IN FINANCIAL advisory circles they have been known to call a DFP (diploma of financial planning) a diploma of finger painting. In this business, the barriers to entry are not exactly … exacting.
Bernie Ripoll and his colleagues ought to be commended then, for advocating better education for financial planners. But that is where the eulogy ends. The recommendations of the Ripoll inquiry radiate barely a ripple across the fee-deep ocean of financial advice. This report carries all the weight and ferocity of a wet lettuce.
Look no further than the imprimatur afforded it by the Financial Planning Association, which was ”pleased with most of the recommendations” and so on. FPA boss Jo-Anne Bloch was still doggedly defending the Storm Financial business model to this reporter earlier this year as thousands were losing their life savings.
Just as revelatory was the response from John Brogden, who heads up the Investment and Financial Services Association, the peak body that goes in to bat for financial products spruikers.
”The committee’s recommendation seeking a fiduciary duty for financial advisors is a win for consumers and a win for the professional standing of the advice industry,” declared Broggers. ”We do not believe that ceasing remuneration paid to financial advisers from product manufacturers is required …” But of course.
Unfortunately, Ripoll fails to resolve the central conflict of interest in financial services, that is, that under present industry structure, planners are paid for flogging products, not for providing good advice.
Check recommendation four: ”The committee recommends that the Government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers.”
Ripoll has squibbed on the critical conflict of interest. He has left it to government to ”consult” and ”support” industry in doing away with its lush fees. Fat chance of any meaningful ”ceasing” of product payments. We await implementation day – July 1, 2012 – with baited breath.
Any criticism of financial advice must, of course, be put against the backdrop of ”caveat emptor”. You can’t legislate for good behaviour. Nor can you legislate for stupidity.
Over-regulation is folly. There will always be spivs, market cycles and fancy structuring to maximise fees and exploit loopholes.
Still, the system must at least attempt to protect people’s life savings before it protects the revenues of powerful vested interests.
And frankly, under the Ripoll recommendations, another Storm is brewing right now. Planners remain incentivised to ”gear up” their clients. Under the Storm model, and others, the more debt (margin loans and the like) a sales force shovels into its clients’ portfolios, the greater commission its sales people are paid.
As for recommendation one, that advisers have a fiduciary duty, stockbrokers have a fiduciary duty too. That doesn’t stop the unscrupulous ones from ”churning” their clients. Great Southern and Timbercorp responsible entities (REs) had a fiduciary duty. They went bust. Before REs came along, trustees had a fiduciary duty. That didn’t stop Westpoint blowing up.
Recommendation 10 relates to a call for a last-resort statutory compensation fund – which has everything to do with cure and not much to do with prevention – at taxpayers’ expense. And much of the recommendation relates to delivering more power and money to ASIC to police the industry. But ASIC’s problem is cultural, not financial. A peek at the regulator’s latest accounts show ASIC pulled in a quiet $552 million in fees and fines on behalf of the Commonwealth last year. Its resourcing is not an issue. ASIC’s track record on preventing corporate disasters, however, is poor. It gave Storm, for instance, the ”all-clear” the year before it collapsed, after many complaints.
Notwithstanding complaints, common sense might have prevailed. It was clear that a model that aggressively pursued the leverage of elderly clients with little or no income was flawed and bound for disaster.
Giving ASIC more money or ”sweeping powers”, therefore, will hardly change a thing.
The brutal reality for Ripoll is that the big banks control the majority of Australia’s financial planners and financial products. They are hardly going to advise their sales forces to ”cease” rolling in commission and start selling anybody else’s financial products – not without a big fight anyway.
The hoi polloi has had its say, via submissions to Ripoll. Now it’s the industry’s turn, again. When the Government ”consults” with industry as to a possible ”ceasing” of commission payments over the next 2 ½ years, it will be hearing one side of what is a very lucrative story.