Power to the planners: Money Management/Fidelity Round Table

For the final instalment in the series of the Money Management/Fidelity adviser round tables we invited back some of our more vocal participants to dissect the most pressing issues facing the planning industry.

WestPoint and the FPA

MT: Earlier this year the Financial Planning Association (FPA) took action under its own terms against some of the advisers who got caught up in Westpoint. How was that action received in the industry and did you think it was effective and appropriate?

JB: I obviously think that it’s appropriate. I think that if we want to be a professional industry we have to make sure we are dealing in professional ethics and behaviours, and if some of our members fall foul of that they need to be investigated and addressed that way and banned if necessary. So I think it is completely appropriate. We are a professional industry body.

DW: You’d have to wonder why they didn’t if not.

JB: We can’t stand ourselves up to be above others if we don’t abide by those rules.

IS: I totally agree with Julie, I think Jo-Anne [Bloch] is doing a fantastic job giving it credibility, and you know the one thing that is important for the industry is the value of good quality advice and if the FPA doesn’t ensure people are getting good quality advice then I think they are failing.

JD: I would further that and take it one level higher up; one of the major challenges that we are faced with is moving from industry to profession, and if we are to create trust and respect … in the eyes of consumers we almost need to be conducting ourselves in a similar way to lawyers as equal practitioners, controlled in a sense by their associations. I suggest that the FPA needs to set it a little higher than the regulators in terms of the way we conduct ourselves as well.

MT: Do you think planners have been adequately cautioned by the FPA’s actions in punishing some of the planners caught up in Westpoint?

IS: I think the FPA needs to come up as a body of integrity and it is trying to do that and it is not a question of fear, the real fear I think has been promoted more by ASIC’s (Australian Securities and Investments Commission’s) attitude towards the industry rather than the FPA. It would do well for all of us that we do the right thing, the quality of advice is good and that we do care for our clients, which most of us do. I don’t think it will bring fear. I think it will bring a better level of regulation and give substance to what the FPA is actually or should be all about.

JB: And as well as that, the FPA can only act on members breaching the FPA’s rules. We can’t act on members breaching ASIC’s rules — it’s ASIC’s role to do that.

IS: What about the other groups, there are other so-called associations around, or proposing, or promoting themselves as associations, what are they doing? The FPA by actually by taking this action stands out as something of credibility. The others probably do nothing.

DW: I don’t know that we should [have] advisers living in fear of doing the wrong thing. I think it is more a matter of engendering pride in doing the right thing by FPA standards. I think if we can get the industry to that sort of level we are talking about a profession rather than a cottage industry, which in some ways we still are.

JD: Again, I fully reinforce that too. To move away from the cottage industry, move away from being an industry group to a profession, taking genuine pride in relation to [believing] ‘I am part of this community that is trustworthy, respected and adheres to these standards that I am proud to be associated with, and the association has the guts to be able to enforce that as well’.

JB: That was a bit lacking before and that is the thing that has come to the fore now. I think Westpoint highlights that.

MT: You don’t think there is a danger that the people who have been banned will now association shop?

JB: But do you want them in your association, if they are not professionals? Do you want numbers or do we want quality?

IS: We’ve got to stand up and show that we are a profession and this is a professional body.

PI insurance

MT: One of the other things that has emerged in recent times is compulsory PI (professional indemnity) insurance. What are your views on that initiative?

JB: It will make costs go up won’t it? They introduce compulsory PI and I believe that the PI providers will feel that that will make their risk higher. Perhaps the ones that don’t have PI don’t qualify for PI for whatever reason, they might be higher risk people or higher risk businesses, so I think the consensus is that it will push the premiums up across the same industry. But is the fact that everyone is protected by PI a bad thing? That will be something to look at in the future.

DW: I think I suggest that the answer to that is no, it is going to be a good thing.

JB: And if you listen to the discussion about the limits potentially going up, whether they do or they don’t, the good chance is that up is the direction that they’ll go in, that’s going to increase the PI premiums as well, so I think there is still a lot of unknowns [as to] what they are going to exclude, what limitations they will put on PI.

