The Messenger: On the Elephant’s trail

It’s the financial planning room and there is an elephant in the house. Everybody knows the elephant is there, knows its size, shape and colour, and hears it breath.

The elephant dominates much of the room, but the room’s policy is that its existence is not to be acknowledged. Its name is ‘Conflict of Interest’.

It has four legs. The first is ‘remuneration’. Fees eliminate a potential conflict of interest that exists in commission. Some people in the room deny that commission ever biases advice. However, nobody really believes this.

This does not mean that everyone who works on commission is unethical, nor that everyone who works on fees is ethical. However, the temptations to take commission into account, and to churn, do exist and can influence advice.

At the bottom of this leg is a spongy hidden pad, called ‘soft dollar’, that allows the elephant to stand much more comfortably.

The second leg of the elephant is ‘objectivity’. Most institutionally owned dealerships are about distribution. Some are there to distribute associated investment products. Others exist mainly to distribute fund manager platforms. These are legitimate sales functions. However, it is not openly acknowledged that the primary commercial function of a large portion of the financial planning industry is platform distribution.

The third leg is called our ‘profession’. There are real professionals but they are a minority. They structure their businesses in a variety of ways but they all exist primarily to serve clients and to make a profit doing it.

There are many other business activities going on in the room, commission sales, distribution and so forth. Few of these transparently disclose that impartial, client oriented advice is not their primary commercial imperative. Most purport to be objective, professional advisers. This disguise is part of the camouflage of the elephant.

The fourth leg of the elephant is ‘false promise’. Ongoing client service obligations are rarely contractually set and this ambiguity is sometimes deliberate. All planners give the best service they can to prospects, to land the business. This usually involves leading the client to expect they’ll be cared for after they invest. Often this care is not delivered, as the business focus turns to the next prospect.

The elephant’s mouth does not work through disuse. It is fed by a transfusion into the veins of its leg via a tube that runs from the fund manager’s room. The elephant is addicted to feeding this way.

There is now a great deal of agitation in the room because theAustralian Securities and Investments Commission(ASIC) and the Australian Consumers’ Association (ACA) has released a survey which shows that there was so much broken furniture in the room that ASIC is suggesting that there must be an elephant in there.

Certain small dealers do talk about the elephant. They insist that it is huge because it is made up of large dealers. Some small dealers were created in order to break away from organisations where they thought they might be crushed by the elephant.

However, close examination of this animal shows that it has a very small tail, that is, some small dealers are part of it. The idea that being small automatically bestows quality is naïve, if not disingenuous.

The ASIC survey has caused such consternation that suddenly there are groups of people engaged in intense conversation, the theme of which is: “Why don’t we all turn and name the elephant as ‘conflicts of interest’?”

These people include really professional, client service-oriented practitioners, some of whom work in small dealers and some in large. They include senior executives of certain large dealers who, despite any general perception to the contrary, are intelligent and concerned about clients and the industry. They recognise that there is a problem and that change is required for them to sustain quality, profitable businesses.

Concern about the elephant is rising because it could cause the whole room to collapse. This is apparent to the people in the room, the regulators, the media and even to some consumers.

Fund managers are concerned because they depend on the financial planning room standing. Some are considering pulling out the intravenous tube because their customers are complaining about their ridiculously fat fees, which are artificially puffed up to keep pumping initial and trail commission into the tube.

There is now perhaps, just perhaps, enough will in the room to expose and tame that elephant.

The main threat to it comes from several of the biggest institutions, which have begun to push the animal out of their corner of the room. These businesses have real strength.

While many of us speak as if ‘the banks’ are the great obstacle to change, a number of individuals of vision and integrity are bringing revolutionary change to institutional dealerships. Steve Tucker has put it to the highest management of the National Australia Bank (NAB) that its in-house dealerships need to focus on advice more than transactions to be sustainable.

He has asked for support to substantially invest, and to forego a huge amount of new sales inflow in the short-term, in a restructure which emphasises ongoing advice and revenue — a shift from commission to fees.

NAB management has backed this. Yes, the bank!

There are individuals in several other institutions who are as utterly determined, as is any small dealer, that the financial planning industry should never again go through another public trauma like the ASIC/ACA survey. Some are in board positions on theFinancial Planning Association(FPA).

This is a serious threat to the elephant.

FPA chief executive Ken Breakspear, and the key members of his team, were put in the untenable position of defending the indefensible in the face of a voracious media following the survey. They have been criticised for not doing a better job in defending practices that should be eliminated, not protected.

Breakspear is a man of considerable character and integrity who, in my view, has no illusions about the role of the elephant in the room of which he is the official representative. The FPA is now in a position where it can provide unprecedented leadership for this industry.

If the FPA moves to acknowledge the existence of this animal there will be a rush to defend it from many vested interests. However, for the first time, there are enough people who are utterly sick of living in an elephant’s shadow that it might actually be brought to its knees.

This industry now faces an unprecedented opportunity. It is highly significant that there are now some large dealers like NAB and AMP (who employ hundreds or thousands of FPA members) that will support the association if it makes a stand on matters of principle. Historically, there has been a fear of a fatal split if standards were set too high.

There is a chance, right now, for this industry to actually move closer to being a noble profession. It will require the active support of the many individuals who have eliminated conflicts of interest in their own practices, and of the regulators and the media. But it can only occur through FPA-led, industry-wide change.

The ball is in the court of Breakspear and the FPA board. The recent taskforce on disclosure is an excellent beginning. Don’t underestimate the significance of this step.

Two final notes: there is no point in agitating for industry change without a diligence in eliminating conflicts of interest in our own businesses; and any firm that might threaten to quit the association, if it gets serious about the elephant hunt, should think of the headlines — ‘FPA stands for ethics, ABC walks out in protest’.