Despite the challenge that it poses, the industry is slowly moving in the right direction towards improving the overall quality of advice, which in turn will work to boost the reputation of the financial planning profession in the eyes of consumers.
The push for quality of advice has been a particular crusade for the FPA over the years, with the most recent development being that of its remuneration policy, which requires its 12,000 members to move away from commission-based fees for financial planning advice by 1 July 2012.
In October, the FPA was given the green light by its board to execute this policy and has subsequently set up a transition committee to help members make the move to a fee-based remuneration arrangement as the standard financial advice model.
The decision signalled a significant change in approach by the industry body to the never-ending debate over whether to charge clients on a fee-for-service or commission basis for financial advice.
Traditionally, the FPA’s stance on the subject was about choice and transparency whereby planners could adopt either model as long as the clients were fully aware of how the chosen remuneration structure worked.
The change in stance came about for several practical reasons that could no longer be ignored, according to FPA chief executive Jo-Anne Bloch.
“We introduced conflict of interest principles two years ago, which talked about separation of fees, the negotiation with the client and those issues, but it was under the principle of choice. So you could use commission or fee as long as you kept to these principles,” Bloch says.
“But two years down the track we found it extremely difficult to apply those principles to commission-based advice because it’s very difficult to split a commission, it’s very difficult to disclose the commission on a regular basis and it’s certainly very difficult to switch off a commission.”
While the ability to choose a particular remuneration structure was seen as a good thing by people in the profession, the public was unable to see the merits of it.
This continuing negative perception of commissions was another catalyst for the association shifting its support to fee-based remuneration.
“Choice is a good thing, but the community wasn’t seeing it as a good thing,” Bloch says.
“Whether you like it or not, the fact is commission-based remuneration is now so deeply entrenched as an adverse negative we can’t get beyond it.
“The fact is when you do research and you talk to consumers, when you see the media reports, and talk to some of our members, commission has not served and is not serving our industry very well from a reputation point of view.”
Indeed, ASIC’s shadow shopping survey on superannuation advice conducted in 2006 put the quality of financial advice under the spotlight when the findings confirmed that, in some cases, remuneration and association-based conflicts were inappropriately influencing advice.
The survey, which assessed 306 examples of advice given to consumers, found 16 per cent of advice given was not reasonable.
Unreasonable advice was also three to six times more common if the adviser had an actual conflict of interest over the advice given to the client.
Furthermore, one in five planners surveyed had also switched clients to more expensive superannuation funds, a practice that various industry stakeholders believed was largely driven by commissions.
However, fast forward to 2009 and times have certainly changed.
The quality of advice, conflicts of interest and commissions are now particularly high on the government’s agenda following its intervention with the Parliamentary Joint Committee Inquiry into Financial Products and Services in Australia.
Members of the financial services sector all had an opportunity to have their say on how all these issues and other pressing matters could be addressed, with the findings to be tabled in Parliament on November 23.
In its submission, ASIC flagged its interest in increasing its surveillance of financial planning firms in order to establish a benchmark for the quality of advice, however, the regulator was unclear on how it would ensure firms do not fall below the benchmark.
ASIC also recommended that declaring planners to be fiduciaries would lead to a higher quality of advice and the emergence of a professional advice industry.
The regulator is adamant such a step is one of only two that would be likely to have the most significant impact on protecting retail investors.
Meanwhile, a better distinction between sales and advice roles by restricting the use of the term financial planner could also potentially lift the current quality of advice standards.
This was one proposal a number of licensees and other industry bodies raised in their submissions to the inquiry.
The FPA recommended stricter qualifications for those who should be allowed to use the term financial planner.
The association stated the minimum standards required under RG146 are inadequate for the delivery of quality advice, and therefore create a risk of consumers acting on information from providers that are not appropriately or professionally qualified.
Over the years, the FPA has been a strong advocate for financial planners to obtain certified financial planner (CFP) certification.
Furthermore, the industry body has voiced its plans to continue improving and promoting the CFP program to ensure it is widely acknowledged as the must-have designation for professional financial planners.
The CFP designation is an important one for advisers as it represents a global symbol of excellence in financial planning and has professional standards associated with it.
The designation also shows to consumers and to others in the industry that the adviser has gone down a track of education and is prepared to operate at a higher level in terms of status.
Although it is still very young, with its genesis in Australia at the beginning of the 1990s, industry stakeholders are optimistic the CFP designation will grow in stature in the years to come.
Indeed, perhaps when it does, consumers will seek out a CFP professional, rather than a non-CFP, when they are looking for financial advice. This presents yet another promising step for the industry on its journey to quality of advice.
What’s more, dealer groups have also signalled the importance of obtaining CFP status and are looking to boost CFP numbers within their networks.
In the 2009 financial year, the FPA experienced a 2 per cent growth in CFP practitioners and currently has around 600 students enrolled in some part of the CFP program.