IS: I actually believe it is important to have PI. I take it not so much from wilful fraud that you try to advise clients, but sometimes mistakes are made — errors in clients’ understanding of what you are trying to advise them, even though it could be written and it actually does protect clients in certain circumstances. It also protects the business, and I think as far as we are concerned the way we have organised our insurance also protects our advisers, who may be unfairly challenged.

JB: What is the alternative? Does anyone have an alternative to PI to cover both the vulnerability of the business and the consumer?

MT: The only alternative is self-insurance.

JD: I would support all that because for many it cuts to the very heart of consumer-client confidence. You would imagine that in most circumstances the PI insurance would be something that we prudently have in place anyway. You would imagine as a sensible business owner or manager that you would have that in place as a matter of course.

IS: As for the types of policies and others, I suppose if many more participants in the industry actually do take it up then the insurance companies will come up with something smarter, hopefully.

JB: And it depends what ASIC comes out and says has to be in the PI cover, because that will determine costs as well. I mean, what are they going to put in there, what limitations or exclusions?

DW: I assume the FPA is looking to talk to the regulator and everyone else about it.

JB: Yes, we’ve certainly got a working party going.

Shadow Shopping

MT: The regulator will probably come out with another shadow shopping exercise in the near future. Does the industry have a lot to fear from it?

JB: I don’t think we need to shy away from a shadow shop. Invariably there will be people who have made an error or perhaps have not followed a process — that is just the way it goes.

DW: It might even be ‘bring it on’, but having said that, the one qualifier would be any debate about issues post a shadow shopper would be well and truly positive and commercial.

JB: Do you think that it is possible that we would have increased surveillance as opposed to a shadow shop per se where there is more focus on the compliance and more surveillance rather than a broad-based sort of shadow shop thing?

DW: I don’t know. I tend to think that a shadow shop can actually produce the sort of results that you want, provided that they are fair dinkum shadow shoppers.

JB: But you are assuming that the shadow shoppers would go in there to put a positive spin on it, and historically the shadow shoppers have gone in there to try and find a negative spin. But if we could shadow shop with a positive spin maybe that would be a reasonable thing.

JD: Absolutely.

IS: But I think the whole premise is actually wrong and I think it is a bit like garbage-in garbage-out because they are not clients, they don’t want to be clients and they don’t wish to invest, and so when you start with a false premise, and let’s say your term is wrong, the answer to your problem is going to be wrong too. So you start from the wrong premise, they aren’t clients, they don’t want to invest, they want to find fault and then you get a result which is also false in a way.

JD: I cannot recall, unless I am mistaken, any equivalent process being undertaken with any other industry or profession. You don’t have the equivalent of shadow shopping for accountants, lawyers or architects or any other profession.

DW: Well, actually, the health commission, the health insurance commission, has in fact done shadow shopping with doctors who were seen to be over prescribing or in the old days ripping off Medicare.

JD: What is revealing is a degree of scrutiny and a degree of, dare I say, suspicion then directed towards us by ASIC.

JB: But do we have a little bit to blame ourselves historically for that?

JD: I think there is an element of to what extent are we easy targets or convenient targets for the likes of consumer associations or the regulators when it comes to this space, and to me it harks back to this very fundamental premise of what will it take to move us from an industry to a respected, trusted profession? Isn’t that part of the growing pains? Why is it that we are under the scrutiny and suspicion that we are under?

DW: We use a market research company that specialises in high-net-worth individuals, which is our target market, and the really interesting thing is that they’ve shadow shopped us literally hundreds of times in the last year, and if you take the results of those shadow shops and use them positively you can get a lot out of it. Those apparently are real life people really looking to get advice and really wanting to do something, and I think that is a kind of interesting premise to start with anyway.

JD: What the last shadow shopping to us revealed … was the extent to which consumers are yearning for quality advice. Because what actually resulted on the back of that survey was that we were inundated in terms of phone calls, requests for appointments and website hits that just skyrocketed on the back of it.

