What’s wrong with financial planning?

The banking royal commission have focused their spotlight on the financial planning industry, and whilst the evidence presented is shocking, it is sadly not surprising to many working inside the industry.

We know that the bulk of financial planners working today are skilled and trustworthy professionals who work in their clients best interests, however a subclass of incompetent and self-serving advisers have been allowed to operate for too long – supported by misguided banks and other financial services licensees, and a regulatory framework that has missed the mark.

I believe the problems with the industry boil down to three areas (the 3 C’s) which are now being challenged by the royal commission:

Conflict of interest

The financial advice industry has evolved from a sales background – it’s not that long ago that financial planners were known as insurance agents, who were remunerated purely by commission – at least everyone knew where they stood!
Nowadays, most advisers work on a flat dollar fee basis which removes the incentive to promote one product over another – however, commissions still remain on some products (most notably insurance) and a sales culture overshadows what should be unbiased advice.

Competence

Education requirements have been inadequate with many advisers only completing a diploma course over a matter of weeks. Setting a low bar has allowed some into the industry who never should have been here. New standards have been introduced that will require all financial planners to have a degree qualification and complete a competence exam.

Compliance

Major changes to financial planning regulations have been introduced in recent years which affect every aspect of the industry, including how advice must be documented, what records must be retained, and what authorities must be obtained from clients. Some sections of the industry have failed to adapt to the new standards, and importantly the banks and other licensees that are responsible for supervising their advisers have failed to make sufficient changes.

Fortunately all of these areas have been addressed in part by the Future of Financial Advice (FOFA) legislation that is now in place. We can expect further changes in the wash up of the royal commission that will hopefully set us on the path to redemption.

Ultimately for consumers, it all comes down to one thing – trust– and clearly at this time that trust has been eroded.

Having worked as a financial planner for over 22 years, I still get great satisfaction from helping clients make the most of their financial position – and I know that most other advisers are the same. Unfortunately when you are dealing with money, there will always be an unsavory element that will be attracted to the industry like bees to the honeypot – and consumers must be protected from them.

But for every client I see that has been a victim of poor advice, I see a multitude that have suffered as a result of not seeking advice at all – and you can’t even seek compensation for that!

So, what more needs to be done?

We believe the following changes will help to eliminate rogue advisers and poor practices:

  • Removal of commissions altogether – it’s unlikely that someone will sell you an inappropriate product if there is nothing in it for them.
  • Improve independence of financial planners – Expect to see big changes in the connection between financial planning licensees, and financial product providers.
  • Streamlining advice to reduce costs – A combination of technological advances and more sensible regulation has the potential to reduce the cost of advice and improve the experience for consumers.
  • Improved governance and supervision – One thing we can be sure of is that banks will now be actively reporting and kicking out advisers that don’t make the grade. ASIC is also likely to have more teeth and the clout to take on banks and individual advisers that don’t come up to scratch.

We will continue to watch the royal commission with interest and look forward to a brighter future for all.