An unfinalised PhD thesis on the Australian AFSL regime, written by academics Angelique McInnes and Abdullahi Ahmed and seen by ifa, has zeroed in on the topic of dealer group politics and ethics, which the academics argue has until now been “neglected” by serious researchers.
The thesis – which references ifa articles on eight separate occasions – argues that Australian financial advisers licensed by a third party are ultimately “dual agents” working for both their clients and licensees.
“Licensing financial advisers through third-party, often commercially-driven product-conflicted, institutional licensees is a threat to independence and raises conflicts of interest. It can therefore be termed illegitimate,” the paper states. “Licensing advisers via third-party licensees is inconsistent with four objectives of the Commonwealth Corporations Act 2001.”
Adopting the so-called “Suchman theoretical legitimacy framework”, the paper argues that the traditional model of licensing is “convincingly illegitimate” as it leads to breaches of the best interest duty and the principles of the common law governing advisers.
The logical conclusion of the research is a move to individual licensing, the paper contends, suggesting that FASEA takes control of regulating, appointing and disciplining financial advisers instead of commercial licensees. In addition, the paper addresses the issue of independence, arguing that advisers licensed by financial product manufacturers are doubly illegitimate.
“Most advisers in Australia are affiliated to financial product issuers,” the paper states. “Essentially, this affiliation leads to conflicts of interests and threatens independence. Conflicts of interests are undesirable, because it misaligns adviser-client interests.”
Ms McInnes, a lecturer at Central Queensland University, will be presenting the paper at a forum of financial planning academics in Hobart this week, ahead of the FPA National Congress.
waste of time but have fun getting your PhD…and can everyone PLEASE stop referencing Law or medicine or Accounting as professions to which we should conform? They are not the same as PLanning and never will be and the ultimate irony is that not all Doctors hold the same quals nor do Accountants. I know Accountants who hold Diplomas and members of the ITAA or other and doing 1000’s of small ITR’s, my GP has the basic medical degree but holds no surgical quals nor any other specialist capability yet ALL planners will have to hold a degree. If it’s Accounting we are most like then why didn’t we get a similar framework which would allow for a spectrum of planning quals and corresponding abilities ie If i want to sit out in the burbs and do risk and super for amounts under a certain limit or be limited in scope to only these areas and not Aged Care, SMSF etc which are now widely considered Specialist advice areas…this would have allowed many more in the future a way to make a start in the industry and ensure lower socio economic people with simple needs a way to access fast yet simple solutions from someone happy to service that market operating under a framework that still keeps them in check…it doesnt require academia it requires more simple common sense than anyone pulling the strings will ever have…research that!
I’d be guessing but I assume they are saying that the conflicted structure is against the spirit of s760A of the Corporations Act (the “objects” bit of the Act as far as it concerns giving advice). A long bow but the more interesting point is that the lack of any real reflection on the impact of the FoFA rule around best interests. This in fact has the capacity to make all talk of conflicts “academic” (pun intended) – provided someone can be bothered enforcing the new rules. And it looks like this is something ASIC is very keen to be seen to be doing.
Brett, thanks for your insight. Statutory best interest duty has changed the identity, role and performance in practice of financial advisers based on the findings of my research. How advisers see themselves and how the legislation views them is different too. Indeed, enforcement by ASIC is on the increase and I suspect with technology may eventually become easier to do given the ATO and Centrelink data matching going on is starting pay dividends for the Treasury.
Over the coming years there will be three types of advisers 1) An adviser happy to be tied to a bank, industry super.. these people are happy just to have a job, perhaps a start and help distribute product…nothing wrong with that 2) Advisers indirectly licensed by a product manufacturer and these will be those advisers about to retire in less than 5 years, just starting up, have a poor compliance history, wish to offer a high risk strategy and or unsure whether they want to be in the industry for 5 years or less. 3) those advisers who don’t want to be in category 1 or 2 and will go out and get their own AFSL. Having your own AFSL the costs are cheaper, the support is higher, the compliance support is greater as so are the individual risk. This last point is why I believe it’s better for the industry for people to become self licensed.
Your Type 2 advisers are the real problem with the industry. Consumers perceive them to be independent, when they are actually slanted towards a product provider. This is where change is most needed. Either make them fully tied and clearly branded as such, or divorce them completely from product companies.