IS: We had a similar experience. We don’t know who it was, we don’t where the report came from, but it was a good result for us. We did nothing different but we could see there was more interest. However, when you look back at the outcome I think it was negative for the industry. Because … none of the five candidates wanted advice, none of them had money, they didn’t know what they were looking for and they wanted to find a situation where they could bag the industry and, on the back of that, you had the demands of FSRA (Financial Services Reform Act), which got worse when the legal practitioners got involved and the simple piece of advice that would give a good strategy and support to a client became subservient to the legalistic jargon of 70 pages of waste. It just got out of hand, the whole thing ... and it just forced a different kind of legislation, that first shadow shop, which actually was false in its own premise. The second one was not that bad. I think, as Julie mentioned, that maybe surveillance, a proper form of surveillance, and also the fact that the FPA has come out now to set standards, quality standards, could be a better solution.

JB: And even the ‘Don’t ask Dazza’ campaign which financial advisers ‘love’, had terrific consumer response.

DW: People want good advice.

JD: They are yearning for it. We could observe that.

IS: There was good advice … and what that shadow shopper could have actually [done is be] a hurdle for clients to go and get advice because a lot of the media needs to sell a newspaper and that is fair enough — [but] it is the bad news that sells the newspaper. So the media actually promoted a lot of the negative stuff, not the good stuff that you are talking about.

New ASIC head

MT: Do you think that the new head of ASIC is going to change attitudes within the regulator and therefore attitudes within the industry on issues like shadow shopping?

JB: The general feeling at the moment is that Tony D’Aloisio is more focused on better informing consumers on the risk of investments and the types of risk in investments, and looking more on the product issuers and the fund manager side of things and the clarity of those kinds of things than the financial planning end of it.

IS: I would say that it would be well for Tony to start from a position of trust in the industry rather than one of distrust, which is one that has started in the past. Because everything that the industry did was distrustful, was sleazy, was wrong, that is the impression that was given by the regulator and it went out of its way to find fault in the industry and overshadow the good things that we did.

JD: I think up to now the perception in the industry has been one where the relationship with ASIC has been pretty small and on an adversarial basis, it would be wonderful to see a shift to more of a collaborative relationship where we are all equally committed to seeing a delivery of quality advice to Australians that say we need it; obviously FPA involvement would be absolutely critical to creating or reinvigorating a relationship based on collaboration and trust.

JB: And there is so much that we can do together, as far as making it a professional job.

IS: The other thing that ASIC, or even a lot of people, don’t realise is that there is a lot intangible work that financial planners do that doesn’t get recognised in the purest way; there is a life-threatening situation or terminal illness, the kind of work that a planner does to get close to the client to assist them and support them to structure their finances so that the other people are looked after. All that gets forgotten because much of the value that we add to clients is intangible. The stuff that we put in an SOA (Statement of Advice) or the facts on a disclosure statement or the fee are not the main elements.

IS: How do you measure that? When you measure it as a shadow shopper?

JB: Well you can’t as a shadow shopper.

DW: Not wanting to live in the past, but if you think back say 10 years there was none of this high-level requirement for everyone and it seems to me there were fewer client complaints.

JD: Is it possible that that is a function of markets? You get a correlation between markets … not in terms of customer complaints but more in terms of the perception of the industry.

IS: When markets are weak, there are complaints of performance, but it is a question of, as you know, educating the client to understand where they are going and what can happen.

JB: I think the irony of the whole thing is that they send an SOA that is supposed to protect and inform the consumer, [but it actually] confuses the consumer. You don’t need 70 pages to tell a client this is where you are, this is where you want to go, this is how you can achieve it.

IS: When you add it up there is not 70 pages only, there is 70 pages of disclosure, you’ve got another 40 pages of each PDS (Product Disclosure Statement) that you are offering, and then the clients all lie to you and say that they have read it all.

Enforceable undertakings

MT: If people enter into an enforceable undertaking (EU) with the regulator it has been the practice of ASIC to publicise that widely. If that is the case, are EUs attractive things to enter into, in terms of reputation, when you know that as a starting point the regulator is going to straight to the media?

JB: At what point should it be public? Should it not be made public only after found guilty?

