The financial advice industry has been under the regulator's microscope since the global financial crisis shed light on the shadier advice practices that had emerged across the financial services landscape. A sudden decline in capital markets, as seen in the GFC, awoke many investors to just how much risk they had inadvertently been exposed to upon the recommendation of their adviser. The uncovering of systemic cultural flaws leading to poor advice by a subset of advisers, many within some of Australia's leading institutions, forced a broad based governmental response to a complicated industry.
To date, the broad raft of industry reform has tended to create as much noise as action, although there are some notable positives as well as areas were there remains significant room for improvement. We sum up the last seven years of activity in the below single paragraph... Not really but you'll get the idea.
The path so far
There have been parliamentary joint committee reviews, lots of reports named after some pretty boring people, a number of enquiries that resulted in range of legislative amendments, some more reporting, a great deal of media buzz generating further enquires, again leading to more reforms. Enter stage right (political pun) a change in government, some legislative reforms are scaled back resulting in more media noise prompting industrious journalists to uncover some really bad advice practices. These journalists win some awards and the institutions at fault lose a great deal of money and goodwill (rightfully so). Stage right government decides to partially unwind their legislative unwinding, prompting more lobbying, industry moaning and media frenzied chin-wagging. All the while a bunch of moderately unpopular politicians communicate via slogans, zingers, poorly executed winks and take it in turns to generally poke their tongues out each other. It's all enough to make you dizzy and proves that a collective of heads doesn't mean much when politics is involved.
Industry reform was designed to make the financial advice industry impartial and hold advisers to a professional standard were they acted in the best interest of their clients. A simple goal to be sure but one which is too often distorted by competing stakeholder interests.
The results so far
- Consumer awareness, particularly amongst more sophisticated investors is at an all-time high;
- A best interest duty is now law;
- Banning of conflicted remuneration is now law (eradicating direct conflicts of interest);
- Far more transparent fee reporting requirements have been introduced;
- Regulators are influencing the provision of advice through prescriptive advice process requirements. This commodifies advice delivery resulting in sub-optimal outcomes for clients;
- Education standards for advisers remain far too low;
- Professional bodies have not been empowered to transition the industry into a profession;
- Indirect conflicts of interest still exist for advisers employed directly by, or licensed through, a financial institution;
- There remains a lack of differentiation between aligned advisers and those who operate without any conflict in interest.
What should be done
Regulatory focus to date has been on constraining the manner in which financial advice is provided with minimal consideration to the ethical, educational and professional standards of the advice providers.
To truly address the needs of the advice industry we need to stop focussing on legislating how market participants engage and start focussing on transitioning financial advisers into professionals. Some simple measures will be far more effective at improving adviser standards than the previous seven years of noisy but toothless reform. The following three changes are simple, cost effective reforms that will greatly improve advice standards;
- Legislate that all financial advisers must become a member of an accredited professional body like the FPA or AFA;
- Legislate that these professional bodies have the capacity to disqualify membership, resulting in an inability to continue to act as an adviser;
(These two simple changes will fast track the path to a self-regulated profession where industry participants are motivated to enhance the standing of their profession by weeding out unethical advisers. Both the AFA and FPA already have in place a rigorous code of ethics and are both far more attuned to the intricacies of the industry. This is how most other professions are managed. It is not a new idea)
- Introduce a higher educational barrier to entry.
A higher level of education results in a higher barrier to entry, increasing the opportunity cost of acting unprofessionally. Additionally, increased education standards provide a broader set of learning opportunities to better develop an appropriate understanding of personal moral standards and ethical frameworks.
It is not and should not be a regulators responsibility to mandate how and in what capacity market participants engage each other. However, in the absence of professionalism amongst market participants this is an understandable reaction. The latest report reviewing the role advisers have in providing life insurance advice, the Trowbridge Report, has again taken an unnecessarily prescriptive approach to advice provision. This is yet another example of an industry review completely overlooking the far more important aspect of improving adviser professionalism. In fact, a likely outcome if recommendations from the Trowbridge report are accepted is a further consolidation of adviser into vertically integrated institutions.
If industry regulators continue to externally constrain how market participants engage each other, we are certain to see a significant reduction in client access to qualified advisers, especially qualified independent advisers. The simple recommendations outlined above are no different to the existing structures in place for almost all other professions. For once a solution that is both simple and cost effective exists and yet for all its merit is has been quietly overlooked.