Anonymous, we appreciate your comments. From the qualitative data in this research there are many problems with the industry, which will be addressed whether by evolution or revolution. It will depend on advisers and how they embrace by engaging to professionalise financial planning. Not only does my academic job depend on financial planning becoming a recognised profession like other professions, but so does every single financial adviser in the country.
Anonymous thank you for your thoughts on the matter. As much as I would like to agree with you, I go along with the law. Section 923A of the Commonwealth Corporations Act 2001, which reflects the sentiments of the Australian Government and Regulator ASIC, which represents the Australian public, clearly only differentiates between s923A independent [non-aligned, non-institutionally owned, etc. ] advisers and those who do not comply with this section. That counts as two categories. Also, the role of FASEA, which is also being driven by legislation is working towards professionalising financial planning. Survey respondents (sample of practising advisers) confirm in this research they are open to individual licensing like OTHER professions, such as medical, legal and accounting. I understand many self-licensing advisers have gone to a HUGE expense to self-license and will find any change now quite difficult to stomach.
Dear Academics…try a bit of economic theory:
It’s called economies of scale: It makes things cheaper, bandies together many great minds and ideas all of which is in the clients best interest. There goes your rather ill conceived thesis…file 13.
Gavin, if you check out my LinkedIn profile, I am pretty strong in the discipline of Economics. Hmm, economies of scale seems to be quite an issue for many who are a part of the big licensees. As far as I understand Economics, hypothetically speaking, what if the allegedly 25,000 ASIC Adviser Register authorised representatives were all accredited [licensed] by a single independent financial planning professional standards body [board] {IFPPSB} after meeting professional, educational and ethical standards and instead of paying monthly ‘dealer’ fees to their respective AFSL licensees they paid it to a single body. Who now has economies of scale? The multiple AFSL licensees of varying sizes or the IFPSB? According to an article by Professional Planner I think AMP only has about 2,870 advisers??? which body has economies of scale now? Just a hypothetical thought!
Mr Economics, agreed let’s have 1 industry body, get rid of vertical integration and have advisers responsible for their own advice.
As a securities adviser operating BEFORE the current AFSL regime was implemented (i.e. pre-1990) the original idea was to create efficiencies for both state governments (who managed adviser registrations then) and organisations (brokers particularly) who were also grappling with high compliance costs associated with the cumbersome individual licensing regime that existed at the time.
After Dr Allan Fels ‘blew up’ the tied agency model of the major life insurers, AMP, National Mutual Colonial, etc. due to corrupted selling practices (remember Agency Development Loans?) the AFSL licencing system was effectively ‘highjacked’ by the life insurers so they could keep control of the agency force (through Licensing) but no longer have the associated overhead structures. Such a great idea the banks took it up!!
Veteran adviser, thank you for this additional bit of information, because ‘vets’ have much to contribute to the debate. We all aim to ultimately make for a better more certain future for ourselves, our businesses and the future young financial planners. Indeed, this issue has been longstanding and political. Likely one of the reasons research scholars avoided researching it. We cannot get away from the politics, that’s for sure.
Frankly as a small practice I’m very grateful for the support that my dealer group provides. If I had my own license there is not a hope I could afford to pay for most of the services I get, it would cost several times more than the fee I pay.
If you think that your dealer group is conflicted, or that it causes you by default to be conflicted, get your own AFSL or change dealer groups, there are some out there who aren’t prescriptive!
Small businesses can not fund the regulatory burden, be it research, compliance, software ect ect with out the buying power of a dealer group.
And lets not forget, there is academia, there is theory and then there is the real world.
Chris L. thank you for your contribution. We academics crave this engagement and critique. Your point is valid, because it is one of several concerns raised in the survey. Advisers want individual licensing via a single body, BUT they are asking where are the subsidised support services going to come from, what about the cost of a license, cost of compliance and the loss of economies of scale, etc. With this researches substantiated scientifically verified evidence, we can work together on solutions to address them. Yes, academia is often seen as theory versus practice, but that’s a myth and anyone who thinks this way is ignorant and should spend some time in a hospital. It should dispel this myth. Besides, academics cannot get funding for research if it does not provide solutions for the real world. Financial planners just need to engage financial planning academics. Although at the moment there are not many of us, you might learn something surprising about the good academics.
Interesting concept.
There is a great deal of confusion in the market regarding what is ‘truly’ in the best interests of the market.
Is it in the best interests of the market to have planners run their own licences whilst trying to focus on running their own business and having to spread their clients across many different product providers?
