All remuneration is conflicted
There is no way that financial planning can be provided in a way in which the adviser’s remuneration is not conflicted. Conflicts are everywhere. Get on with it.
Extra! Extra! Read all about it, all remuneration is conflicted.
The adviser and the client are different people so they naturally have distinct interests and these will conflict when providing a service.
For the incompetent or criminal people (you decide) who believe that Fee for Service is not conflicted then you have no place in giving advice.
As stated by American writer J R Robinson in his article No Moral High Ground in Financial Planning Fee Debate, “Again, the implication is that alternative compensation models are free from the conflicts that plague other models – and again, the moralistic hyperbole reflects a naive understanding of basic economic principles.”
ASIC has also publicly said that consumers should favour advisers charging fee for service by way of submissions to the Ripoll inquiry, Senate standing committee on economics and the MoneySmart website.
This is despite former ASIC deputy chair Jeremy Cooper saying the following in 2006, “There is no magic in the 'cottage industry' approach to financial services and, in any event, it is not for ASIC to dictate how the financial services industry is structured”.
A report named Review of Billing Practices – The Way Forward, published by Stuart Westgarth and Raja Balachandran in August 2015, deals with the difficulties faced by the legal profession in regard to legal billing practices. They look at hourly billing, flat fees, fixed fees, project fees, conditional fees and a range of other types of remuneration and come to the conclusion that the legal profession must change from current method, which is predominantly time billing.
“The dependence on time billing alone is insufficient, although time billing may remain the major system for the present. Many alternative systems have emerged which will benefit the law practice and the client,” the report said.
The reality is that with diverse client requirements, service offerings by providers that are heterogeneous and offer one billing solution will not be the magic bullet.
Given that all remuneration methods are conflicted, how many AFSLs have identified and dealt with appropriately in their conflicts management obligation as required by the licensing regime?
Given the broad false dissemination that some remuneration methods are conflict free, hence unrecognised conflicts, it is highly unlikely these are being properly dealt with by licensees as required by RG181. This would have the effect of saying those providing fee for service may not be satisfying the law in regard to managing conflicts with their clients.
An example of how to address the conflicts associated with remuneration is in the Accounting Professional and Ethical Standards Board paper, Basis for Conclusions: APES 230 Financial Planning Services, which deals with charging by way of asset based fees.
The organisation rightly identified the conflict and then looked to mitigate its impact.
Funnily enough, their requirement is basically the same as the actual legislation that supports the law makers process in constructing FOFA.
Interestingly, the main conflict identified was in recommending the client to borrowing money to invest, which of course has been banned by FOFA.
Client protection was further strengthened following the implementation of FOFA. This is because the conflict is dealt with by the best interest duty, which includes the client priority rule. This ensures that the adviser must always prioritise the client’s interest before their own regardless of remuneration method. If they do not then they breach the law. More laws are not required, we simply need to enforce the existing law.
Another fact that is commonly overlooked is that we are a market-based economy. Accordingly, we believe that the market comprised of willing buyers and sellers is a far more effective vehicle for determining the market structure rather than regulation in most cases.
Our industry has a habit of looking busy by addressing range of issues that are not core to the fundamental problems. While these problems remain unaddressed the industry hurtles towards its next storm or CBA disaster. Also, by continually introducing unnecessary laws we are opening up to the possibility of unintended consequences, which can in a lot of cases be worse than the initial problem.
How a client is charged is not an issue, especially considering the current legal framework along with the fact that all professionals manage conflicts as part of their day to day work.
Robert Coyte is CEO and an authorised representative of Shartru Wealth
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