- Trust in the financial services industry cannot be won by disclosure of conflicts and the adoption of higher levels of academic education.
- Expensive compliance regimes introduced to combat scandals in the financial services sector are a distraction from the truth.
- When reform of ethical standards is left to government, the resulting legislation is typically compromised, complex and flawed.
The scandalous history of the financial services industry has amply demonstrated that trust cannot be won by disclosure of conflicts and the adoption of higher levels of academic education.
As worthy as these objective are, they are a distraction from a truth that many financial advisers choose to deny. That is, trust can only be created by the removal of all forms of conflicted remuneration, and not merely by their disclosure. The widespread denial of this truth has resulted in the imposition of ineffective workarounds in the form of complex, costly, intrusive and flawed compliance regimes.
This conclusion has been strongly confirmed through my extensive involvement in the design and presentation of financial literacy education programmes for members of the public. The most commonly asked question from participants in these programmes is: “who can I trust?”.
Trust your instincts
One recent initiative designed to answer that question is the Financial Advice Referral Program for members of the Australian Defence Force (ADF). The programme was developed as a direct result of members seeking trusted financial advice, but not knowing how to source it, which is hardly surprising given the industry’s reputation.
Similar programmes have been based on arrangements between an employer and a financial institution, such as a bank, or an industry superannuation fund and a professional association.
This programme is quite different. It is open to any individual licensed financial adviser in Australia (but not to “dealer groups”), provided that the adviser is willing and able to sign a legally binding undertaking guaranteeing the absence (not mere disclosure) of all forms of conflicted remuneration.
Importantly, the programme does not discriminate on the basis of the institutional ownership of an adviser’s Australian Financial Services Licence. As a result, some advisers find it difficult to sign the undertaking. This raises the important discussion about whether advisers who are licensed directly or indirectly through a financial institution can ever be trusted to offer advice that is truly in the best interests of their clients.
Can licensed advisors be trusted?
Some in the industry would argue that licensed advisors cannot be trusted, however, the programme draws no conclusions about that. Similarly, the programme draws no conclusions about so-called “independent” advisers who own, or have financial connections to, a product/platform, or about advisers who have no such financial connections, but may be encouraged or offered incentives to place business in particular directions.
The programme leaves all such conclusions to the business models and ethical standards of individual advisers, who must determine their ability to execute what amounts to a self-regulated legally binding undertaking.
I have always believed that the financial planning industry will only become a true profession by a process of self-regulation. This requires adherence to a set of unqualified ethical and professional standards that are well above the level of the law, coupled with a genuine belief in those standards and strong, uncompromised leadership from within the profession that will drive their voluntary adoption.
I have always believed that the financial planning industry will only become a true profession by a process of self-regulation.
Central to those standards must be the voluntary removal of all forms of conflicted remuneration, which is what most of the scandals and controversy of recent years have centered on.
Rethinking ethical standards
Unfortunately, when reform of ethical standards is left to government, countervailing vested interests will guarantee that we end up with legislation that is so compromised, complex and flawed that it will inevitably lead to more complicated amendments down the track.
Frankly, at this rate, it’s only a matter of time before the financial advice industry is so completely corralled and controlled by bureaucracy and red tape that most of its participants will become little more than compliance officers. This is unnecessary, undesirable and avoidable.
At the time of writing this column, some 44 individual advisers had signed up to the ADF Financial Advice Referral Program. Many more have expressed interest in participating.
This is a truly encouraging sign that individual practitioners from all parts of the financial advice industry understand what needs to be done and are willing to offer their professional advice on terms that the public can reasonably and confidently trust will lead to outcomes in the best interests of consumers.