Why financial planners need a fiduciary duty

Tom Collins argues the introduction of a fiduciary duty for financial advisers is overdue. 

The Ripoll Committee rejected the concept of separate licensing categories for independent and aligned advice on the basis that it adds a layer of complexity and would be unnecessary if the fiduciary duty requirements were implemented.

I would argue many of the issues the Ripoll Committee considered are being caused by the very fact that we do not have separate licensing categories.

The consumer is entitled to know whether the person they are talking to is there to provide advice independent of a product sale and who is liable for the advice.

More than ever, advisers are controlled by institutions. For about 80 per cent of advisers, their licensee is a bank, life company, fund manager or super fund. And what do institutions want?

Most institutions (product manufacturers) are vertically integrated. Even a number of the industry funds and larger corporate funds have become vertically integrated.

For many institutions, the adviser’s role is to feed the chain, especially into the institution’s platforms.

For example, www.moneymanagement.com.au recently reported that the "six largest institutionally-owned dealer groups place an average 73 per cent of their clients’ super products with their own parent company, with the top three placing more than 80 per cent" (October 28, 2009).

For industry and the larger corporate funds, advice is being offered to both keep members with larger balances and have retired members transfer to the super fund pension division. Some are even public offer, so they can attract even more members.

These institutions will not want to give up their current form of distribution.

So how can 80 per cent or so of intermediaries, many of whom are salaried, owe a fiduciary duty to clients when their masters (their licensee) are encouraging the use of their own products? The intermediary is in a no-win situation.

Another way to look at this fiduciary duty is through the implications for a bank teller responding to a customer’s enquiry about term deposits.

Would the teller have to say, ‘Here at PQR Bank we’re paying 4.5 per cent on a six-month term deposit, but our competitor XYZ bank is paying 5.5 per cent’?

I’m not against an intermediary representing a product provider, what I’m against is product selling/retention being represented as ‘regulator sanctioned’ advice for the consumer. This would be further exacerbated if this aligned intermediary also had a fiduciary responsibility — which I believe would be impossible for them to do.

Professionals who do have a fiduciary responsibility (e.g, accountants, lawyers, etc) obtain their ‘right to practice’ as an individual, normally through their professional association. The same should apply to those financial advisers who want to be independent.

Let’s stop the charade and have two distinct channels, agents and advisers, on the basis set out in the accompanying table.

Tom Collins is principal of The Tom Collins Consultancy.