Commonwealth Financial Planning: from bad apple to shining star?
While recent media reports have painted a less than flattering picture of its former culture, it is important to recognise that Commonwealth Financial Planning has come a long way since 2008.
Commonwealth Financial Planning recently re-entered the media spotlight as new information emerged about a scandal the group was involved in five years ago.
The reports by Fairfax Media alleged the Australian Securities and Investments Commission (ASIC) took 16 months to respond to a tip-off about fraudulent activities and bad advice provided by a group of rogue planners working at Commonwealth Financial Planning at the time.
As a result, ASIC Commissioner Peter Kell was mercilessly grilled by Senator John Williams last month at a Senate Estimates Committee hearing about the watchdog’s failure to act swiftly on whistleblower tip-offs and evidence of criminal activity.
This then resulted in a vote to launch a Parliamentary inquiry into the inner workings of ASIC and its performance as a regulator.
But while the focus quickly shifted to the corporate watchdog and its actions, the media reports once again highlighted the culture which dominated many advice groups years ago, dealing another blow to the current efforts of the financial planning industry to improve its image in the eyes of the public.
This is why it is important to note that Commonwealth Financial Planning has come a long way since 2008.
Background
A group of former Commonwealth Financial Planning planners, including Don Nguyen, were found to have placed a number of their clients into high-risk investments regardless of their personal circumstances and despite being instructed otherwise by some.
This group of advisers deliberately failed to carry out some of their basic duties as financial planners – such as completing financial needs analysis documentation and providing statements of advice – and Commonwealth Financial Planning failed to detect their wrongdoings.
The inappropriate advice was provided for a period of at least two years, according to the corporate watchdog, between 2006 and 2008.
The deepening of the global financial crisis in 2008 exposed the inappropriate strategies employed by Nguyen and his colleagues, which resulted in a multi-million dollar loss of client money.
The aftermath
Following ASIC’s investigation into Nguyen’s activities, Commonwealth Financial Planning implemented a client compensation program in 2010, which aimed to bring the affected clients back to where they would have been financially if appropriate advice had been provided.
According to Kell, 202 investors have so far received more than $23 million in compensation in total, while another nine compensation claims are yet to be finalised.
The following year the regulator banned Don Nguyen from providing financial services for seven years, citing the failure to have a reasonable basis for advice, failure to provide statements of advice and product disclosure statements, as well as providing misleading forecasts to clients regarding the performance of financial products he wished to sell.
Later in 2011, ASIC accepted an enforceable undertaking (EU) from Commonwealth Financial Planning, which agreed to conduct a comprehensive review of its risk management framework, among other things.
The EU ensured the group had adequate processes to prevent potential misconduct or detect actions similar to those of Nguyen’s.
October this year will mark two years since the EU was accepted, and the regulator has acknowledged the Commonwealth Bank’s efforts to co-operate with ASIC in creating robust compliance systems.
In total, ASIC had so far banned seven former Commonwealth Financial Planning advisers from the industry, including Simon Langton (two years), Jane Duncan (three years), Christopher Baker (five years) and Anthony Awkar (permanent ban).
Commonwealth Financial Planning today
I was invited to sit in on a company meeting conducted by the new Commonwealth Financial Planning general manager, Harry Mitchell, in April this year, when he announced to a roomful of advisers the overhaul of their remuneration model.
The meeting was streamed via the web to planners based in other parts of the country, with the feedback flowing in through CBA’s intranet.
The most significant change, in my opinion, is that the new model would allow Commonwealth Financial Planning to assess its planners on their non-financial performance, not just the purely financial, with the assessment including elements such as behaviour within the team, quality of advice and customer service.
Some of the changes – such as ceasing all trail commissions for advisers on managed investments and platforms – even go beyond what the Future of Financial Advice legislation requires of the industry.
However, there was no sign of frustration in the room, and most questions directed at Mitchell at the end of his presentation were of technical nature rather than questioning the group’s decisions.
This might be because advisers were the ones driving this change.
Mitchell – who had been with the group for a little over a year - told Money Management at the time that the first thing advisers told him when he joined Commonwealth Financial Planning was that the remuneration problem was not ‘fit for purpose’.
The group then engaged more than 100 planners from around the country in the initial consultation process for the overhaul and tested the final model on 40 advisers under confidentiality.
This is not to say some might not be happy with the direction in which Commonwealth Financial Planning is heading.
However, Mitchell made it clear that those who were not ready to become part of the new culture were not welcome at Commonwealth Financial Planning.
“I’m not too precious about it - I don’t think we have any flight risks of people we want to keep,” he said.
“It’s going to be really uncomfortable for people who don’t want to do the right thing and I’m OK with that.”
After years of negative coverage, the financial planning industry is trying to make good, be it through the Financial Planning Association’s focus on education and professionalism, or by the renewed focus on ethics that groups such as Commonwealth Financial Planning are adopting.
Furthermore, the removal of conflicted remuneration and the introduction of the best interests duty will prevent much of the wrongdoing which was easily committed in the past.
The point is, while Storm Financial and other scandals from that era will remain in our memories, it is important to note that financial planning as an industry and as a profession has taken a turn for the better, with visible signs of improvements.
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