An open letter to the FPA
The AIOFP is dismayed and frustrated with market stakeholders continually blaming advisers for the industry's deficiencies regardless of mitigating circumstances.
Dear [FPA chair Matthew Rowe],
The AIOFP Board does not agree with the FPA's handling of the Commonwealth Financial Planning issue and wants the market to hear our views.
In the current case of CFP, it is clearly a product manufacturer/management issue that allowed their advisers to indulge in advice and activities that were clearly not in the best interests of clients. Surely this is a Financial Services Council matter? Shouldn’t they be commenting on the conduct of one their corporate members? Why are the FPA continually seizing on opportunities to denigrate the advice industry?
The FPA are intimating CFP is an advice issue that exists across the entire industry and therefore you are calling for – and trying to justify – your recently released 10-Point Plan to be ratified. We don’t agree with a number of your Plan’s suggestions. It is too adviser-centric and totally ignores the questionable role a number of other stakeholders play in delivering both advice and product to consumers. This CFP matter is a prime example of an institution lacking integrity, not the advisers.
We also see no value for consumers or advisers if an Association enters into a servitude relationship with the regulators, what is this going to achieve? Promoting ASIC to have extraordinary powers to act on ‘suspicion’ without the facts is clearly not in the best interests of the advice industry or consumers. ASIC’s indifferent approach to the CFP as reported by the ABC raises a number of questions about preferential treatment that is clearly not in the best interests of consumers or the industry.
Furthermore, after the very disappointing past FOFA negotiations with former Minister Shorten that heavily discriminated against the independent sector, we do not recognise or respect the FPA as our representative with government and regulatory matters.
The FPA’s almost egotistical attempt to bring the industry together for a ‘summit and save the industry’ will not get our support. This is a very serious institutional incident that potentially affects a large portion of the FSC/FPA’s membership, we do not want it portrayed as an ‘industry wide dilemma that the white knight FPA must fix’….. This is clearly an FSC/FPA problem not the independents and a defining moment where consumers can decide whether they wish to seek advice from the institutions or independents.
We think the FPA are better off investigating the conduct of the other institutional advisers in cooperation with the FSC with a ‘compliance summitt’ to ensure CFP is not repeated instead of trying to drag the whole advice community into this mess.
Below is the AIOFP’s solution for improving the industry, in which we are looking across the industry’s entire culture and structure, not just targeting and sullying the advice sector. We suggest you take note of our initiatives and reconsider your Plan’s priorities and direction.
Consumer protection and industry evolution
The AIOFP vision for the financial services industry is a candid assessment of all stakeholders and how they can improve their performance to give consumers choice/comfort that their savings are safe from product failure, all are acting in their best interest and the industry has a level playing field.
FOFA largely focussed on the conduct of advisers, which is unfortunate for consumers and the industry in general. We contend that advisers are at the very end of the industry production line and there are a number of other upstream stakeholders who need to review and improve their performance to ensure the reasons behind past product failure are addressed and eliminated.
There is no escaping the fact that advisers needed to change some habits, and certain aspects of FOFA have been positive for the industry in general and consumers in particular. The abolition of investment product commissions and the imposition and reminder of fiduciary duties/best interests are the highlights. However, other changes are unnecessary, counterproductive and in some instances discriminatory against some market sectors. These issues need to be also addressed to create a level playing field for all participants.
It should be clearly understood that before an adviser recommends an investment product/strategy to a client, it has commonly been reviewed/assessed/structured by five other entities before the adviser makes a decision. These are as follows:
1. ASIC or APRA are the first to ‘register’ the Product Disclosure Statement.
2. The product is analysed and rated by at least one research house.
3. The custodian then holds the assets on behalf of the investors; typically a bank subsidiary fulfils this role.
4. A board of Trustees oversees the process.
5. Managers and their team of legal and accounting personnel monitor the product on an ongoing basis.
Once all these duties have been performed, the adviser then makes a decision on whether the product/strategy is in the best interests of the client. It should then be pointed out that most advisers are financial strategists not investment analysts; that duty should remain with the five other professionals mentioned above. Surely these five other entities have a far better vantage point from which to assess a product than advisers.
Regardless of what the legal ramifications are for advisers because ‘they gave the advice’, these five other entities should also be held to account for their past conduct. Be assured that a product paying a 1 to 2 per cent commission to advisers (or higher in the agricultural schemes) in the past does not make it fail. There are clearly systemic problems in the investment product structural/approval/assessment process that need addressing or history will continue to repeat itself and consumers will not be protected.
