Individual Certification of Advice Professionals
My first paper in May 2017, argued that a true profession should have an underlying structure supporting its professional mission. It currently doesn’t! You won’t find any profession where the professional operates under a licensee, often with commercial interests, which in turn is accountable to the regulator (ASIC in this case). The financial planning sector can only take it’s place as a profession under the Professional Standards Legislation if it’s structure and culture reflects other professions. For example, doctors, lawyers, accountants, engineers, architects, actuaries and many other professions don’t have a licensee structure as an intermediary to trade.
Since the first paper many people have asked technical questions, but also what it means in a broader business context. This paper addresses both these areas.
FSR in 2001 set the tone…
The underlying structure of financial planning stems from FSR (Financial Services Reform Act) in 2001; where legislation was trying to simplify a complex legislative structure across different product types and regulators. At the time it didn’t have any objectives around building a profession.
The last 10 years has seen so many enquiries and legislative reforms, advisers and business owners feel overwhelmed. The FOFA (Future of Financial Advice) reforms resulted from community mis-trust following the global financial crisis. Whilst FSR was well intended, it sowed the seeds of many problems today, as it enabled product to become the area of focus. In fact, AFSL licensing is centered around authorising the licensee to carry on a financial services business to provide financial product advice and to deal in classes of financial products.
FSR also created an opportunity for licensees and advisers to participate in product aggregation. The most common form was margins from white label platforms, but deals were also done at a product level across insurance, investment management, debt and other associated product areas.
Separation of product and advice…
Most professions simply operate under a common law duty to their client. Clearly, the legislators didn’t think that was enough and also introduced statutory law, including “safe harbour” provisions. The sector is very adaptive and negotiated various concessions; however, negotiated forms of conflicted remuneration won’t last long term. If we ever have another GFC do you think the public will be surprised that “volume linked” research fees are still possible via managed accounts structures?
Many colleagues have told me managed accounts is totally different; however, I think the public will react poorly to learning that by changing the entities the licensee can still receive a percentage based margin from the product the client invests in. The outcome is the same however, the licensee sets up a new entity and appoints the administrator, Responsible Entity (RE) and investment manager. The RE signs off on paying the margin through the administrator, and in some instances the underlying fund. In the end, exactly the same volume effect occurs.
To make this economic system work many have self-licensed due to difficulties in a licensee passing this through to authorised representatives. In the case of licensees, it’s an important part of their P&L to keep the licensee fees down in a distorted market. In recent years independent data reveals it costs circa $35-40k per authorised representative. Unfortunately, if you charge over $30k you’re out of the market as the usual fee is more like $20-25k. It’s clear the licensee charges substantially lower than its cost base in the hope of making up the gap through product margin in some way or form.
I’m not sure if we put all this through the “front page test” the public would buy it, in fact they may be very disappointed. The new version of the front-page test is being played out before our eyes in the Royal Commission. Even the greatest optimist must see risk in this surviving after the Royal Commission. At the very least you would think we will see separation of product and advice at an economic and fiduciary level.
Licensees become value added advice groups…
In the long term I’m advocating licensees don’t exist and financial planning looks more like accounting, with a public practicing certificate structure through a professional body, recognised under the professional standards legislation.
In the meantime, licensees should live and die on their value proposition to advisers: having valuable client-facing tools, enable efficient client reviews, running a better business and providing a strong professional culture. They should play no role in product aggregation to subsidise the fees to access the professional services. This will create an even playing field and true competition on value. In time, advice groups that add value won’t fear the end of licensing.
Ask yourself this question: if licensees didn’t exist would I be part of this group? That’s the acid test of true value!
This model should also lead to much greater efficiency in the entire system. It’s madness that it costs a licensee almost $35-40k per authorised representative to break even. If you strip back all the costs in recent years you will find a greater proportion has come from compliance related impact. The regulator doesn’t trust the licensees and they don’t trust the regulator. It’s a game of “chicken and egg” creating substantial cost and angst for all, with the consumer eventually paying the costs (literally)! This is clearly evident at the Royal Commission.
