In this opinion piece for Financial Standard magazine, Lifespan CEO, Eugene Ardino, discusses the fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and what the future might hold.
There is no doubt that some of the Royal Commission findings have been harrowing and shocking. Some instances of terrible financial advice have been uncovered, but the overarching message has been that where there is bad corporate culture and poor governance there will always be a negative outcome for the client.
Much of the fee-for-no-service issues highlighted in recent hearings, occurred not because of lazy advisers providing inadequate service to clients, but because the licensee did not hire enough advisers to service the clients. In other cases, aggressive KPIs and sales targets were set around new business with little incentive to service existing clients.
The sad reality is that without robust, ethically based oversight, some in the industry will break the rules if they think they can get away with it. And if management is happy to flout the rules, strengthening compliance frameworks won’t fix the problem. The practise of fining the banks millions of dollars has been shown not to work as the fines are a drop in the ocean to them – merely a cost of doing business. They have other revenue streams outside of financial planning anyway.
The large organisations that have come under the Royal Commission spotlight must significantly improve their culture. That starts at the top, and may mean replacing more leaders at board and executive level. Hard working, ethical advisers are furious at how the behaviour of others has adversely affected their livelihoods and undermined their profession.
Don’t blame ASIC for this
ASIC has been roundly criticised for lack of action but culture and governance cannot be easily regulated. ASIC can only do what the government funds it to do. Accountability at all levels should be the focus, not creating more rules for the majority of advisers who are doing the right thing.
We support giving ASIC more powers to police the industry as long as we have rules that govern outcomes. But we don’t need more rules for financial advisers. If the rules we have in place had been followed we would not have had these problems. More rules would just create more work for the majority of advisers, who are already doing the right thing, and make it even harder for ASIC to supervise the industry.
Vertical integration in isolation is not the problem
The problem is not vertical integration per se, it is how the risks and potential conflicts created by vertical integration are managed. When you have a situation where the people who give the advice and implement it are the same, there is a risk of a conflict of interest, especially where the implementation is where most of the revenue is created for the adviser.
However, when you combine an advice business and a product business and an inherent sales culture with aggressive sales targets, you make it extremely difficult to manage these conflicts.
The medical and legal professions have strong potential for conflicts of interest because when people seek advice regarding a problem, the solution suggested will often determine how large the practitioner’s remuneration will be, which in my view creates a significant conflict.
However, they seem to manage this risk through good governance, self-policing and the absence of sales culture, which is something that sections of the vertically integrated financial planning industry have failed to do. This needs to change.
Grandfathered commissions aren’t the problem either
The Financial Planning Association (FPA) has agreed with ASIC that grandfathered commissions should end but has suggested a three-year phase-out period. Former Treasurer Peter Costello had predicted a blanket commission ban. The AFA’s submission very eloquently set out why switching off trailing commissions would not benefit clients and would potentially cost clients more if they wished to retain the services of an adviser.
I am not going to join those demanding commissions should go. The reality is that there is no benefit to abolishing trailing commissions because in most cases, this would not result in a reduction in cost to the client. It would just put more profit into the pockets of the product providers, which are the large corporates and banks.
Many clients would end up either paying more if they stayed in existing products and paid an adviser fee over and above the management fee, or pay significant exit costs to move to a product that has lower fees (because of no trail) and pay an adviser fee.
High up-front fees for service would only prevent more people from receiving advice. It is estimated that 80 per cent of Australians currently do not receive advice from licensed financial planners. Why make changes that will only increase this percentage.
Where to now?
In many ways it is good that the Royal Commission has laid everything on the table. We now have a chance to address the problems and agree on solutions. Improving education standards is one step that will go a long way towards improving organisational cultures.
More highly educated people entering the industry who genuinely want to work in a profession will improve organisational cultures. There should be more serious penalties for executives and management who tolerate poor advice culture and practice. And we may at last soon have an industry-wide code of practice that all can adhere to. These would form a new foundation on which to rebuild the industry as it recovers from this painful experience.
Click here to read the original article in Financial Standard magazine.