Or is it in the best interests of the clients to align themselves with a dealer group that uses one superannuation platform that’s high quality and can access discounts with the company due to sheer volume that’s provided to the platform.
Is there a conflict of interest for an Adviser to get reduced fee rates based on the amount of volume of business that a platform holds? Yes, but is that not better for the client?
Are conflicts always inherently bad?
The industry is confused. Best interest is grey and not properly understood and constantly in the press for negative reasons.
The change being pushed now is not change for the better. It’s our time to get it right but it needs to be revisited.
Anonymous, thank you for your interesting thoughts on the matter of best interest and conflicts of interest. What my literature review is very clear about, is aligning adviser-client interests, controlling, managing and avoiding conflicts of interest as well as the best interest duty are legislative requirements. Advisers who completed our survey confirm licensing advisers via third party licensees misaligns adviser-client interests, leads to unintentional [and intentional] breaches of the best interest duty and leads to conflicts of interest from association that can only be managed, seemingly unsuccessfully, via disclosures.This is not me saying this, this is what advisers reported in the survey.
The one area academics fail to address is “implementation”. I have aspired to the ideal of being self licenced for years, however for a single adviser practice the PII is up to $50k per annum whereas through an AFS licensee I get a package including PII for under $15k flat fee per annum. I do not see the issue provided product manufacturers are stopped from also engaging in the advice space. All the government needs to do is realise that there must be a necessary and simple choice: Advice or Product but never both.
My PI cover just came back at $14,000 for 3 advisers. Running costs are approx $12K each, with compliance, kaplan and PD days via larger AFSL included. On top are software costs. Margin lending however is restricted to a 50% gearing ratio and we don’t have a credit license.
Indeed, costs and unsubsidised and subsidised licensee support services, together with PI were major concerns for survey respondents. As well as practicality of implementation. Implementation is important, but the most important decision is the decision to change. look at the disruption that occurs when the management of small, medium and large corporations decide to merge across firms, across states, across countries with different legal jurisdictions. they seem to do so quite successfully, albeit with much pain where not everyone, nor the old cultures survives the changes that it brought. So the more engaged advisers are to embrace the change, the better prepared they will be, because if financial planning is to become a true recognised accredited profession, then it will have to meet the requirements other professions have to meet. One of them is independence and autonomy, which the current licensing model threatens.
Patrick, thank you for your critique, which is important to the further the success of this research. Indeed, I did not address ‘implementation’ in my research, because first steps first. Before we can make any change to an existing AFSL-AR licensing model, we needed to confirm whether it was legitimate or not. As my research found it to be illegitimate, only now can we consider desirability and appropriateness of an alternative. Our research did find advisers overall were open to individual licensing via a single independent professional standards body [board] desirable. However, we have yet to research the appropriateness of such an approach, especially when the concerns you have raised survey respondents have raised as well. Also, self-licensing via ASIC may be completely different from individual licensing via a single independent professional financial planning standards board [body] funded by advisers and run by advisers like other professions. As Prof Adrian Raftery reminded me at the Personal Finance and Investment Symposium in Hobart on the 21st November, one step at a time. For now, the focus should be on working with FASEA so that all advisers comply with the Professional standards, educational and ethics legislation or you won;t be able to practice without creative systems.
Did IFA ask who paid for that research? Phds take years ! Most Uni research these days is conflicted-it’s not done unless external funding is provided. Monash Uni Road Traffic Research was paid for by state governments seeking a “researched “solution to increasing speed fine revenue. As Runaway Roger says, everyone in our society is conflicted. ASIC is ideologically blind-sided by its push for “fees only” advice
Anonymous, thank you [b]so much[/b] for asking this question. Australian taxpayers and I am paying for the cost of getting a PhD degree, not this topic. This specific research project is not being funded by any external funds, because I realised early on, this is a [color=red]’chilly ho[/color]t’ sensitive and controversial topic. Thus, avoiding conflicts was paramount. If I had been offered any grants, even the one I did apply for, because it is one of the requirements I should meet during my PhD candidature, I would have [b]DECLINED[/b] them. I even went as far as cancelling my memberships to Financial Planning Association and FINSIA and even unrelated memberships to professional and non-professional bodies. I agree everyone is conflicted, but not all conflicts are harmful and thus we need change as painful as it is right now and is going to be in the future. Know as an ex financial planner, I do empathise with your frustrations, because like medicine and law for example, a career in financial planning is not for wimps.
