The financial planning industry must offer consumers real value for money

For the third time in eight years, the Australian Consumers' Association (ACA) and the Australian Securities and Investments Commission (ASIC) organised the monitoring of consumers shopping for financial planning advice. These consumers were volunteers, responding to a CHOICE magazine "Can you help?" column asking for genuine consumers who needed assistance with their financial planning. The ACA was overwhelmed with offers - more than 1000 people volunteered when we only needed 60 in total. That's how intense the perceived need for consumer advice in this area is.

The volunteers were selected mainly to represent consumers geographically (to reflect the financial planning industry itself) and at different stages of their lives - some retiring, some younger trying to save to educate children and so on.

As everyone in Australia must now know, given the huge intensity of the media coverage of the issue, the results of this reality shopping survey were disgraceful. Importantly, the financial plans that consumers were given were evaluated by industry experts - accountants in the financial planning business, certified financial planners, plus some institutional people and by the regulator, ASIC.

The bottom line: the chances of a consumer getting a financial plan that is just okay or better are not quite 50 - 50. And it gets worse. The chances of getting a plan that the industry's own experts would rate as "Very Good" were less than 50 to 1; only 2 of the 124 plans assessed by the team of industry experts rated in the Very Good category. Only 24 plans were rated as Good. The rest could only make a grade of okay (29 per cent), borderline (24 per cent) - which meant some serious deficiencies were present, poor (17 per cent) - which meant that the overall score was a fail or that there were critical errors, or very poor (10 per cent) - seriously bad plans.

The main problems were that many of the plans provided a strategy that failed to meet the consumer's needs (pushbutton or generic plans), many failed to show how the advice was appropriate, and also critically, 14 per cent of the plans failed to comply with legal requirements. That's pretty basic stuff.

No one can help but be shocked by results like these. Both ASIC and ACA had been expecting improvements in the performance of the industry over the 1998 survey, so the outcome was doubly disappointing.

The results of this marketplace monitoring of financial planners have sent shockwaves through the financial services industry. At the base of many of these problems is the structure of the industry. Consumers tend to believe that financial planners are independent advice givers - assessing the marketplace for appropriate products, which will meet the consumers' objectives. Nothing could be further from the truth. Almost all planners take commissions to sell the managed-fund products which are their staple advice. With the consolidation of the industry (banks have been buying planning firms and fund managers as part of their "wealth management fad", insurance companies have switched life agents into planning roles), what might once have been a real financial advisory service has become a sales job with tight management targets. In a bid to shore up the bottom line, many financial institutions have moved their planners from monthly sales targets, to weekly and now daily targets. That's a recipe for disaster. This is akin to a medical group putting their doctors on commission from pharmaceutical companies based on how many prescriptions can be sold per day. No consumer would ever trust a medical professional in that situation.

If financial planners want to be seen as professionals and trusted with consumers' money, what needs to happen? Three areas of reform are necessary - legal, enforcement, and industry professionalism.

New Law

The Financial Services Reform Act has new requirements that all financial planning firms must meet by March 2004. This will help. The Act converts some long-standing good practice standards into law. Advice will have to be given in writing and must state the basis for a recommendation. Further, the implications of switching products have to be clearly disclosed; this is an attempt to address the 'churning' problem where consumers are switched into different investments primarily to earn the planner a commission. Stockbrokers churn investors as well - buying and selling equities when the better decision would be to hold. The importance of these good practice standards becoming law is that not only can a planner be banned if they fail to adhere to the legal requirements, the firm can also be prosecuted - which might make a few of them pay a bit more attention.

The new Act also defines the term "independent". Hopefully, this will change the shape of the industry - which many now describe as "structurally corrupt". Banks currently own between 40 - 50 per cent of financial planners (not one of the consumers who were sent to the big banks in the shopping survey got a plan classed better than just okay), and the whole market is currently characterised by substantial vertical integration. Having the term "independent" defined provides a legal control to ensure that consumers will have genuine advisers in the marketplace who do not earn their income from commissions. Planners who are commission-driven sales agents, trying to meet management sales targets, are clearly in a conflict of interest in terms of advising a consumer seeking impartial un-conflicted advice. Fee-for-service financial advisers who have no "boss" other than the consumer should do better. Bring 'em on!

The law has not solved disclosure problems adequately, primarily because the regulations that gave substance to the Act were so weakened by industry influence that they were disallowed in the Parliament. The disclosure regime which almost got through would not have required, for example, comparable fee disclosure from the managed funds and others - basically failing entirely to enable consumers to choose in the marketplace. The disallowance sent a strong message to the industry, and to the Government, that consumers are supposed to take precedence in the government's consideration of these issues. Concerted self-interested lobbying by industry bodies is not.

Improving Enforcement

The Act tightens up some problem areas, but that's useless if the law is not enforced. ASIC has visibly served a warning to the financial planning community that it is fed up with their performance, and is clearly taking its consumer-protection role seriously. To do that of course, it needs the resources to investigate, to prosecute and to be, in general, more proactive. The ACA would like to see ASIC showing up on the doorsteps of many more financial planners saying "Open the books - we want check what you're doing". And a lot more whistleblowers are needed within the industry - these people need to be encouraged and protected. The Australian Government needs to come to this party with the resources that enable ASIC to be much more vigorous and with stronger whistleblower protections.