Leader- Advisers must learn to count their lucky stars

The financial services industry’s current obsession with star ratings opens up a can of worms for consumers and the industry.

The financial services industry’s current obsession with star ratings opens up a can of worms for consumers and the industry.

First we had star ratings for fund managers and their underlying funds, launched by InvestorSource and followed up by both MorningStar and Assirt. These seek to guide consumers and their financial planners towards the best investment teams, processes and returns. The research houses objectively measure a fund’s perform-ance and then use indepth analysis of the people and processes that manage the in-vestments to form an opinion on the likelihood that the fund or manager will con-tinue its current rate of return.

Later this month, banking industry research group Cannex will launch a star rating system for margin lending products. Details of the ratings system are still sketchy but it is likely to focus on the terms of the contract offered by the institution lend-ing the money for investment.

Earlier this week, star rating mania arrived on the financial planning scene. A group going by the name of Adviser Ratings will seek to give consumers a guide to quality financial planners based on a star rating. Adviser Ratings has the formida-ble backing of the likes of MorningStar’s Graham Rich and industry stalwarts David Childs and Paul Resnik.

Advisers will be rated on the basis of a 15 page questionnaire asking for informa-tion on professionalism, research resources, remuneration and technical knowl-edge. While this may be a more thorough guide to the quality of an adviser than simply examining technical knowledge, it still could confuse consumers looking to secure the best financial planner for their personal circumstances. In other words, it opens up the question of how to rate the quality of a financial planner?

On the one hand, associations such as the Financial Planning Association are sending the message to consumers that they should deal with financial planners who carry the Certified Financial Planner (CFP) mark. On the other hand, services such as Adviser Ratings will be recommending advisers who score a five star rat-ing.

There is also the question of compatibility of adviser and client. For example, a five star financial planner may be eminently qualified to advise a young, cashed up executive but would the same five star planner be able to handle the retirement needs of a couple with $200,000 in superannuation? Surely, a financial planner cannot be all things to all people.

A rating system for advisers also opens up a series of further questions. Is a finan-cial planner who bases remuneration on fees better than one who bases remunera-tion on commission? Is a university qualified financial planner necessarily better than an experienced financial planner with a Diploma of Financial Planning (DFP)?

These are not just questions for Adviser Ratings, they are questions the industry it-self needs to answer. A rating system is probably an inevitable bi-product of con-sumerism but the industry needs to choose how it wishes to promote itself to con-sumers.