IS: It goes back to the point we’ve been talking about — the adversarial approach. You want a scalp, you want to prove a point. I hear that a lot of the requirement of the AMP undertaking was actually watered down and … maybe ASIC could have asked the existing AMP clients: ‘Are you unhappy?’ And most weren’t unhappy, so what is the purpose of an EU where a client is actually happy? Or the bulk of the clients are actually happy? What does it prove? Maybe people are supposed to live in fear of ASIC. It wants to bear its teeth, and a regulator that constantly bears its teeth does not get support from the people it is supposed to regulate. It should be a collaborative arrangement, a consultative arrangement where we trust each other and we work together for the same goals. It is supposed to be the regulator and we are part of their fraternity and if we don’t want to be in that fraternity with them then the purpose gets defeated. So it’s got to be collaborative.

DW: You have to accept that you can’t regulate dishonesty out of any industry or profession. There are going to be bad apples in every bunch, but it is a question of how you treat those.

JB: Hang them when you find them guilty, don’t hang them prior to finding them guilty.

IS: If you find them guilty take them to the highest point where everyone sees them, and whoever it is, just get them, because we want to clean the industry too. It gives all of us a bad name, including the media, including us, including software developers, everyone. Hang them high but, as Julie says, find them guilty first. And be commercial about it, be reasonable about it, by hurting the industry no-one benefits and the people who really lose out are the clients. The people who want to get advice, who should get advice, or need advice, might baulk at it.

JB: Or the expenses go up so much because of the carry on and they can’t afford it.

IS: And the more people talk about the fees, at the end of the day the cost is going to go up.

Recruitment

MT: One of the things that we noticed doing the latest piece of research is that some recruit feverishly and some recruit selectively, but the bottom line seems to be finding a really good, experienced planner who is going to bring value to your business is like finding hen’s teeth. So what is it like out there in recruitment land?

JD: I think without a doubt there is a chronic shortage of quality, experienced advisers and … we are now seeing increasing remuneration packages that are being offered to attract quality advisers. I think the impact of that is that we are going to see a growing number of inexperienced or aspirant players entering the industry. I think we will see much greater interest and attraction in terms of potential graduates entering into financial planning courses in the hope of entering into the industry. What interesting trend is emerging is the idea of looking not at recruiting experienced advisers but looking at recruiting those with the requisite interpersonal communication skills from a professional background, be it accountancy or a legal background, and to what extent can they be moulded into becoming financial planners. I am also very interested to see what happens in the banking industry. That’s been a traditional breeding ground of advisers in the industry and what banks will be doing in terms of creating structures to increase their retention rate of their advisers, in terms of what they can offer advisers as a career within the banking industry as well.

JB: The interpersonal skills is the missing link. You can technically train anyone all you like, [but] it doesn’t make them good planners — it’s your interpersonal [skills] that need to come along. There is a course that has just been piloted at NIDA actually teaching young financial planners, upcoming financial planners — and anyone who thinks they need to be taught how to have that interpersonal relationship type of thing.

IS: The other thing about these salaries that I am reading [is] sometimes you don’t always get the best quality person and it becomes a function of a company wanting to retain the funds under advice rather than lose the revenue from it, so you are prepared to pay to recruit someone just to service those clients, and they may not be good quality people, and you are prepared to pay the money and you are paying a lot of money to retain that client base for that revenue. Time will tell if those people stay.

JB: Do you think that part of the issue is the cost of training? A lot of the smaller businesses, for example smaller financial planning businesses, really struggle with that cost of compliance and training for new people coming through.

IS: Well, for a small business certainly compliance is an added complexity. We have 55 advisers [and] compliance is an enormous cost factor to our business. We are happy to take young or middle-aged, even aspiring planners who want to have a career change. And we put them through the induction program, the training program — how to look for clients, how to look after them — and we actually piggyback them with senior planners too so that they can understand what sort of questions to ask, how to handle issues of questions from clients, how to look after them and to build them. Anyone can be part of a white shoe brigade and sell a product, but to build a relationship with a client and have the empathy to really care for their feelings, that’s the hard part. And in time it happens, it is a natural thing. When you deal with people, you deal with clients, you feel for them. So that training is tough.

