an industry that those already specialise in, be of concern?
Becoming an ethical and professional industry is the ultimate goal. Change creates obstacles, and a key pillar to professionalism is education.
It is not an unintended consequence.
If you want some motivation, think about this.
Advisers are leaving the industry. Yet FASEA has significantly increased the barriers to entry for new entrants. This is important. We have a need for advice and an ageing population. Economics 101 taught us that as demand rises and supply falls, the price goes up.
The cost of self-education will be rewarded. Quickly.
Leadership & Culture
Rouge advisers and incompetent executives, cannot be completely removed. Greed and power effects people differently. There will always be a few bad apples.
Despite positive influence from leaders, management in financial planning often adopt a coercing style, meaning ethical behaviour is rarely praised. The industry needs to reward ethics.
Advisers need to understand unethical behaviour in order to acknowledge consequences. Incorporating ethics into compulsory curriculum, is a way of minimising unethical behaviour, therefore you can understand why FASEA made this subject compulsory for all.
Culture is the shared values, norms and expectations that govern the way people approach their work and interact with each other.
Leaders have the ability to change attitudes of others and motivate the industry to behaviour morally.
This starts at the top with established compliance frameworks, membership of a universal code of ethics, and leaders being accountable. Individuals then acknowledge the existence of ethics, before acting or making a decision.
The Regulator
Given the admissions at the RC, it is fair to say the regulator has failed.
Whilst penalties exist, for most, they are merely a cost of doing business, as the reward is greater than the risk.
Penalties must focus on deterrence, punishment, compensation and incapacitation.
The Government has already started this process, with criminal and civil penalties significantly strengthened (Frydenberg, J 2018), hence change has started:
If the community is unconvinced of, or confused by, the value of the regulations, they may turn to other sources of advice. Actions must be open and responsive, as both advisers and clients may view the regulatory authority as a potential threat. For example, the Banking Executive Accountability Regime (BEAR) may be the only real possibility of taming cultures. Should the BEAR failure, what will happen? Westpac conceded “the Royal Commission recognised that certain conduct did not meet legal or regulatory requirements”, with “employee remuneration arrangements inadvertently contributed to poor behaviour” (Chairman’s Letter, 2018).
A key psychological hurdle in closing the gap, is moral. Understanding that our industry can be competent and law abiding, means we can befriend the regulators, not alienate, strengthening cooperation. Once accepted, a path of right emerges, and the threat of change is removed.
Conclusion
It’s not enough to simply espouse high standards. As an industry, we must live by them, and guide others to do the same.
Disjointed change is insufficient.
The RC has demonstrated market failures. But it is these failures that allow us to learn. The coming together of corporations, regulators, individuals and all stakeholders to collectively work in the client’s interest, means core beliefs, ethics and culture must be universally shared.
Conflicted revenue will be abolished, with advice fees separated from products. Whilst affordability of advice may be effected, clients are already discounting conflicted advice from the media presence of the RC.
Consumers are becoming more informed.
Over time, the consumer will continue to seek non-conflicted, fee for service, independent models. This is the future.
Without ethical leadership there can be no ethical following.
Change starts with influencers, as they can influence behaviours. There is an ability to change attitudes, motivate and inspire the financial planning community towards professionalism.
Professionalism is the building block to earning trust, with accountability playing a key part. Leaders must be accountable for this process, ensuring culture fits within compliance frameworks.
Advisers must become accountable for their own training, development, enhanced education levels, and membership to a national, mandated code of ethics.
The industry must respect the rules. Penalties must match punishments. Strong, enforceable regulation protects the consumer.
Challenges will be costly, time consuming and involve significant restructuring. Advisers not willing to embrace professionalism will continue to leave. This is a short-term burden, as the true cost of the status quo is much greater. Implementing change now is paramount to reset cultures, restore confidence by reducing uncertainly, and attracting the right people.
The industry is at a cross road.
If you change nothing, nothing will change.