Sorry…there's no excuse for ignorance

This is supposed to be the information age, but no one has told the financial planning industry. This has to be the industry that has the least information available about itself.

This is supposed to be the information age, but no one has told the financial planning industry. This has to be the industry that has the least information available about itself.

McDonalds can tell you how may gherkins they use; the Weather Bureau can tell you how many lightning strikes there are in a storm; NATO can tell you how many bombs were dropped in Kosovo; and the Agriculture Department knows how many millions of chickens they have inoculated against Newcastle disease.

Yet we work in an industry where many advisers don’t know how many clients they have; dealers don’t know their funds under advice; or how many of their advisers have DFP and are CFPs. Many dealers don’t know what exposure they have to particular fund managers, products or asset classes. Many advisers don’t know this either. Do I need to go on?

Closer to home, stockbrokers, the insurance industry and fund managers keep very good statistics (if you ignore the research houses’ stoush over what is retail business). If this is the case, why is the financial planning industry the poor relation? The two probable reasons are the regulator and the way the industry grew.

ASIC’s predecessor, ASC, never required statistics to be collected as the ISC did for the insurance industry. I believe ASIC doesn’t even know how many advisers there are. One of its other predecessors, ISC, kept statistics on everything and published them. (Probably because ISC was run by actuaries.)

The financial planning industry grew out of the old investment advisory business that was new sales focused. Records of new sales were kept, primarily for commission calculation purposes. As the industry has evolved towards on-going rewards and fees, many dealers do not even know their new sales figures any more. This has been caused by the decentralised structure of the business. The adviser holds the client details and very few dealers did or could collect these details, and even fewer would have a central database.

It amazes me that an industry that is about information, more importantly about the analysis and interpretation of information, is so ignorant about itself. Even the Financial Planning Association can’t get its database right. Recently it did a mail-out to promote the Diploma of Financial Planning. The only problem was that many members who had already done DFP (including myself) received the mail-out.

So does anyone in this industry know anything? How much does the client know, the adviser, the dealer, the owner of the dealer group, ASIC and the FPA. Bugger all I’d say!

Clients are supposed to make an informed decision from an adviser who is supposed to know the client and know the product. Many advisers impose their own values on their clients — just like the current debate about risk profiling. Others rely on some favourite products or their dealer and provide a plan that is an insurance policy rather than an informing exercise.

What do advisers know about their clients and their own business? Many are more interested in the process than the client. Some do not know how many clients they have or what exposure they have to particular asset classes and fund managers.

The dealer is totally responsible for the conduct and advice of their advisers and has the fiduciary responsibility for the client. But how much does the dealer know about the client? They do not have the database; most compliance systems are not based on 100 per cent coverage; and very few dealers survey their clients. And if their advisers do not know their exposure to asset classes or particular fund managers, how would the dealer know. Dealers have been known to ask fund managers for a list of their clients with that fund manager. Imagine how keen the manager would be to provide this information if it knew the dealer was considering recommending a sell for that manager.

How much do dealers know about their advisers? It appears they know little about their past, their financial situation or their skills. As long as they have the right qualifications and can write business, why does anything else matter? Very few dealers contact an adviser’s previous dealer to check them out. ASIC is also not helpful when an adviser is under investigation and switches dealers. Surely a dealer would like to know if any of their advisers were in a difficult financial situation.

What sort of business has the dealer got if they do not have a database on their clients; know little about their advisers and less about where the monies are invested. How many dealers would know whether any of their advisers overly favour one fund manager? What about margin lending? What guidelines do dealers have about this, especially about client suitability? And how does the dealer police its guidelines if it knows nothing about the client?

I wonder how much the owners of dealer groups reckon they know about the businesses they own, especially where the owner owns a number of dealer groups or owns the underlying structure behind a co-operative group. Westpac and Suncorp Metway must be wondering what they have to do and what it will cost them to ensure that their financial planning arms do not fall foul of ASIC again. From what I hear, many other dealer owners are wondering whether they will be next!

The Australian Bureau of Statistics (ABS) probably knows more about the financial planning industry than ASIC. ASIC worries more about detail and processes. It takes a bottom up approach to the industry. If it had decent management information about the industry it could adopt a top down approach. This should mean that it could develop some early warning signals for possible problems. This would mean ASIC could develop a risk management approach rather than its current stifling prescriptive approach.

Finally the FPA. I have already mentioned its database. Unfortunately it also has supported and abetted ASIC in its prescriptive approach — process before people. A classic example of this is DFP8. The whole emphasis of DFP 8 is process and insurance. A candidate is assessed on points covered, technical proficiency and adequate disclosures and disclaimers. (I won’t mention the contents page.)

From what I understand, no attempt is made to assess whether the advice is suitable or that the plan is written in a way that it could be understood by the client. As I said in one of my earlier articles, financial planning is regarded by many as an academic exercise. For them, the client is just a necessary irritant; someone to pay the bills.

For the last few years the FPA has attempted to survey dealers, but the response from dealers has been pathetic. As many of you would know I have been involved in a recent survey of dealers, and there were a number of dealers who could not answer fundamental questions about their businesses. I have also been involved in an audit of some of the major groups. We had the same frustrations with the audit.

With my KPI Research hat on, we also did a survey on master trusts. The quality of information provided for this survey was streets ahead of the information dealer groups were able to provide for the Money Management Top 100 Dealers survey.

Technology, new players and CLERP 6 may be our saviours. I originally thought master trusts/wraps and InvestmentLink would deliver the centralised database, but this is not to be. Technology will enable and new players will want more information. Information is the source of knowledge and knowledge is power.

Finally ASIC, with CLERP 6 and with some osmosis from the ex-ISC people, may just realise that information rather than regulation is a better way to manage the industry. Bugger.