Is the financial planning industry ‘stuffed’? Many people think so! Recent research into the ‘trusted professions’ found that financial planners rated right down at the bottom.
My suspicion is that if the regulations were not so complex and there were not so many investment options, many Australians would happily never see or hear from a financial adviser again.
In a sense, seeking a planner is rather like using a bank — people select the ‘least worst one’ and use it because they have to. One industry commentator cynically jokes, when asked about selecting a financial planner, “Use one from a large institution, you will get the same indifferent advice as from a boutique, but at least they have deep pockets, which is helpful when you sue them”.
But it’s not just financial planning that is in crisis, the whole financial services industry is lurching towards meaninglessness.
With more fund managers than ever, a huge excess product manufacturing capacity and an avalanche of public offers from industry and corporate super funds, there may be more marketers than investors.
Every day a new launch promises higher, faster and more tax effective products to tired, disillusioned investors. None address their deep dissatisfaction with investment performance and excess fees.
The life insurance companies may be in even worse shape! They have oodles of capacity, but diminishing numbers willing to distribute their products.
The regulators insist that financial advisers steer consumers through the financial maze — with certainty of process and outcome. Yet, in a curious conspiracy of silence, neither the regulators, nor those who would be self-regulators, have been of much use in telling planners how planning is to be done.
Increasingly, the final arbiters of how planning should be done are the courts. With no more help than ‘it is a matter of professional judgement’, dealers and planners have been left to work out for themselves what financial planning is. This is because there are no practical financial planning standards, and consequently, no benchmarks planners can use to judge their work.
While there is a high degree of rhetoric in relation to advice matching clients’ needs, there is no sensible methodology to map out clients’ lifestyle goals, and consequently, no way to judge how well they are travelling towards meeting those goals.
The big secret is that most financial planners have never been trained or given the tools to do financial planning. You just need to look at the inconsistencies and formulaic nonsense in the various financial planning training courses in relation to ‘preparing a plan’ to confirm this fact. Going forward, it’s hard to imagine that PS 146 will make any impact on this state of affairs.
There is clearly a need for quality advice, but how can an industry, which has lost consumer confidence and that has inconsequential standards, rise to meet the challenge of delivering the products and services Australian consumers clearly need and want?
Advisers say the media, politicians, consumer representatives, regulators, their dealers, insurers and clients (and probably their spouses, children and dogs) pick on them for a range of sins, only a few of which they actually commit.
They lament: ‘I passed my exams, I meet my continuing education requirements, I meet my dealer’s standards of professional practice, I abide by a thousand and oneFinancial Planning Association(FPA) rules, I have never had a professional indemnity claim and I really care for my clients! Why is everyone picking on me?’
The answer is the industry has let them down. It has entangled them in a web of product-over-advice compromise. The average planner doesn’t know who they work for, whether they are to provide appropriate advice or sell products, how to use simple analytical tools, or what standards they are to be judged by.
Whatever you think of accounting standards, at least they are available for all to see and are constantly tested and updated to deal with changing circumstances. There are none for planners.
The standards so clearly needed would articulate the primacy of the client’s needs and goal achievement over product sales.
How to go forward? First the commission versus fee debate, while raising many valid points, misses the main one — consumers have the right to advice that will empower them to take control of the resolution of often conflicting decisions about:
* How they spend their time — that’s the split between time spent earning money and time spent not, like when to retire or the consequences of not working the extra shift at weekends. Or, should my partner work?
* How they spend their money — how much to spend now and how much to put aside for future needs?
* How much insurable risk the client, or their family, should accept — how much to transfer to an insurance company? This is about the cost of a third party guarantee for the client’s life goals.
* How much extra financial risk will they take above their comfort zone to achieve their financial goals? That is, what exposure to volatile growth assets, how aggressive their tax planning, how much, if any, gearing will they accept?
These are the critical decisions individuals and their families wrestle with and prioritise in order to achieve their life and financial goals. This is the essence of financial planning. It is personal. It is immediate. This is true liability shifting because it becomes the client’s plan. Consumers need financial planners as guidance counsellors, not “equity selling”, as Tom Collins calls it, dismissing the vast majority of financial planning. For many planners, the ability to be guidance counsellors will be their value proposition in the future.
Secondly, consumers need to understand the business partnership they are being offered. This means transparent disclosure of ‘all’ biases that could influence the advice being given. Convoluted remuneration schemes, ownership lost in branding, all the fine print — they all must go and be replaced by standard disclosure that consumers can understand and appreciate.
This clarity must continue to product selection, alternative legal envelopes, investments, strategies and downside risk. Many allocated pension clients are now learning the hard way about the consequences of risks and volatility — and it is clearly news to them!
To commit to a financial plan over the long-term, consumers need this guidance. While we say planning is an ongoing process, few planners are actually capable of delivering it.
Let’s remove the churn and burn merchants, the short-term opportunists, the crass and the careless.
Let’s set and enforce our own standards, standards set to return consumer confidence. It’s not too late to avoid strangulation by regulation. We all win if we get the client to own the plan.
Paul Resnik is founder of the Paul Resnik Consulting Group.