[i]I agree everyone is conflicted, but not all conflicts are harmful [/i]
I assume it is Angelique who wrote this comment and if so I am delighted to hear it from someone who is clearly very independently minded. ASIC and IFAAA continually perpetuate the falsehood of “conflict free advice” when there is no such thing. As you say, everyone is conflicted. Furthermore ASIC and IFAAA’s war on insurance commissions would seem to be focused on a conflict that is not actually harmful in a BID and LIF regulated world.
Anonymous, It is Angelique, because I could not change the ‘Anonymous’ default. I believe Aleks will fix it if he gets some time.
Yes, PhDs take years and let me tell you four years ago my respect for any academic Doctor So and So depended on his bed-side manner. Well, now I know better. We need more doctorates in financial planning to work with practitioners to shape a better future for the average Australian. FYI, although I have been enrolled as a student since April 2014, this topic came to me in 2011 when I realised my licensee-adviser relationship was making best interest duty more challenging to implement than I had the energy to deal with.
This is typical of academics who are truly ignorant of the Financial Planning Universe. I did some of my own research into academics as a curiosity when I was completing my Masters of Financial Planning degree. I was curious in how they arrived at their conceptions towards financial planners. Their research was based on other papers researched by other academics whose research was based on ….. Do you get my drift? And their research was based on news paper articles and questionnaires sent out as samples. My advice is to take this article with a grain of salt as it is of no use and counter productive.
Angelique McInnes has previously run her own financial planning practice licensed via AMP.
Thank you Anonymous for confirming I am not an atypical academic. Note, I truly miss being a financial planner, but realised early in my financial planning career things needed to change.
Anton, thank you for your transparency by not hiding your identity. Just want to say I am offended, but just a tad, that you would think me the ‘typical’ academic. To set the record straight, I am actually an atypical, unusual, untypical, non-typical, uncommon, unconventional and quite unorthodox early career academic, who has a [color=navy]PASSION for financial planning[/color]. From your comment, I assume, but correct me if I am wrong, your Masters in Financial Planning was taught by academics with zero financial planning experience from a textbook, which was likely outdated. If so, I empathise and hope that any students I teach never leave university feeling the way you do about academia and how it shapes the way they perform their craft in practice. I sincerely hope too, that any scientific research outcomes on adviser licensing is never taken with a grain of salt, because then the public who need financial planners may indeed be impacted negatively. Finally, it saddens me see a highly qualified financial planner so cynical that he would consider this type of research of no use and counter-productive, when it is serves as another means besides media hype to, for instance, give a voice to financial advisers who choose to participate in the debate that potentially affects their livelihoods and futures, as well as those they serve in most cases so well.
The thesis – which references ifa articles on eight separate occasions – omg i hope there not reading the advertorials that appear daily and that they actually speak to someone with knowledge.
Do the Work, thank you for raising a valid concern. Rest assured, this thesis has been, and is still being heavily scrutinised by many highly knowledgeable and qualified experts using rigorous scientific methods of examination of PhD theses covering hundreds of years. The thesis document has not been finalised, because it has yet to be examined by examiners. Although, as a student I cannot verify it, but maybe my comments to you, if important enough, is being noted by my appointed examiners;). Note I do not even know who my examiners are?
My personal opinion is that a simple answer to avoid any conflict of interest would be to follow the UK model, i.e. you’re either a tied agent and disclose your association with a product provider, or you’re completely independent. Then the client can choose whether they want to remain with you for advice.
I work for a large, non-bank, non-insurance company, dealer group and always disclose the fact that I run a client SERVICE, and part of that service is to use aligned administration systems due to the efficiency they afford me in looking after the client. I also have flexibility in going outside of the dealer group’s administration system if it is ultimately in the client’s best interest to do so. Clients do benefit from my ability to react quickly to their changing goals & objectives and, in many cases, have commented on the efficiency of my service.
The IFA really needs to stop its approach of “financial planner bashing”, with all the negative reinforcements that come with it, and start to focus in on all good things that financial planners do for their clients in an ever-changing regulatory climate and complex investment arena.
Oh sorry, I keep forgetting that the negative is a steel trap for the human mind and is always first in attracting attention . . . . . . .
