Royal commission shows us why financial planning, in its current form, isn’t worth the risk

This article is originally published in The ABC.

Once again the banking royal commission nailed it.

Take this question from counsel assisting the commission, Rowena Orr, to the head of the Association of Financial Advisers (AFA), Philip Kewin:

“How can an organisation that is seeking to make itself attractive to potential members in comparison with other industry bodies also, at the same time as seeking to make itself attractive, regulate the conduct of those members? Isn’t there an inherent conflict in those two propositions?”

Mr Kewin’s response?

“I don’t think so.”

But we now know so, thanks to the way the commission has revealed that the AFA and its rival organisation, the Financial Planning Association (FPA), tried to protect members accused of serious misconduct.

Like so-called celebrity financial planner Sam Henderson, who allegedly told his employees to impersonate a client and claimed educational qualifications he doesn’t have.

The bodies that claim leadership of the financial planning industry are organisations that want to grow member numbers, and as Ms Orr’s question to Mr Kewin indicates, they don’t want to rock the boat.

So, when financial planners see a threat to the easy money gravy train of commissions and other sales-based payments, their “leaders” are quick to fall in behind and take up the cause.

And how do we know?

Because while the royal commission is getting all the headlines, another inquiry is quietly continuing in the background — an inquiry into the way those accountants who are also financial planners get paid.

Financial planning industry fighting to keep status quo

It’s being conducted by the Accounting Professional and Ethical Standards Board, and both the FPA and the AFA have made submissions.

And they reveal the industry’s true colours.

The FPA said:

“Limiting remuneration to a fee-for-service basis could cut off remuneration options that make advice accessible and affordable for consumers.”

The AFA argued:

“We do not believe there is any need for further reforms [to the way accountant financial planners are paid] at this stage.

“We strongly recommend against any consideration by the APES Board to ban commissions on life insurance or asset-based fees [which are commissions by another name].”

So, despite the avalanche of wrongdoing revealed over the last 10 years or so (the royal commission is really the “icing on the cake”), the financial planning industry is fighting as hard as it can to maintain the status quo.

To keep the conflicts. To keep a model where clients can’t be confident whose best interest the planner is working for. Yours or theirs?

And there are mountains of evidence that the number one cause of all the wrongdoing in the financial planning industry is the way planners are paid.

The financial planning bodies are the same organisations that fought the Future of Financial Advice reforms at every turn, including basic things like sending accounts to clients, something every other industry takes for granted.

By way of history:

In 2012 the Accounting and Professional Ethical Standards Board (APESB) ruled that taking commissions based on the amount of money a client has invested compromised “integrity, objectivity, competence and due care”.

It said, “no safeguards could reduce this threat to an acceptable level,” lumping other forms of payment such as those from third parties, as well as soft dollar benefits, in the same boat.

The APESB also observed that if financial planners need to sell something to be paid, then it limits the advice they will give.

As the board noted, a planner may think twice about telling a client to pay off their debts, like their house, if it shrank the pot of money from which he or she is taking a commission from.

It wanted all conflicted payments banned.

All three accounting bodies rejected this, a position they are maintaining in the new APESB inquiry, and as we’ve seen, they’re being aided and abetted by the FPA and the AFA.

RC exposes dud deal that is most financial planning

It’s depressing stuff, but there is some good news.

A small, but growing, number of financial planners are genuinely independent and genuinely fee for service, where all you are paying for is advice.

There are enough of these independent, fee for service, financial planners now to confidently say that the leadership of their industry is wrong — focusing on advice and putting customers first does work.

One of those genuine fee-for-service firms has put it like this:

“If we defend commissions or asset-based fees then we are taking a lazy approach and we are not being proactive in justifying to our clients and potential clients that our advice services are truly worth paying for.”

Only one in five Australians use the services of a financial planner.

The industry tells us it’s because Australians can’t, or won’t, afford their services, so they try to hide the real cost by taking commissions.

But Australians spend big money on many things, if they can see value. Think cars, holidays, houses, and furniture, among other things.

Australians also know a dud deal when they see it.

The scandalous revelations coming out of the royal commission will only have reinforced that financial planning, in its current form, isn’t worth the risk.

Career Money Life’s financial advisors are fee for service only. Contact us to learn more about our Financial Advice Programs

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