JD: It’s a big deal changing dealerships for anyone. You have to start again in most situations. Sure, you might get a few clients that follow you, but you can’t just go willy-nilly pinching all your contacts. I think that we are going to have to focus on growing our own and, you know, that’s tough.

JB: But you’ll get a better quality in the end — it’s just the cost and the time that it takes to get there, but you do get there.

IS: And in the end they are more loyal, hopefully.

JD: The benefits of having someone who has been successfully inducted with the principles and the philosophies and the way you give your advice and delivery advice and service the ethos and an understanding of what you are offering in the target market is absolutely invaluable.

IS: And that can only be nurtured and grown from within.

The upcoming Federal Election

MT: What is your take on Government policy going forward and the impact on your clients’ sentiments as we move up to an election?

JD: One question we’ve seen emerging a bit more in the last couple of months is the degree of risk that is being undertaken by a client in terms of investing in funds almost or exclusively within the superannuation environment, given that almost overwhelming it is the most compelling means to save for retirement. Given that we’ve had thousands upon thousands of changes to superannuation over the last 10 to 15 years, to what extent may further changes dilute or impact the attractiveness of superannuation going into the future? Now that is not about the Coalition or Labor Government, but is probably more at the level of are we subjecting ourselves to some degree of legislative risk by relying on superannuation and should we be diversifying our clients across different types of investment vehicles?

DW: I would argue that it has always been like that. As an adviser I have always suggested to people that they should have a diversification strategy just like that across asset classes.

JD: Now you are looking at an environment whereby all money [superannuation] can come after age 60 entirely tax free, that is why we’re seeing the rush, people are willing to take advantage of that. I believe the degree of sensitivity is heightened more so than it was previously, that would be my contention.

IS: Generally it is before an election … that the volume of clients coming through actually dies down. People sit on the fence and don’t know what is going to happen and who is going to win. So that affects business, but there is always this fear now that ‘what if they change the rules on me’ and the Government has been pretty good at changing the rules on people.

JB: But mostly in favour of peoples’ super.

IS: The Government of the future is going to rely on the power of the baby boomer. We could change the Government in one election if they don’t go with us because we’re going to have the numbers and the population to back us, so just let them take something away and they are gone.

DW: You don’t think in terms of Government changing (superannuation) policy that the intergenerational report has basically sent a message to parties of every persuasion that says that (a) we have a rapidly aging population (b) most of them are under superannuated (c) you need to get them to do something to support themselves in retirement? It would be a foolish Government that would upset that dynamic.

JB: There is no noise out there about major change coming from either side and interestingly enough, for probably the first time if ever, both sides recognise the value of advice. I just want to go back to the risk of change of legislation. I think it has been like that forever.

IS: Who it is remains a risk for is the administrator and the manager. It has become quite complex. It is easy to say that we can take your money and put it back in super and get rid of the components, but there are so many that have to be carried forward, to the point of death of the client and systems changes that have to take place, and there are some legacy systems and a whole heap of processes have to be put in place so that you don’t give the wrong information. It has become extremely complicated and complex.

JD: Has the Government gone too far? Will they suddenly realise we have gone too far?

JB: Later down the track if you’ve got all these people turning 60 and not paying tax anymore on anything it puts rather a burden on all those left paying tax for the people who didn’t fund themselves.

IS: I think they’ve done their sums and that the population growth will come through plus the assets are invested in productive assets. The money is invested in something.

DW: The on-budget effect of the thing is actually minimal. If the Government has actually delivered back to the superannuation industry, which would have been on the entry tax as opposed to the exit tax, then the on-budget impact would have been about three times.

IS: In fact, to collect the stuff like superannuation surcharge was more expensive for the Government than to not have it. It was costing more to collect it than the money they were collecting.

Fincorp and ACR

MT: Have you seen any repercussions for yourselves, positive or negative, from the fact that no planners were actually involved in the Fincorp and ACR collapses?

IS: We’ve seen a repercussion — positive. Quite a few people in the Newcastle region were affected and some of our clients said thank you for not letting us do it. It has been positive for us to stay away from it.

JD: I think that unfortunately it takes one or two of these every now and then to refocus the client’s mind. To say, ‘now I understand again why I am talking to you on an ongoing basis, the value that you add, and as much as you lead me to the opportunities you are also keeping me out of trouble’ and that is really powerful from a client’s point of view.

