A Professional Sector needs a professional structure (Part I)

Financial Planning as a Profession and birth of the Advice Groups

Over the last eight years, financial planning has been through myriad inquiries and legislative changes. Yet one of the most significant chapters still lies ahead, with the commencement of the new standards body, the Financial Adviser Standards and Ethics Authority (FASEA). Many commentators have rightly pointed to the vital importance of this body in the development of the financial planning profession. But is it enough? In my view, NO.

On the Professional Standards Councils website, you will find the following definitions of ‘profession’ and ‘professional’:

  • “A profession is a disciplined group of individuals who adhere to ethical standards. This group positions itself as possessing special knowledge and skills in a widely recognised body of learning derived from research, education and training at a high level, and is recognised by the public as such. A profession is also prepared to apply this knowledge and exercise these skills in the interest of others.”

  • “A professional is a member of a profession. Professionals are governed by codes of ethics and profess commitment to competence, integrity and morality, altruism, and the promotion of the public good within their expert domain. Professionals are accountable to those served and to society.”

New professional standards in financial planning clearly will make a substantial impact on the journey towards becoming a profession. Most financial planners I know have a passion and desire to make a difference to their clients’ lives – a truly noble cause for any profession. There are countless examples and case studies, which don’t get anything like the respect and recognition they deserve.

Why? It’s my view the public hasn’t built trust in many aspects of financial planning.

Shadows of doubt and mistrust...

The current structure in the financial planning industry creates doubt and mistrust that the profession serves the public interest rather than just itself. There are two fundamental reasons for the publics lack of faith and confidence:

Firstly, the public must have more trust in the system that accepts people into the profession and removes them from it. In the coming years, the new standards should bear fruit for this element of trust.

Secondly, there must be more trust in the broader system in which the profession operates. Financial planning has a structure like no other profession. If you examine medicine, law, accounting, engineering and actuary work, you will observe none of them has a licensee structure or equivalent; instead, the professional is either registered under the law, must pass entry standards or both.

Change the model...

Financial planners should move to model with a ‘profession structure’, where they become directly licensed by either the Australians Securities and Investments Commission or the Standards Board. Licensees should become “registered advice groups” that live and die on their value proposition to advisers: having top client-facing tools, running a better business and providing a strong professional culture. Good quality groups will survive and thrive in this environment. The cost base and complexity necessary to deliver their services should fall. That benefits advisers and consumers.

Many readers might think this article will draw the ire of the institutions. That’s not my mail; in fact, the groups with a strong proposition welcome these ideas. If your value proposition hinges on a license, it’s sitting on a house of cards.

The term ‘registered’ in ‘registered advice group’ is very important in this model. To be a registered advice group, you can’t subsidise the fees or provide soft dollar incentives. Various tests could be introduced to ensure these groups are purely a conduit for services supporting the adviser and firm in discharging their professional duties and running a healthy business.

Any registered advice group not prepared to work under such test shouldn’t operate at all. Use of back-door operators or sideline deals puts the adviser’s registration at risk. We all know what could happen and it’s imperative the public trust the system.

Sounds simple but…

For the professional model above to work, some blockages in financial planning must be repaired. Here are a few items that need fixing:

(1) Professional indemnity insurance and liability

In recent years, providers have dropped out of the market. I hear mixed stories out there. Some long-standing quality firms aren’t having too much trouble, but newer advice groups and those with certain business models have found it difficult to obtain insurance or have experienced premium increases. Predicting how this might evolve under the model above is difficult; however, moving to a proper professional framework and structure surely increases the chance of financial planning becoming a profession under the Professional Standards Council. This would enable the emergence of proper professional standards liability schemes for professionals.

(2) Approved product lists

When Financial Services Reform (FSR) came in 2001, it had a major focus on improving the efficiency and effectiveness of a disparate regulatory system. This was the catalyst for the licensee system and associated approved product model. It is important for many reasons, one being that it’s the basis for many professional indemnity contracts with licensees.

With a complete and proper move to a financial planning profession, the current system under FSR should change as well. It’s time for financial planning businesses to take responsibility for products they use. There is plenty of external help out there, and businesses would evaluate the registered advice group on its value proposition in helping advisers discharge this responsibility.

A quality advice group would focus on quality information and external expertise in areas such as: complex investments, liquidity risk, targeted portfolio construction and life insurance definitions. I’m not sure having five life insurers versus seven, selecting between plain vanilla funds that are recommended or highly recommended, or platform selection adds much value for the internal effort expended.

Bottom line: the professional is in charge; everyone else is merely supporting them.

(3) Spare a thought for the regulator

The regulator feels the community doesn’t trust financial planning and if it doesn’t perform volumes of activity, it gets slammed in an inquiry. This means if we don’t consider the problem from the regulator’s perspective as well, the system won’t work.

Firstly, if the financial planning profession can’t get its act together and become a registered profession under the Professional Standards Council, the model I’m proposing will be unworkable from the regulator’s perspective. This reinforces the vital role of FASEA, but also the importance of an appropriate structure to support the profession.

Secondly, I consistently hear from large licensees that they get more than a notice a week from ASIC requesting information. Everyone is losing: the regulator needs considerable resources and complexity to get the data it needs to discharge its obligations; the licensees often have disparate and legacy operating systems, which means they’re drowning trying to meet the requests. In turn, the adviser is copping it, constantly getting asked to provide data in a manual and inefficient way.

Advisers currently provide data to licensees, who then hand it on to ASIC. Under direct licensing, if ASIC wants data from an advice business, why can’t the business give it directly to the regulator? Even better, what if all the stakeholders started working on a way to make that data exchange efficient and simple for advisers and the regulator?

This system would introduce more data responsibility for advice businesses; however, they might start looking at registered advice groups’ value propositions in this area. It would put the advice group under pressure, but advice businesses would be in charge of the situation.

(4) Customer access and trust of Advice

Under the current system, the number one stakeholder in financial planning, the customer, is losing as well. The cost, complexity and confusion of dealing with financial planning make it hard for consumers to trust, or for that matter access, the services. The exception is that 10 per cent of the population that has an active and personal existing relationship with an adviser. But even for these stakeholders, the changes above would make the system work more efficiently and effectively.

A professional system for a noble cause...

The system discussed in this article would move financial planning towards being a true profession and earning the trust and respect it badly needs. It’s not good enough just to change the standards; the public needs to see an entire system they can understand and trust.

This system isn’t unique. In the United States, the Investment Advisors Act defines a “registered investment adviser”. In general, they have to register with either the SEC or state securities authorities, depending on their size. To achieve registration, the adviser has to meet the stipulated standards.

There are exciting but important times ahead. Let’s hope all stakeholders have the courage to go the whole distance and turn this sector into a true profession – as we all know the significant difference it can make to people’s lives.