In 2001 the Financial Services Reform Act (FSR) was implemented, bring much-needed reform to financial advice. Among the changes were licensing for financial service providers, ongoing training for all finance sector employees, segregation of duties between workers who are licensed to provide advice and workers who are not, rigour around know-your-client requirements to ensure appropriate advice is given, and mandatory plain-language statements for customers about the services provided and the financial products sold.
In 2012 the Future of Financial Advice Act (FOFA) commenced, which added further requirements around giving appropriate advice to clients. The main components were: a ban on conflicted remuneration, such as "trailing commissions" earned by advisors from products for which they sign up their clients; transparent fee structures for financial advice; and the requirement to act in the client's best interest at all times.
Together FSR and FOFA have benefited consumers, added rigour to an industry which wants to consider itself a profession, and weeded out the worst providers of lazy or detrimental advice.
So it is a concern that FOFA will this year be amended to remove its most important requirement: the catch-all rule to always put clients first.
The FOFA amendmentsI think all the other points in the FOFA amendment are good:
- Removing the 'opt-in' requirement, for existing clients to re-paper every two years: Fine. It is difficult to do over a large client base and doesn't in itself increase consumer protection. Good providers will probably continue a form of this anyway: if you're in regular contact with your client you schedule a review; if not then you review the arrangements at the point the client requests a service.
- Removing the Annual Fee disclosure requirement for existing clients: Fine, as above. Clients don't want yearly mail-outs anyway.
- Scaled Advice: Good, allows cheaper advice options for small customers
- Grandfathering: Good. Allowing customers to easily transfer from one provider to another is essential to consumer protection and competition
- Exempting "general advice" from conflicted remuneration: Well, OK... as long as you keep the catch-all provision!
Trail commissions vs paying for adviceIt has been argued by insiders that removing trail commissions makes financial advice too expensive for small customers, and that is a valid point. But it's no argument to retain commissions and kick-backs, which are frowned on in other professions. Cheap, compromised advice is not good advice. If commissions are removed or restricted properly then financial service providers will find other ways to provide fair advice to customers. (And the "scaled advice" provision in the FOFA amendments does just that).
The catch-all ruleThe catch-all rule to always put the client's interests first is critical. To anyone outside the industry it must seem a no-brainer. To financial planners and brokers it is not quite that straightforward, because there are often multi-layered and multi-party transactions where clients, counterparties and broking/advice firms all have a stake. Financial deals are also often complicated and volatile, and outcomes not easy to predict. That's why there are safeguards for advisors built into this rule. ASIC summarises it as:
A duty for financial advisers to act in the best interests of their clients, subject to a 'reasonable steps' qualification, and place the best interests of their clients ahead of their own when providing personal advice to retail clients. There is a safe harbour which advice providers can rely on to show they have met the best interests duty. This is intended to be the minimum standard of compliance with the best interests duty. (ASIC, FOFA Background and Implementation)
You know what happens when advisors act more in their own interests than the client's interest?
The Goldman Sachs hedge fund scandal happens.
Less spectacularly, advisors with a conflict of interest fail to offer the best product for their clients or offer completely inappropriate ones, so they can get the trailing commissions, future referrals, or other benefit.
The advisors and brokers I know are all good people who enjoy looking after their clients and take pride in their professionalism. They are happy to comply with regulations and do so. I'm not an advisor, but I can't see much of a downside in being part of a professional body that safeguards you and your clients by way of some manifestly sensible rules.
The importance of the 'catch-all' provision is not to trap advisors in a red-tape nightmare, or hang them for deals that don't turn out well. Its purposes - and this is why it's so critical - are these:
- provide an over-arching ethical boundary: always put the client first! This guards against seeking loop-holes to other rules and acts as a brake for advisors to consider, any time they look at a new offering
- last resort: provide a way in to terminate or prosecute a bad advisor, who can be shown to have disregarded the ethics while ticking all the other boxes
It seems to me that every profession has an over-riding 'catch-all' requirement to look after the best interests of the people they serve or represent. If financial advisors and planners want to be considered professionals, then in my opinion they should be happy to accept the same basic requirement.
I am an operations project manager at a stockbroker's, and have no direct dealings with clients or financial advice.
Further reading for those interested:
Australian Government's FOFA website: http://futureofadvice.treasury.gov.au/
ASIC FOFA page:
"Save our FOFA" consumer protection site (of which I'm not a member):