“The Financial Services Reform Act (FSRA) represents the most comprehensive reshaping of the financial services industry in the history of Australian law reform.”
This subdued understatement and others of similar ilk by promoters of the FSRA have served quite deliberately to create an atmosphere of high expectations, especially in standards of professional advice offered to the public.
Even if claims of “immediate improvements” to the advisory side of the industry prove to be a little extravagant, any reasonable person could be excused for believing that many financial advisers, who have hitherto exhibited practices reminiscent of Parramatta Road used car salesmen, will be “born again” during a Damascus Road conversion experience. The question which must be asked is whether these high expectations are justified.
Few people would seriously submit that the introduction of the FSRA has been a complete waste of time. However, the jury will be out for some time before a verdict can be announced on whether it will deliver on expectations of substantially enhanced standards of honesty and integrity in dealing with the consuming public. This is because a core issue in the advisory side of the industry, its fundamental conflict of interest, has not been addressed.
The conflict of interest lies in the public’s expectation of advisers, who, as the description “adviser” implies, are expected to offer advice, not sell a product to them. Unfortunately, most advisers work directly or indirectly for product manufacturers who have an expectation, not unreasonably, that their advisers will “prefer” their products.
Will the FSRA do anything to solve this problem? Most unlikely. Given the costs in continuing to be involved in the industry post-FSRA, we are much more likely to see a process of consolidation of advisers into a smaller number of large financial institutions. This will mean that the problem of conflict will become worse, not better!
How can the conflict be overcome? It can’t, unless the advisory side of the industry is completely separated from the product manufacturers and forced into a form of remuneration which is based on “hourly rates”. This is an idealistic position which is not practically achievable. Among other things, it would require institutions to give up control of “tied”, “preferred” or “friendly” distribution networks, which they would not do without resistance.
Something which can be achieved, however, is the creation of an advisory segment of the market which is based on proper professional standards in technical training, business practices and ethical attitudes.
Some professional bodies have taken tentative steps in that direction, but some hard and unpopular decisions must yet be taken.
This segment of the market will be represented by no more than 10 per cent of the current crop of advisers and will take a generation or more to grow and nurture into a respectable group of truly professional people. The remainder of the advisory industry should be recognised as the sales force that they are and be required to describe themselves as such, without resort to obfuscating titles such as “consultant”, “adviser” or “planner”.
The FSRA simply recognises the reality of the current financial services industry and reinforces the polarisation which has been taking place for some years. No attempt has been made to unravel the conflict of interest, rather, so-called “advisers” have had imposed upon them a new regulatory regime which simply makes it more difficult and expensive to sell the products which they are currently induced to favour.
Fundamentally, the source of the financial services industry’s poor reputation lies in its “mixed messages” and downright hypocrisy. Many advisers and their sponsoring institutions claim to care about their clients’ interests, while their actions exhibit exactly the opposite. The FSRA can do little to solve this problem which can only be addressed over a long period of time by properly motivated industry leaders exhibiting high and independent professional standards without fear or favour. The FSRA merely sets a minimum standard of behaviour expected of an adviser in dealing with a client. Of much more importance are the self-imposed personal standards of each individual adviser, which are derived from an ethical position which must demonstrate a desire to place the client’s interests ahead of any other motivation or conflict of interest.
