Preserving client confidence in financial planning

Recent well publicised reports on financial planning groups have highlighted systemic risks and recurring failures by licensees to meet their legal obligations.

In the light of these public failures, many in the industry must be asking what does it take to grow and prosper in the longer term?

Just as importantly, we should be asking what the industry as a whole can do to retain public confidence and preserve the professional reputation of financial planners.

None of us are immune to the effect of these failures on the public's perception of the industry as a whole. Consumer protection and effective market regulation are, of course, core responsibilities of the Australian Securities and Investments Commission (ASIC) , and so necessarily should be significant concerns for any financial planning practice which intends staying in business.

In addition to ASIC's increasing focus on detection and enforcement, the financial planning industry will be profoundly affected by a range of legislative and regulatory reforms following from the Financial Services Reform Bill (FSRB). These include ASIC Interim Policy Statement 146, which focuses on setting minimum competency standards for financial advisers and imposes increased training and monitoring obligations, and other policy proposal papers which focus on the organisational capacities of the licensed dealer.

Although the full effect of the FSRB is still being assessed, the reforms themselves are not unexpected. Few are surprised that Governments have tightened their regulation of an industry which has seen such enormous growth over the last twenty years with such a proliferation of financial products and services. Few would dispute that we need to set high standards of professionalism, competency and care for an industry on which so many depend for their future standard of living.

The industry is itself changing to meet the demands of a growing business and the expectations of planners, clients and the community in general. We have seen numerous ownership changes and consolidations in recent years and a number of strategic alliances for business development.

So what sort of business structures do we now see and how well are they now placed to meet all the obligations of a modern financial planning practice?

Many of us who have been in the financial planning business for a number of years started in a smaller financial planning operation. While many of these have grown or been amalgamated into larger businesses, certainly a number have continued to function well as so-called boutique firms. There's no doubt that this style of operation has its attractions. At this size, they may have more direct control over their business, but they must also take on an increasing regulatory and financial burden.

Maintaining in-house the full range of resources and skills that will be required may not be realistic in many cases. However, even where it is appropriate to outsource some of the licensee's obligations, outsourcing may reduce accountability and add significant costs which must be recovered from limited revenue. Unless these smaller firms have a particularly strong client base and a well differentiated range of services, they may find it difficult to meet their client and licence obligations while sustaining a profitable business.

When small practices expand to meet growing business demands, their resources and systems can soon become stretched. They can no longer manage with small office resources, and the more complex, extensive systems and support services they will need are costly to acquire and pay for from the profits of a moderate number of planners.

It is at this stage of their development that, with increasing regulatory pressures, these medium size dealers are particularly vulnerable to falling short of their regulatory and client obligations.

They may have limited planner supervision and have bought in or resourced other essential planner services at a price which makes quality control difficult, you get what you pay for. Planners may be largely left to their own resources and those who are less experienced or who have not maintained a strong technical knowledge are particularly at risk, and so are their clients and the licensee itself.

In some cases the upshot has been the tarnishing of the dealer's brand by uncontrolled proper authority holders who have fallen short of their client obligations. In others, the dealer itself has breached its licence conditions for inadequacies in essential functions such as technical expertise, training and supervision of planners, for system failures and inadequate compliance procedures.

Most importantly, in such organisations which have limited resources and control, all proper authority holders carry a higher risk through both loss of reputation of the dealer group name and, if the dealer's licence is revoked or modified, loss of their proper authority and possible fragmentation of their client base.

Larger, better organised dealer groups are often in better shape and have economies of scale, adequate systems and sufficient resources to cover all the regulatory requirements and maintain a professional service to clients. Their size enables them to adapt more easily to regulatory changes and to invest in superior planner support and business management systems.

Ideally they should have robust compliance systems, technical advice on demand, reviews of all new plans before delivery, regular training and investment research suited to the client base.

They will also have administration systems with extensive reporting, active business development programs and assistance, effective IT systems and support, a strong business ethics culture, succession plans and procedures and checks that ensure compliance with all regulatory and agreed business practices.

In addition, as part of a larger dealer group, planners can leverage more off the public awareness of and reputation behind the brand name, and the group is less dependent on, and less vulnerable to, one or two individual planners.

Each planner must choose the business model that suits their personal and business needs. Do you want to be a planner, providing a professional service to your clients supported by a strong dealership, or would you prefer to run your own dealership, splitting your productive time between clients and the rigours of running a business in a highly regulated environment.

Finally, none of us can afford to say "I'm all right Jack" when we see other dealers fail through deficiencies in their business or a lack of adequate resources and systems. It reflects on us all in reduced public confidence and trust.

If we want to be part of this business for the long term, we all need to recognise and support the need for high professional standards and effective regulation of our businesses and our industry.

David Bleakley is the managing director of Bridges Financial Services Group