Here are our seven suggestions for levelling the advice playing field, improving the quality of advice and protecting consumers from product failure:
1. Only advisers funding research – We consider the research source to be the most important aspect of an advice practice to get right. If this process is compromised, it can and will result in product failure. Advisers have little choice but to rely upon other parties to accurately assess products before they are recommended to clients and research houses are the most popular option. Unfortunately, the majority of research houses in Australia accept product manufacturers' payments to rate their products and this has led to over 160 failed, frozen or impaired products since 2005, representing $37.1 billion of consumer savings. Advisers must be the only market sector funding research; product manufacturers ‘shopping around’ for a favourable rating is a profoundly conflicted practice and must be eliminated from the industry landscape. Recent Supreme Court decisions ratify this highly conflicted environment. Inexplicably, the source of research is not valued highly enough by advisers, regulators and consumers and this has to change.
2. ASIC controlling and regulating the research process – Most believe that ASIC ‘registering’ a new Product Disclosure Statement is confirmation the particular product has been partially assessed by them for structure, business model sustainability and director background checks. This is not the case and ASIC have declared this on many occasions; unfortunately, not many listen. We suggest a panel of respected research houses is established by ASIC and funded by a levy on all advisers, with ASIC utilising this panel to assess new PDSs entering the market. Research is too critical to the advice process to allow it to be compromised by conflicted market practices.
3. Degree-qualified advisers – Although some concessions should apply for existing experienced advisers, all new entrants should hold a relevant tertiary qualification before entering the industry. One of the industry’s past failings has been the knowledge and technical expertise base of advisers. We believe that the abolition of product commissions, imposition of best interests and a minimum tertiary education requirement are sufficient guidelines to promote professionalism in the industry.
4. Transparency in adviser practice ownership – Pre-2005, it was mandatory that all institutionally aligned/owned advisers displayed their licensee's institutional logo prominently on all marketing material, allowing consumers to readily recognise who they are dealing with. Since 2005 this has not been necessary so we now have thousands of advisers promoting themselves under obscure names with no reference to whom they are licensed, confusing and/or duping consumers. Most of these advisers operate under vertically integrated model structures that demand advisers sell ‘in-house products’ that are not necessarily in the best interests of clients. Consumers should be aware of who they are dealing with from the outset – the pre-2005 conditions need to be reinstated.
5. Platforms classified as administration services to even the playing field – FOFA regulations allow SMSF promoters to take the entire superannuation administration fee directly from clients without it being considered conflicted (essentially offering their own platform or administration service) and institutions can operate vertically integrated models where advice is subsidised by conflicted administration/platform sales. However, advisers who select an external administration/platform service and receive a scale-related rebate are inexplicably considered ‘conflicted’. Expecting advisers who do not wish to work for an institution, offer SMSFs to clients or operate their own internal administration service to compete with this discrimination is not only commercially tough but discriminatory. A relatively simple solution to this issue is correctly classifying retail administration/platform services as ‘administration’ not ‘financial products’. This levelling of the playing field will assist the survival of the independently owned sector and provide choice of product and adviser for consumers.
6. Product manufacturers included in the FOS process – FOS is designed to hold shareholders/advisers to account for poor performance, alleviating consumers of the expensive and intimidating mainstream process of litigation. This process does work and the prospect of advisers being evicted from a complaints resolution service and therefore losing their AFSL is a powerful weapon to get a quick resolution. Product manufacturers are also shareholders of FOS but are not subject to the same process as advisers. There are many examples over the past 10 years in which clearly negligent product manufacturers have preferred to defend their actions in the Supreme Court rather than show compassion, admit liability and settle. A strong motivator in this decision-making process is depletion of the executives' bonus pool and the associated self-interest influencing decisions. If FOS established a panel of product manufacturer peers to assess product manufacturer conduct and subjected them to the same process as advisers, consumers would enjoy greater protection and a speedy resolution to failed products.
7. FOS review – FOS have considerable and disproportionate power within the industry that needs curtailing. Although most agree consumers need an advantage with the legal process, their current conduct is threatening the professional indemnity viability in Australia. In addition, the severe lack of natural justice and procedural fairness for advisers needs to be addressed to ensure an ongoing sustainable environment to operate in.
Although our industry leads the world in many respects, it is far from perfect. The multiplicity of failed products since 2005 highlights systemic failings that cannot be ignored if we are going to protect consumers from product failure and improve the image of the industry.
The AIOFP has compiled this report without fear or favour. We see no member or consumer benefit in developing a servitude relationship with any industry stakeholders. For the industry to efficiently evolve, all aspects need to be considered, challenged and changed if necessary.
Peter Johnston is executive director and founder of the Association of Independently Owned Financial Professionals (AIOFP) and related entities Personal Choice Private and Filtered Research Committee.
Peter entered the industry in 1979. After playing league football for Glenelg in South Australia, he joined the Scottish Amicable VFL insurance/investment service strategy and then established his own practice, Goldsborough Financial Services, in 1980.
In 1995, Peter established a career transition/labour hire business to complement the advice practice, and established the AIOFP in 1998.
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