Don’t blame financial advisers for product failures

Mike Taylor writes that the failure of the industry’s critics to distinguish between the failure of product and the failure of advice is continuing to tarnish the reputation of the financial planning industry.

The continuing image problem confronting financial planners was last month reinforced by the chairman of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, during a forum at the Self Managed Super Professionals’ Association (SPAA) conference in Sydney.

When the chief executive of the Financial Services Council John Brogden conjectured what might have happened to the financial planning industry if Storm Financial had not collapsed, Medcraft quipped that there had been other issues involving financial planners such as Westpoint and agricultural managed investment schemes.

In doing so, the ASIC chairman neatly encapsulated the inability of many of those driving current debate to differentiate between a failure of product and a failure of advice.

Storm Financial was, indeed, a failure of advice. Westpoint and the numerous MIS collapses were a failure of product.

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This is not to say that all financial planners were blameless in terms of client losses with respect to Westpoint or the MIS collapses, but it is worth noting how many people were self-directed investors or, by their own acknowledgement, threw money at forestry and olive oil schemes at the behest of their accountants so they could access tax deductions.

Brogden’s point to the SPAA national conference is therefore important, because it succinctly makes the point that Storm Financial was the only really definitively advice-related failure amid all the other financial services collapses of the past half-decade.

It begs the question of what type of regulatory future would have been imposed on the financial planning industry if Storm Financial had not collapsed.

A report published in a major Sydney daily newspaper last week also revealed the degree to which lobby groups such as consumer group Choice have sought to leverage off the collapse of Storm to prosecute their agendas.

In that newspaper report, Choice chairwoman Jenny Mack said that what had been seen in the financial planning industry had “been a sales force, not a professional advice service”.

"It’s these very conflicts that have caused huge consumer losses in Westpoint, in Timbercorp, in Rewards Group … these were commission-paying products and financial advisers recommended them because they were getting a big cut from them,” she asserted to the newspaper. 

‘’The business model of Storm [Financial] was driven by remuneration structures that paid advisers commissions every step of the way,” she said.

It is, of course, well accepted that Storm Financial planners operated on a fee-for-service basis, but this does not stop the likes of Mack suggesting that the whole issue was driven by fat commissions.

Nor does she seem to be unduly concerned about the amount of evidence surrounding the involvement of accountants and self-directed investors in the losses incurred from the collapse of Westpoint and Timbercorp.

Financial planners and the now largely-defunct commissions seem to be her target.

According to Mack, the Government’s Future of Financial Advice changes will represent a panacea for the ills of the financial industry, but in reality, the changes which will progress through the Parliament over coming weeks will not serve to prevent consumers losing money in ventures such as those pursued by Westpoint or Timbercorp.

Indeed, it is doubtful whether the FOFA changes will serve to prevent another Storm Financial collapse in circumstances where the losses incurred by clients were not the result of regulatory breaches, but a failure of strategy.

Both Medcraft and Mack might care to reflect on the fact that where regulatory compliance was concerned, Storm Financial had ticked all the right boxes and only collapsed because the rapid tightening in liquidity which accompanied the onset of the global financial crisis served to rupture investment strategies based on too much leverage.

Medcraft, who last week released ASIC’s policy on enforcement and investigations, might also reflect upon the fact that his organisation had received warnings about the strategies being promoted by Storm Financial but chose to look no further than meeting its statutory obligations.

While the changes outlined in the FOFA bills extend ASIC’s power to act in circumstances similar to those surrounding Storm Financial, the degree to which the regulator utilises those new powers remains to be seen.

It will certainly need to do more than simply be the policeman managing the scene after an accident has occurred.

Then too, the current economic climate suggests it may be some time before the impact of FOFA and the extended powers of the regulator are put to the test.

Few new products are being introduced to the market and most investors are showing an inclination to remain in cash.