Perceived barriers to individual certification…
(1) Professional indemnity insurance and liability
The issue of liability hinges on moving to a proper professional framework and financial planning falling under the Professional Standards Legislation. This would put financial planning on the same footing as accounting where financial planners with a public practicing certificate would access a scheme limiting their liability on civil proceedings. This often operates in amounts above $2 million. In addition to this scheme, the professional must also hold professional indemnity insurance with stipulated minimum amounts and conditions. Importantly this is facilitated through a professional body, properly registered under the legislation. We have also seen recent proposals to establish a compensation scheme to prevent people receiving no compensation because the licensee has gone.
I have received many questions how this would work with the PI insurers and implications of past liability. If you became a CPA tomorrow and joined the scheme you’re still liable for actions committed prior to joining the scheme. This is where it’s important to ensure professional indemnity insurance still operates in its current form prior to the commencement date.
If financial planning moves to individual certification it’s my view the professional associations, PI brokers and insurers all need to come together to form proper grandfathering of events prior to a commencement date. In terms of events post the commencement date the blue print already exist with other professions. This won’t be easy; however, everyone I speak to amongst the stakeholders tells me it’s complex, difficult, but possible. Some see these problems as impossible; however, the right people, with the right purpose, intent and ability to enact change could solve it.
(2) Approved product lists
There is actually no requirement under legislation for a licensee to have an approved product list. Really, it’s been a mechanism for some licensees to control the product equation, which has in turn driven aggregated product economics. This system stemmed from FSR and acts as a roadblock to professionalism.
In my last paper I advocated removing approved product lists; however, feedback has changed my mind. The intent of approved product lists should be twofold: (1) The ability to bring together quality ideas and rigor through an investment committee to help advisers provide top quality solutions for their clients; and (2) In the transition to individual certification it’s the professional indemnity dilemmas that are already complex and difficult. Maintaining this will aid in a complex transition in this area.
Many people commented on the UK type system, where advisers ended up having to pick the best product. The Australian “Best Interest” system is different to the UK and the advisers can demonstrate they have met the duty provided they have considered the individual circumstances and objectives/goals of the client, considered what they currently have and looked at a reasonable set of alternative options when considering any changes. Current guidance indicates a selection of circa 3 genuine alternatives is required. You’re not being asked to broker the entire market; therefore, the current research and investment advisory market, combined with base level compliance expertise should enable an individually licensed adviser to discharge this duty.
(3) If ASIC struggle to keep control now how will they have chance under this system
Under the current system advisers provide data to licensees, who then hand it on to ASIC. Under direct certification, 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 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.
The technology world is evolving with incredible speed. Keep your eye on one term: API (Application Programming Interface). When I speak to self-licensed businesses or advisers in the aligned licensee model looking at self-licensing may feel the scrutiny and requests from ASIC across the top 6 won’t permeate down because of the size and scale. That’s a very dangerous assumption.
The different regulators in Australia have invested heavily in data and analytics solutions. They already have the capability to ingest data on a mass scale and then apply cognitive analytics over that data. In time, they will be able to interpret language and match the fact find and SOA or ROA for consistency. Commercial operators are moving quickly, you may have heard the term “Reg Tech”. No matter what plays out in licensing or flow down from the top 6 licensees by adviser numbers, start preparing yourself for a day where ASIC tells you their API specifications and the business pipes the data direct.
In this model the licensee is an expensive, low value intermediary to this data system, unless they help the business navigate through the complexity and select an appropriate method. That’s the domain of a value-adding advice group and doesn’t require a licensee structure.
Best of luck everyone, what you do is important and has a profound impact on people lives. This is the lifeblood of any noble profession. Does anyone think an incremental approach after the Royal Commission will work? We need a radical change with a logical and patient action plan.