In pursuit of professionalism: Advice versus product

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Eric Walters is a company director and senior financial planner at Continuum Financial Planners Pty Ltd on Brisbane’s Southside. With many years’ service to the accounting profession in the governance stream at CPA Australia, he and his firm argue that the financial planning industry has a strong case to attain recognition as a profession. He plots a pathway to that status:
 
The recent article in Wealth Professional (9 May 2014) – ‘CBA and ASIC get defensive’ – has reignited my interest in this issue: one that I have argued in a number of forums; and one that I had suggested should form part of the agenda for the Financial Services Review currently under way.
 
In the steady evolution of the financial planning industry, partly through the leadership of the regulator working with licencees; partly through the cooperation of advisers who are focused on delivering a sustainable, profitable and compliant business service to clients; partly through the professional/industry organisations that represent the advisers; and partly because of the law-makers in federal parliament, new discussions are opening up as to how to transition from an ‘industry’ to being truly ‘professional’.
 
Organisations such as the accounting professional bodies CPA Australia (CPAs) and The Institute of Chartered Accountants in Australia (ICAA) have long prescribed ethical standards by which the members are guided - and a self-discipline process is in place to see that they do so.
 
I understand that FinSIA, the Financial Planning Association (FPA) and other groups representing industry members, similarly guide and ‘supervise’ their members. So what stands in the way of the financial planning industry from being considered a profession?
 
The distinguishing hallmarks of a profession, include:
•             A body of knowledge that is ‘expert’ in a particular discipline;
•             A code of ethics, preferably self-disciplined; and
•             A market willing to pay for the trusted services of the holders of the expert knowledge.
 
A fair argument can be made that a significant body of those practising as financial planners are expertly trained and have attained graduate tertiary learning accreditation to support their discipline.
 
As stated above, a number of organisations representing a significant proportion of the financial planner population have also prescribed ethical standards, and self-discipline members for any breach: so where are financial planners falling short in the use of their expert knowledge to gain the trust of the community to engage them to share that expert knowledge?
 
A simplistic case is made that it is in the cross-over of providing advice – and selling product!
 
A further issue in the evolution is that the financial services industry is so entrenched in its old-style distribution process that participants are reluctant to restructure the model, with the consequence that there are perceptions of (and in too many situations, real) conflicts of interest in the distribution remuneration model.
 
It should be understood that in at least a number of these cases, the end-user client can be shown to actually benefit cost-wise from the existing structure.
 
The real-life commercial dilemma in this is that for all that any financial planner wanting to act ‘professionally’ may want to do to change the model (and/ or the perception of conflicted remuneration), they are competing with others who are willing to accept the commission paid by certain providers, who are in the main, insurance providers.
 
Any attempt to change the process and still receive ‘fair’ compensation for the effort made and risk taken appears to be in danger of economic failure.
 
Until the industry can change its distribution model, the only sure path to professionalism for financial planners is to withdraw from the sale of product and limit their services to wealth management ADVICE! Once the advice has been provided, the client would then accept responsibility for meeting the strategic plan by buying product through a broker, investment product adviser, or another ‘shop’ specifically set up for such transactions.
 
There will be some practical issues to negotiate as financial planning firms move away from selling product and towards concentrating on the client’s ‘advice in their best interest’ – for a fee commensurate with the professional risk undertaken by the planner.
 
But at the end of the journey, clients will have a clear perception of who serves their best interest; and planners/advisers will be recognised in society for their professionalism, and trusted for their professional conduct.

SEE MORE:

Quality filter supports apathy and mediocrity

CBA and ASIC get defensive

Rogue former CFPL planner promoted so he would see “fewer clients”

  • James Howarth on 15/05/2014 9:34:03 AM

    We already are a profession.

    We still need to separate product and advice though. That is asics job

  • Funky Goose on 15/05/2014 10:02:48 AM

    Disagree.
    Financial Advisers service clients 'products'on an ongoing basis and it is appropriate to be paid as part of the product cost. Whether that product is an inhouse fully implemented solution or a tailored portfolio constructed by the adviser makes no difference. We are not accountants that see our clients once a year to report on what has happened. We are involved in day to day decision making. Professionalism is earned by showing people on a day to day basis not by the fee structure.

  • Scott Farmer on 15/05/2014 10:03:34 AM

    Nothing wrong in project managing the implementation of product, providing there is NO conflict. And that means no FUM based fees, commissions, platform volume rebates, or any other kickbacks. You charge your clients for ADVICE and IMPLEMENTATION, and THEY pay YOU.

    Products and their manufacturers should stay out of this relationship completely.

    Then we have the foundation to build a profession.

  • david m on 15/05/2014 10:05:23 AM

    Or everyone could just man up, dial the commission to zero and charge a $ dollar based fee for the services and advice provided. Works for me. Works for my clients.

  • On the right track on 15/05/2014 10:06:40 AM

    It is up to the individual to have all those things like integrity, ethics, etc and have the professional bodies guide them. If you have got good principles from the start you will/should question yourself about your behaviour.

  • Melinda Houghton on 15/05/2014 10:10:59 AM

    If you are not restricted (other than by quality/research) on the products you offer, you are not vertically integrated with the product provider, you do not get paid by product, and do not get rewarded by providing any particular product over another, then just how are you conflicted? And wouldn't you just be passing the buck to the broker to be "conflicted" if you believe it is not possible? Implementation and ongoing management is an important part of what the client (not product provider) pays us for. I don't think your model is the answer, unfortunately.

  • GAB on 15/05/2014 10:25:29 AM

    Sounds so simple doesn't it...but can never work. An adviser recommends a client buy shares, managed funds, TDs, corporate notes, get appropriate Death and TPD cover etc....all with no mention of a product? Just go to the product house and they'll fix it up for you...and where might that be and how do they get paid and who checks if it is set up properly? Looks like more headaches, more stuff-ups and more FOS complaints to me.

  • alleycat on 15/05/2014 12:40:43 PM

    @GAB, you're on the money and I agree.
    Of course, Eric failed to mention that every accountant that sets up a SMSF does it in the client interest and arranging ongoing tax returns and audit fees have nothing to do with self interest because they belong to a professional body and have ethics and integrity.
    Solicitors don't use their trust accounts for their own private purposes because they are part of a professional body who make sure they are all honest, ethical and have integrity.
    You only have to look on annual basis, how many are struck off each year for their lack of honesty and ethics.
    As a generalisation it's a small number in the scheme of things but it does happen.

    The problem is that whilst Fund Managers, Banks, Life Insurance companies and the ISA control the bulk of distribution/ product manufacture, these conflicts will always be present and how that's paid is immaterial.
    Even ASIC is starting to get that.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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