The Messenger: Why planners must say no to freebies

Several years ago I attended a financial planning conference organised by one of the accounting bodies. One evening a number of participants were sitting at a bar, two of whom were fund manager representatives.

One of the planners turned to these two and asked which of them would be paying for the rest of the evening’s drinks. The business development manager (BDM) hadn’t offered — they were asked. The other accountants/planners at the table seemed to think this was a perfectly appropriate question, as if one of their roles is to be bought drinks.

I was embarrassed and, while attempting to cause no offence, made it clear I was happy to pay for my own share of drinks.

Ironically, one of the themes through the conference was that accountants have a competitive edge over planners because they operate in a more ethical manner, but apparently not in this respect.

I am not singling out these individuals. They were merely part of a culture of being ‘on the take’ that pervades too much of retail financial services.

Many financial advisers think that someone should be ‘buying them drinks’, literally and metaphorically. This extends from soft dollar benefits and undisclosed commissions through to large grants of undeclared cash, often in amounts of $50,000 to $100,000 per year per fund manager for large dealers, called ‘sponsorship’.

I recall a dinner in 1994, celebrating our 10th anniversary, at which we hosted those fund managers with whom we then had a relationship. During the evening the chief executive officer of one of these organisations commented how much he loved the industry, noting that the only element he found unpleasant was the constant request for money from planners. He said this “felt like extortion”.

Many planners may be surprised to realise their actions can be seen in this light.

At our next board meeting we adopted the policy of never accepting sponsorship or any other material benefit in kind, which was communicated in writing to all fund managers. This is a practice thatCentrestonefollows today.

I’ve had many discussions with representatives of financial institutions who, almost universally, view these requests — from free drinks to free lump sums — as an unpleasant but inevitable part of relationships with advisers.

No matter what the regulators require in terms of disclosure, another factor that should mould behaviour is simple self-respect, which is manifested in conventional courtesies such as reciprocating in buying drinks or taking someone to lunch. That such basics of good manners are rare in planners’ relations with fund managers says much about entrenched attitudes.

Similar in flavour, but incomparably worse in scale, is the industry masquerade that cash grants to dealers is ‘sponsorship’ and not part of the price of being recommended.

Dealer conferences are often the pretext for requests. Who actually believes that managers would freely pay this, as a voluntary use of their advertising budget, if it was not for fear that a failure to do so could threaten their place on the recommended list?

If you are in doubt about this, test it by promising absolute confidentiality and ask managers what they really feel.

There are two steps required for clients to be recommended a particular product. First, the product needs to be put on the dealer’s recommended list and then the financial planner needs to choose it.

There is much focus on the need for disclosure about the second step. In my view, disclosure should also require a statement that manager A has X products on the recommended list and paid Y dollars to the dealer last year for sponsorship or other benefits.

Why not disclose this? Is it not relevant to the dealer’s decision to recommend it? Is the client not entitled to know? Or is it perhaps that the dealers don’t want planners to know the details of this large revenue stream in which the latter do not participate? In my assessment, for a number of significant dealers, these amounts are critical to profitability.

Some of the trenchant critics of the ethics of financial planners come from industry superannuation funds. Some of these organisations have created their own planning firms with the stated rationale of enabling their members to gain financial advice that is not influenced by commission.

Many industry funds live with the chronic frustration of most planners not recommending their product, despite their sometimes low cost, because they do not pay commission. While there are some fee-based planners for whom this is not true (for the record, my organisation recommends a fund within theASSETsuper suite of products, which pays no initial or trail commission), without doubt not paying commission does preclude many industry funds from accessing much of the advisory industry.

However, the holier-than-thou attitude expressed by some of these funds is open to question.

First, the stated objectives of creating their financial planning arms is often to retain assets when members retire, that is, move from accumulation to income-paying mode. It needs to be recognised that a tied internal sales force selling portfolios that are mainly or wholly in-house products, is identical to a bank or other financial institution doing the same thing.

It is a sham to pretend otherwise.

Less well recognised is the fact that some, though not all, of these financial planning businesses are owned by the fund itself. Members’ funds have been used to build a financial planning business/sales force with the purpose of encouraging those members to not take their money out. Why should they pay for this?

As the sole purpose test requires that superannuation funds exist to provide retirement benefits, the trustees of those funds must have decided that starting a financial planning business was a sound and profitable investment strategy.

Some life offices have followed exactly the same practice. Their in-house dealerships are an asset of a statutory fund, not an investment made out of shareholders’ funds.

These decisions to ‘invest’ members’ assets in dealerships seem inconsistent with the recognised reality that dealerships are marginally profitable. Could it be that fund members are really buying distribution for the institution/industry fund’s promoters?

If we are going to move financial services in a more transparent direction we should start putting the real cards on the table. Disclosure of commission is vital, but there are many other practices that would benefit from exposure to the clear light of day.

Our behaviour should not be limited to mandatory disclosure requirements. These should be seen as an essential minimum. Each individual is free to adopt those standards higher than mandatory minimums that fit well with their personal standards.

A practical guide is to consider a scenario where a valuable client, or a journalist, became aware of an action, and asked about it. If one would be embarrassed or evasive in answering the question, one should not carry out the action.

The industry as a whole is far from this. However, many quality individuals do act in this way.

Those individuals have at least one sustainable business advantage. They offer a relationship based on integrity in a field where clients are searching for it.

Robert Keavney is the chief executive officer of Centrestone.