Financial planner bashing has become a national sport. The financial advice industry has battled consumer and media perceptions that advisers are a bunch of cowboys flogging products to line their own pockets.
CoreData’s research shows that trust* in the sector plunged as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry conducted its inquiry, falling from just over 60 per cent to around 35 per cent. It has rebounded only modestly since then. But it’s time advisers were given a break.
The industry has come a long way since the 1970s, when planners were essentially life insurance agents operating in a sales-oriented culture with little, if any, formal training in providing professional advice.
Even before the Financial Adviser Standards and Ethics Authority (FASEA) came into being and the royal commission began picking over the financial advice industry, the sector had made huge inroads into increasing transparency and removing conflicted remuneration practices.
The 2009 Ripoll inquiry, which led to the creation of the Future of Financial Advice (FoFA) laws, accelerated a shift from commission-based remuneration to fee-for-service models. Opt-in notices and fee disclosure statements made it explicit to clients exactly what they were signing up for – and how much they could expect to pay for the service.
Advisers’ clients are happy
CoreData’s research suggests the typical client is happy with the advice they get. Extensive research of financial advice clients across Australia over many years shows the average satisfaction rating awarded to financial planners by their clients sits at around seven out of 10. In the main, planners are doing a pretty good job.
We can’t escape the fact that over the years, some advisers have deliberately misled clients, investing their life savings in products that were inappropriate and dangerous, given their circumstances.
Australia’s five largest banking and financial services institutions have paid hundreds of millions of dollars in compensation to customers adversely impacted by non-compliant advice given by financial advisers. This figure is expected to continue to climb, as the Australian Securities and Investments Commission (ASIC) continues its work on advice compliance as part of its broader Wealth Management Major Financial Institutions Portfolio.
A little bit of perspective
But let’s put this in perspective. In the nearly five years since ASIC established the Wealth Management Major Financial Institutions Portfolio (previously the Wealth Management project), 55 advisers and one director have been banned from the financial services industry. That’s 0.22 per cent of the approximately 25,000 advisers on the ASIC financial advisers register who have operated outside of the law in the last five years.
For good measure, if we expand our universe to ASIC’s AFS banned and disqualified database and search for all those banned and disqualified from practising in the Australian financial services industry during this period, it increases the count to some 360 individuals. That is still only 1.4 per cent of all the financial advisers in the country.
I challenge you to name any service-based industry in which not a single individual operates outside the law. It simply doesn’t exist.
As humans, one of our key motivations is self-interest. We are hard-wired to seek personal benefits that are both tangible (for example, money, and promotions) and intangible (for example, group status). But this isn’t our only motivation.
Many studies have found people are also prone to act for the greater good. Socrates argued that even then, this behaviour is driven by self-interest – people only do the right thing because they fear being punished if they get caught.
The science also suggests social structures that attempt to incentivise people for good behaviour can actually make people more selfish. Whether the advisers who engaged in questionable behaviour were victims of a system that rewarded them for taking undue risk and recommending costly or inappropriate financial products, or simply motivated by self-interest, is hard to say.
But what’s clear is that the incentives that were built into vertically integrated institutions failed to separate product manufacturing from advice, encouraging behaviours that the regulator is now attempting to stamp out.
Advisers are adapting quickly
It’s true that the consequences of poor financial advice for clients are severe. It’s also true that the move away from conflicted remuneration is long overdue. However, times are changing fast, and advisers are changing with them.
The large majority of financial planners are doing the right thing by their clients and constant judgement only serves to undermine the value they’re adding through good advice.
Financial planners should be given the breathing space to turn their focus back to the most important aspect of this whole debate: the client.
* The trust score is the percentage of people who rated their trust in financial advice as a six or higher on a scale from zero to 10, where zero means no trust and 10 means total trust.
Note: This article is an updated version of an article first published in 2017.