Mark T. thank you so much for your personal opinion. Indeed, the negativity out there was one of the very reasons for this research. Yes, the UK model is a possible solution. The question we need to ask is whether the UK model is a ‘desirable, appropriate and proper’ model for the financial planning emerging profession, whereby advisers are recognised and accredited professionals, like doctors, lawyers and accountants? Any researchers keen to tackle this question? We tried to produce a more balanced view in this research using the negativity out there, which was not easy.
I am no fan of licensees however, perhaps an academic could write a paper and explain what strata of society does not contain some sort of conflict. If I get my own AFSL will I be conflicted as I try to convince people to do business with me? Are academics conflicted as they seek grants for various works they perform? Is the Catholic Church conflicted as it teaches its version of Christianity? Is the USA conflicted as it puts its interests above the interests of other countries? Are politicians conflicted as they tell me what they think I want to hear in order to receive my vote? Is my cat conflicted as it is nice to me around feeding time and then ignores me for the rest of the day? Oh, how we yearn for the perfect unconflicted society. Praise be the academic.
Runaway Roger, indeed, conflicts exist everywhere. However, not all conflicts are harmful. For instance, ‘academics conflicted as they seek grants for various works they perform’ has to pass through a rigorous ethical application process via an ethics committee to ensure it does not personally, financially, mentally and/or emotionally harm anyone. If it has the potential to do so, in the case of perhaps medical research, then the research does not go ahead, or there is participant consent and disclosure procedures and various other ways of managing it prescribed by law.
The whole of the Structure was as a result of the Federal Government – Wallis Committee of inquiry into the Financial Services Industry many years ago so this PhD study is seriously flawed as it does not understand where the “dealers in securities” came from. They seem to be working to a conclusion that is false.
A bad paper and one that should be discarded.
You are entitled to your opinion, Mervin. Thank you for your feedback.
I would have thought this thesis is pointing at and stating the bleeding obvious!
Philip, indeed for you it the ‘ bleeding obvious’, but there are other opinions that would not agree with you. Hence, one of the purposes of this thesis is to take what some may think is the ‘bleeding obvious!’ and verify it scientifically to be the actual case and not just hearsay and opinion of one or two of you.
Given their research has not yet been finalised I suggest the researchers consider the practicalities of every adviser having their own license and how that would be managed by regulators. It would also be helpful to research whether investment outcomes of so called independent advice businesses have demonstrable better performance outcomes. It is a big call to say the current licensing arrangements are illegitimate without adequately assessing the viability of the alternative options.
I applaud the general train of thought that McInnes and Ahmed espouse. This is something I made clear in a public submission to a Treasury dept briefing back when they were doing a roadshow on the FOFA reforms. I said that they had missed the opportunity to restructure the industry to put more onus on a ‘practicing individual’ rather than a faceless machine that is the evolution of current ‘licensees’. And it might be semantics, but please stop calling them ‘dealer groups’. The ‘licensed securities dealer’ went out with FSR. We are now ‘Australian Financial Services Licensees’. Oh for the day when we can simply be called ‘Financial Planners’, and have a practicing certificate to prove it!
Thank you Mark for your kind words of support. Our research aimed to replace some of the negative, unsubstantiated evidence around licensing with a more balanced view.
John, thank you for making some valid points. Please appreciate, the issues of the practicalities of every adviser having their own license and how they would be managed by regulators could not be included within the scope of the study, because licensing is more complex than I even envisaged when I started on this project. Given your points were one of several concerns raised by many of the respondents in our survey, together with “whether investment outcomes of so called independent advice businesses have demonstrable better performance outcomes” has been included in my thesis document as future research project recommendations. Oh, and your last point about not adequately assessing the viability of alternative options, you can appreciate would have taken me beyond the requirements to complete the PhD. To keep within the scope of a PhD research project, I could only focused on individual licensing from a macro-level. We needed to first establish whether individual licensing alternative is a solution advisers would consider appropriate given it was mentioned during the Ripoll Inquiry and his report and again during the Murray Inquiry consultation phase.
I’m surprised these kinds of documents are published. Probably best they reside in academia.
Thank you for your comment. Why would you prefer a document reporting the valid views of some of your fellow authorised representatives on the current and future issues around licensing advisers to reside in academia? Surely, the anonymous views of fellow authorised representatives should be made public with regards to the debate on the current and future of financial planning, whether you like it (or not) or agree (or not)?
Not to mention the number of AFSL management who aren’t qualified (for much at all really) as a serious issue!
Thank you for your comment.