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, in advocating better education for 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 welcomed the parliamentary joint committee’s report.
The association’s chief executive, Jo-Anne Bloch, was still doggedly defending the Storm Financial business model to this reporter this year as thousands lost their life savings.
Just as revelatory was the response from John Brogden, the chief executive of the Investment and Financial Services Association, the peak body for financial products spruikers.
The ”recommendation seeking a fiduciary duty for financial advisers is a win for consumers and a win for the professional standing of the advice industry”, Brogden declared.
”We do not believe that ceasing remuneration paid to financial advisers from product manufacturers is required …’ Mais bien sur.
Unfortunately, Ripoll fails to resolve the central conflict of interest in financial services, that is, that under the present 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. We await implementation day – July 1, 2012 – with bated breath.
Any criticism of financial advice must of course be put against the backdrop of ”caveat emptor”. You cannot legislate for good behaviour, or for stupidity.
Over-regulation is folly. There will always be spivs, stockmarket cycles and fancy structuring to maximise fees and exploit loopholes.
Still, the system must at least try 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 still have an incentive to ”gear up” their clients. Under the Storm model, and others, the more debt (margin loans etc) a sales force shovels
into its clients’ portfolios, the greater the commission its sales people are paid.
As for recommendation one, that advisers have a fiduciary duty – stockbrokers have a fiduciary duty too. That does not stop the unscrupulous ones ”churning” their clients. Great Southern’s responsible entity had a fiduciary duty.
That went bust.
Before REs came along, trustees had a fiduciary duty. That did not stop Westpoint blowing up.
As Bloch proudly pointed out, the association already had a code of practice that enshrined the hallowed principle – albeit recently introduced – that the client came first.
To little beauty number nine: ”The committee recommends that ASIC immediately begin consultation with the financial services industry on the establishment of an independent, industry-based professional standards board to oversee nomenclature, and competency and conduct standards for financial advisers.”
Just what the world needs now – another ”independent industry-based professional standards board to oversee nomenclature”.
Recommendation 10 is a call for a last-resort statutory compensation fund – which has everything to do with cure rather than prevention – at taxpayers’ expense. And much of the recommendation relates to delivering more power and money to ASIC to police the industry.
A couple of points here: ASIC’s problem is cultural not financial. A peek at the regulator’s latest accounts show that last year ASIC pulled in a quiet $552 million in fees and fines on behalf of the Commonwealth.
With some odds and sods (unclaimed monies, etc) it booked $604 million – up from $590 million the year before. Thanks to extortionate fees for the likes of accessing public information, ASIC rode out the global financial crisis in style.
Vis-a-vis operating expenses of $295 million, it is no wonder the Government is happy with its watchdog. This is one bow-wowing money spinner.
Its resourcing is not an issue. However, ASIC’s record on preventing corporate disasters is poor. It gave Storm, for instance, the all clear the year before it collapsed, after complaints. Notwithstanding complaints, common sense might have prevailed. It was clear that a model which 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 of Ripoll is that the big banks control most of Australia’s financial planners and financial products.
They are hardly going to advise their sales forces to ”cease” rolling in commissions and start selling anyone else’s financial products – at least without a big fight.
The hoi polloi has had its say now, via submissions to Ripoll. Now it is industry’s turn, again. When the government ”consults” with industry about a possible ”ceasing” of commission payments over the next two years it will hear one side of a very lucrative story.