Financial advisers can be more than bookies

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Man in suit holds up blank business cardThe controversial decision by the Federal Government to water down the Future of Financial Advice (FOFA) legislation highlights a series of misunderstandings about finance.

At first glance, the proposed wind-backs seem extraordinary. As Peter Martin commented in the Sydney Morning Herald the Government is proposing to remove the catch-all requirement that advisers act in the best interest of their clients. He adds that the changes 'will also re-allow sales commissions and other forms of conflicted remuneration where advice is general in nature'.

The major banks will be the beneficiaries. Four out of five of Australia's 18,000 financial planners are owned by a bank or insurance company. In effect, they are salespeople for the banks' wealth management platforms. Making this explicit to the clients, and requiring financial planners to act in the interests of those clients rather than of the platform provider, is apparently a step too far.

The fact that the industry's lobbyists are pushing for these changes, and will probably get them, demonstrates that this is not a profession. Imagine if a doctor wanted the right to act in the interests of pharmaceutical companies rather than patients. It would be grounds for sacking. For lawyers, not acting in a client's interests is grounds for disbarment. Accountants have similar legal requirements to do what is right for their clients.

This action confirms that financial advisers, like stockbrokers, are just bookies in nice suits. They are spruikers rather than people possessing any special knowledge. There is no point establishing a professional code of conduct for them. They are not professionals.

In a sense, that is a welcome revelation. Perhaps the best thing to come out of the current controversy would be for clients to understand that they are not receiving 'advice', but a sales pitch cloaked as advice. Much of the problem derives from people believing that their financial advisers have some privileged knowledge about the markets and investments. Financial advisers are only too happy to promote the fiction, using complexity to create the illusion. Clients are gulled into believing that because the advice sounds technical, it must be right.

It's worth asking what kind of service financial advice is. Financial advice falls into two very different categories. One is the administrative requirement, mainly tax and accounting law. This kind of advice is black and white, either right or wrong. Financial advisers may be able to give sound directions to clients, but it is really a role for accountants. And accountants are legally required to get it right, so there is a higher level of protection.

The second category is investment advice, and this is anything but black and white. There is no reason whatsoever to believe that financial advisers have any special knowledge. Indeed, if they did, they would not be financial advisers, they would be making a living as investors.

They can introduce clients to important investment principles like the need for diversification, or the need to match the type of investments with the client's expectations and tolerance for risk. But these principles are no guarantee of investment success, they are just principles.

Advisers can also provide information, such as how dividend imputation works or what are the financial metrics on particular stocks, but this again is no guarantee of success. What they cannot do is provide a degree of security for a client's savings, which is essentially what clients want. Especially when they are not even required to act in the client's interests.

The counter argument, justifying the wind-back of FOFA, is that it will remove 'red tape'. Prime Minister Abbott declaimed: 'We're working for you today, by creating the biggest bonfire of regulations in our country's history.' This is the standard attack of the deceptive metaphor, which occurs repeatedly in the finance industry. As Ross Gittins commented in The Age, it is a mendacious use of language:

In the process, of course, we'll have changed the meaning of 'red tape'. It's meant to mean bureaucratic requirements that waste people's time without delivering any public benefit. In the hands of the spin doctors, however, it's being used to encompass everything from removing dead statutes to the supposed deregulation of industries.

Such duplicitousness is bad enough in any industry, but it is especially pernicious in the finance sector. Finance is not like other businesses, where the red tape is external. Finance consists of rules, whose iteration is red tape. What matters is that those rules work well, especially for clients. As we saw in the global financial crisis, when the finance sector is allowed to make up the rules and 'self-regulate' the results can be catastrophic.

The only protection against this kind of excess is governments doing the job of governing. These proposed changes to FOFA reveal, in a small way, that governments have learned nothing.


David James headshotDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.

Blank business card image from Shutterstock

Topic tags: David James, FOFA, GFC

 

 

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Existing comments

David James simplistic view and comments are not supported by my experience. I cannot comment on 80% of planners, but I can comment on a small independent boutique firm with two qualified, experienced planners and support staff. I have been a client of this entity for about 15 years, mainly with the principal. During this period she and her associate have provided periodic reviews including in particular strategy, asset allocation, and selection of investments, both direct and through managed funds including indexed funds. The firm's advice goes beyond investments. I trust her and am confident that she is looking after my interests. They are readily available to respond to queries. As an actuary the use of technical finance and investment jargon does not frighten me, as I am familiar with most if not all of it, but it is rarely used, and then it is accompanied by a plain English explanation. Her firm have charged fees for many years, with any commission rebated to the client. Disclosure is complete, with information provided "up-front". The firm has a Client Advisory Board and also has a strong compliance function. I trust her and am confident that she is looking after my interests.
Mike | 26 March 2014


David's article may describe the way some (not all) financial advisors see their function. But would a court see it the same way? Admittedly, I was a lawyer for only 50 years, so I am understandably puzzled. Could someone more expert in the law please explain to me just why a financial advisor is not in a fiduciary relationship with a client, just as is a solicitor, accountant, or estate agent, and there is no need for any statute to impose a duty to act in the client's best interests.. Uninstructed by authority or expert submissions, I would have thought the common law already imposes such a duty. Am I wrong, and if so why?
Alan Hogan | 26 March 2014


As Mike says there are honest advisers but the regulations are to control those who are not. By eliminating the present regulations the sharks will have an open go.
David | 26 March 2014


Perhaps it is time to show in national television the US documentary "Inside Job" here in Australia. How bankers and government shared responsibility for causing the global financial crisis. This is one lesson that needs to repeated over and over again so the Australian government will listen (hopefully) and learn!
Jan | 26 March 2014


Well said, David, the bonfire will open all sorts of loopholes for the unscrupulous. If it ever crosses your mind "Why have they made it more difficult when it was working perfectly well before", then depend on it, someone had found a loophole n the way it was and has been using it to enrich himself.
Michael Grounds | 26 March 2014


Amusing irony: "Imagine *IF* a doctor wanted the right to act in the interests of pharmaceutical companies rather than patients..." Isn't that what occurs now? Doctors are only paid if you are sick, not if you are well. They are paid only to prescribe pharmaceutical drugs, not to advise on adequate nutrition or exercise. Aside from the one-eyed view of financial planners, the analogy of "medical" (illness) experts, falls flat.
Jeremy Britton | 19 May 2014


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