In 2002, the Howard government introduced legislation to reform the financial services sector. Driven largely by the interests of the big end of town who were aggressively acquiring wealth management businesses and eagerly eyeing off the pots of gold at the end of various rainbows, the new act was to bring the financial services sector under control.
What actually happened was something quite different, as witnessed in the royal commission. The banks and AMP set about gobbling up much of the industry, vertically integrating their operations and distributing products through their vast networks.
The race was on and selling financial services was as easy as falling off a log; trusted brands, branch networks, incentives, best of breed software, large scale support, careers and egos.
The larger organisations initially found attracting good talent fairly routine. This pool of experience was often taken from smaller organisations attracted by the ability of the larger players to pay higher salaries and provide tremendous benefits that small organisations couldn’t compete with.
The ‘arms’ race wasn’t limited to just the majors. Large accounting firms were getting in on the act, as were non-institutional dealer groups, all hell bent on creating scale with the view to a trade sale down the track. Many of these were supported financially by the vested interests at the top who had by this stage vertically integrated their operations and were agnostic as to who sold their products.
The wallpaper behind this activity was the notion of ‘advice’. Apparently we had emerged from the ‘middle ages’ where showy or even ‘shadowy’ salesmen had been responsible for the distribution of product, and we had moved into the era of the professional advisers. We knew this because the brands behind the advice were trusted names; they were already embedded in many other aspects of our lives.
The banks played on this despite the fact that recruitment of good advisers became increasingly difficult once the stocks of the smaller companies had been plundered. New advisers were rushed to the front line with neither experience nor intelligence.
There were two fundamental errors in this approach from both the government of the day looking for the headlines and the regulator suffering from Stockholm syndrome as attempted to regulate their captors:
- Firstly, moving from sales to advice assumed that primary motivation would be different and aligned more closely with clients interests but there was no merit test for advisers or channel management; and
- Secondly, the pretence of the advisory process provided the perfect cover for the institutions to push their own products without the full disclosure of their motivation; brand accounted for trust, advice accounted product deficiencies and regulator was spellbound.
The old sales system wasn’t broken. It relied on agents and representatives disclosing who they were representing and enabled the customer to make a value judgement as to whether they bought the product or service or whether they sought other opinions from other providers. If any part of the system needed renovating in was the products themselves, not the manner of the distribution.
In addition to this, it had opened the door already for a proper financial planning profession to emerge and possible converge with accountants. The two distribution methods should have existed side by side; the manufacturers beating their drums and selling their products and a professional sector providing independent advice, But sadly, the complexity of the financial sector was overblown in the minds of the legislators and this gave rise to the wholesale slaughter of the old and effective distribution system. The retail financial services sector is very vanilla at its core.
Everybody became an adviser. There were no standards to speak of that weren’t laughable to any educated person and the regulations didn’t impose boundaries that included tax and loans; everybody complied, provided advice and were able to ignore the two greatest elements of wealth creation and investment planning.
In short there was no integration, so is it any wonder that advisory process, hijacked as it was by dopey Mandarins and brain dead politicians, was compromised. It became clear during this passage of time that the advisory process hadn’t improved and so the feckless morons in Canberra needed a scapegoat – enter commission and conflicted remuneration. What a quaint way to lay the blame squarely at the feet of the advisory business.
Commission was now the great ‘bogeyman’, a double whammy for suppliers; commission was the root of all evil and removing it lowered costs.
The regulators flocked to sit at the table. FSR had had failed in its intention to professionalise the industry. Banks were raking it in, customer complaints were on the rise and independent advisers were being asphyxiated by the regulation.
Some in the advisory area were initially happy to join the chorus, not realising that they were being sucked into the vortex of conflicted remuneration and all the sins that could be associated with any practice that resembled commission being an acceptable form of revenue. This is yet to play its final movement as ‘grandfathered’ commission is the new target.
Fee for service would now save the sector. Removal of trails, standardisation of commission, clawbacks, you name it – business revenue was under siege and the independent sector failed to realise by just how much. FOFA was but the logical result of an irrational determination of the problems in the sector.
The heart of this issue though goes back to the failure to understand the commercial imperatives of those producing products and services and those acquiring them. Not only have we tethered a moral responsibility to the adviser to account for the total interests of the customer despite this being an impossible obligation, we have emasculated the ability of the customer to be part of the decision making by producing overly complex statements of advice, useless and misleading projected outcomes, weighty product disclosure statements and introduced annual budgetary changes to superannuation so planning for retirement is a financial lottery.
Not only is this impractical, it has created a fiction in the marketplace that ‘advice’ is reliable, independent and, worse, omniscient.
Today, we have literally thousands of ‘advisers’ limited in both commercial and social experiences, masquerading as advisers, taking the client’s best interests into account without any notion that these advisers have the social skill, the experience, knowledge or intelligence to discharge their duties in this way.
These ‘advisers’ should be simple subject matter experts (agents) selling their wares on behalf of the suppliers. On this basis there would be no confusion.
So, this is the hoax that has been played on the financial services sector. It has bled as a result. It is wearing the bandages of FOFA and other recent acts and amendments but the outcomes haven’t and won’t improve.
Commission driven selling is the high water mark for disclosure. It creates clarity, it creates choice, it encourages the customer to seek other opinions, but most importantly it divides the sector into component parts and creates the opportunity for the truly independent advisory professionals to emerge on their terms.
Retail financial products are simple in their nature. Selling investments and insurance should be no different to selling home loans or cars or anything else. Stock brokers have and are doing it still. Let the brands compete and do their best but allow the breathing space for impartial advice to co-exist rigorously; a profession will emerge because when you integrate financial products you then need advice. Until this issue is addressed it will remain smoke and mirrors.
Trail and up-front commissions are not the enemy. They are paid from the manufacturer, forms part of their marketing and business acquisition budget, does not increase the cost to the buyer, is fully disclosed to the customer, lowers fees to clients and underwrites a competitive marketplace from which we know all innovation is derived. The time for commission to make a comeback is now; the internet has never made the market more transparent.
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