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.

Creating a Financial Planning Profession

Finally, it is clear that the industry has failed dismally in its aim to become a profession. With survey results as bad as this, it is unfortunate that the "good guys" in the industry get tarnished with the same brush as the bad. All the ACA can say to the professional and ethical planners is "get your professional association into shape". We probably need a new association - the Independent Financial Planners - who clearly distinguish themselves from the rest by not accepting or rebating commissions.

Further, it is debatable whether the current industry lobby group - the Financial Planning Association (FPA) - should also be the industry professional body. So far, that structure does not seem to have worked to change the industry effectively. The FPA takes virtually no disciplinary action on members and their reluctance to be a proper professional body is now showing publicly. As well, problem denial, which has been the FPA's response to the ACA-ASIC survey, is not a good start. It looks to us like some real leadership is needed - a few heads should be rolling.

While the brunt of the public criticism has been directed at financial planners, the managed funds should not expect to get off scot-free. Who provides the planners with the up-front commissions, the trailing commissions, the trips and outings, the marketing allowances, the Hong Kong 7s? The managed funds of course. Who refuses - in the case of most firms - to rebate the consumer for buying directly rather than through a planner? Who charges inappropriate up-front and exit fees - not only to generate the funds that help pay the commission-based planners - but also to interfere with proper competitive behaviour by consumers in this market? And who gives a certain executive $33 million in payment for supposed performance? The managed funds, of course, whose executives obviously failed to remember the old adage that "genius is a rising market". Perhaps some of these people should now be rewarded for the negative returns their clients are experiencing - by handing some of the performance bonuses back! The corrupt shape of this industry is as much the doing of the managed funds as it is the acquiescent financial planners.

Because of the dismal results of the financial planners in the survey, the ACA has withdrawn its support for superannuation choice. The legal framework, which would allow employees to choose their own superannuation fund, is, in principle, a great idea; the ACA was a stalwart backer of the Government's attempt to introduce choice in the superannuation market. But consumers will need help in selecting this most complex of products. Who will they turn to? Financial planners of course. These planners should not have access to consumers' compulsory retirement savings until major improvements in behaviour are in place as well as stringent consumer protections on fees and commissions.

The message to the financial planning industry is that "time's up" - three strikes and you're out. After the third poor result over eight years in this shadow-shopping by ACA and ASIC, the excuses are no longer acceptable. The industry has been saying for more than 10 years that things are improving; in fact, the industry has gone backwards. If financial planners want consumers to trust them with their hard-earned money, great change is needed in the structure of this industry, and in the attitudes of the planners. In the meantime, for consumers, this is serious "buyer beware" territory. If you decide to see a planner as a consumer, go in armed!