DW: Well I think ACR had been pretty well identified. I heard about it 12 months earlier, so I’m assuming other people have.

IS: I think it is also greed, you know. I am quite confident that many would have been boasting how well they were doing out of the Fincorps and ‘hey, you’ve got a financial planner, but I am earning this and I don’t have to pay’.

JB: We know our consumers are more educated because when clients come in they actually have questions to ask whereas years ago they used to say ‘do what you will, I know nothing about it’. But at the end of the day there are still clients or potential clients, and we don’t get to see them, who put all their money in one thing.

DW: They are more educated but I don’t think they’re necessarily well educated. The think that I find amazing is, people walk in and ask you all these questions but I don’t think they know what answers to look for, it’s guessing. They’ll have read the questions in a book somewhere.

JD: Australians with money are chronically underinsured, they remain chronically underinvested and thousands upon thousands continue to break the two immutable laws of investing: you cannot receive a high return without high risk, it just does not exist; and secondly, diversifying. What challenge does that throw down to us as an industry? It throws down the challenge in terms of our current advice models to allow a broader range of consumers to be able to access the advice that we are able to deliver, maybe it’s a challenge to the regulators as well. Has the cost of advice increased so much because of the compliance overheads?

DW: It is the point before: you can’t legislate away someone’s stupidity. You cannot educate and advise away greed and stupidity, unfortunately.

Sleeper issues

MT: Is there one sleeper issue out there that is going to blow up and bite us on the backsides, or is it all covered off and everybody has everything under control?

JD: I think from my point of view there is a certain euphoria covering our industry: everyone has been busy, everyone has been successful, the market has been kind. I think a bit of a challenge that is faced by all of us is that there will be a downturn, it’s inevitable and it comes in cycles. I don’t think it is a sleeper from the point of view that it is coming, when it does come we’ll all look back and go, ‘so obvious’, but in the current euphoria of people putting money into superannuation, putting money into tax-free income, it is about steeling ourselves and our clients in terms of their hearts and minds in relation to there will be a downturn. What are we doing in terms of not only setting expectations but also what are we doing collectively in terms of adjusting portfolios? That to me is going to be one of those issues that may arise in the course of the next 12 to 15 months potentially.

IS: Obviously, one is the emergence of India and China, which I really believe is the powerhouse that is driving the rest of the world; the potential and the growth is just phenomenal where you’ve got something like 40 to 50 million new births every year in these two countries. But if they have some form of serious economic mismanagement that could put a damper on the world, and I feel that the one area that would be affected is property, maybe because we don’t understand the way the property trusts change the face of the staple securities.

JB: I think what we have to do different next time the market falls is [change] the way we behave and the way we have trained our clients to understand what has gone on and the way we’ve added value and strategy.

IS: That is a continuous process.

JB: That is really what makes us professionals. We are very lucky to work in the environment that we are in at the moment. Where you’ve got government telling people to put money into superannuation, to support a strategy we can provide to clients. We are working in a very positive environment at the moment for financial planners. Not just for investments and returns but for a push that we can identify.

DW: It seems to me that there is a point for a politician at some time to say ‘you cannot be paid by your product platforms any more’. However remote that possibility, if it did happen it would send huge shocks through the industry.

IS: The adviser who gives you clear, concise advice that you as a client can understand and sleep easy is worth a lot more money than what you get out of the product. At the end of the day, frankly, when we pay for our advisers or funds or admin, who pays? The clients. Everything is paid by the client: our salaries are paid by the client. So the client needs to be looked after and, as long as they know what they are paying and what they are paying for, they don’t care how you get it. The most convenient way is the best way.

Round Table Participants

John Dani (JD) - Planning and Strategy Manager, Ipac Solutions

Julie Berry (JB) - Managing Director, Berry Financial Services

Indy Singh (IS) - Managing Director, Fiducian Portfolio Services

Doug Webber (DW) - National Practices Manager, MacquariePrivate Wealth

Mike Taylor (MT) - Managing Editor, Money Management