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Planners you could trust - Eureka Report article

November 19, 2007

Planners you could trust
By Scott Francis



PORTFOLIO POINT: A new designation of Professional Wealth Adviser, whose independence was verified by Government, could improve consumer confidence.

Pressure is mounting for a full-scale government inquiry into the financial planning industry. The proposal got up and running a few days ago when Alan Kohler made the call here at Eureka Report (Planners need reform thrust upon them) and I have been impressed by the range and quality of the letters published in recent days. Working as a financial planner I agree with many of the concerns already aired, particularly the potentially corrupting influence of commissions paid from financial products to advisers. But the outstanding issue for me is education . or the lack of it.

Consider the Diploma of Financial Services course run by PS146, which takes eight-days and has no requirement to pass exams. Doing the course online costs $2,360, which is tax-deductible. Anyone who has undertaken the course can call themself a financial adviser. If a profession is judged by the weakest of its members, then an eight-day qualification like this can only rattle the confidence of consumers.

In the recent history of the financial services industry the lack of academic qualifications has been swamped by other issues. Let's consider the issue of the Westpoint collapse. Much of the commentary around this related to the double-digit commissions paid to advisers to "sell" this investment. This commentary is fair enough but it misses a key point.

Any adviser who recommended that a client place a significant portion of their overall portfolio into a high-risk asset class such as mezzanine finance showed an appalling lack of understanding of the key aspects of portfolio construction.

They ignored a number of key financial truths including the relationship between risk and reward in an investment (Westpoint offered 12% returns - it had to be risky), the role of diversification in managing portfolio risk and making an appropriate assessment of mezzanine as a non-traditional investment asset class - that should be no more than a small part of a portfolio.

It is it hard not to think that the consumers who lost money is this style of investment might have been better served by an industry with more rigorous educational standards.

Of course, financial planning-related debacles only rattle consumer confidence in the financial planning industry, so people decide to do it themselves and are easy targets for the glossy advertising of a company like Australian Capital Reserve which failed thousands of investors earlier this year.

As a working financial planner I simply can't wait for an inquiry to begin, regardless of who wins the election! I'm preparing my submission already and here's a preview of my main points. Financial advisers would need to meet higher standards than they do now. A working name, perhaps, could be Professional Wealth Advisers, who would have to satisfy the following criteria:
  • A high level of educational achievement. As a minimum an undergraduate level qualification (in commerce, business or financial planning) plus a postgraduate course such as a Postgraduate Diploma of Financial Service. In the current financial planning industry the basic qualification, an advanced diploma of financial services, is an eight-subject course that took me about five months to complete. Although the Certified Financial Planner educational program requires all candidates to now have a tertiary degree, this is a new standard, and people can (and do) practise as financial planners long before they achieve CFP status. A high level of academic achievement would be a starting point to practice, not part of a later designation.
  • A business that is completely independent of any ownership structure that has any links to financial service products. This is pretty self evident, really, however the ownership links in the financial services industry are difficult to follow. Do people know that if they are walking into a Tandem Financial Planning office it is owned by ING? Or that their Hillross Financial Planner is owned by AMP?
  • Avoidance of all upfront or ongoing commission, rebates and soft dollar incentives from any financial service products. This can be black and white. You cannot rebate upfront commissions but take ongoing commissions. You can't charge a fee and take some ongoing commissions. Professional Wealth Advisers would be free of all incentives, rebates and upfront and trailing commissions. They simply could not accept any payments or gifts from financial product providers.
  • Some level of experience (perhaps two or three years). This would be similar to the experience required by Certified Practising Accounts or Chartered Accountants. The CFP program expects a level of experience; however this is a "capstone" qualification, not an entry level expectation.

What is the role of the government?

The Government, which already takes responsibility through ASIC for much of the monitoring and licensing of the financial services industry, would do the same for the Professional Wealth Advisers.

Individual Professional Wealth Advisers could be directly licensed, and should face a lower compliance burden given they are not having to disclose to consumers any commissions and ownership conflicts of interest.

A direct licence fee of $10,000 a year, payable by Professional Wealth Advisers to ASIC, could allow ASIC to do a thorough check on the independence and professional standards of practising Professional Wealth Advisers.

If, say, 3000 advisers wanted to be licensed as Professional Wealth Advisers, the fee would provide ASIC with $30 million of revenue to audit their professional standards and independence - and to promote their service and independence to consumers. It might sound like a steep licencing fee, but most financial planners would be paying much more than $10,000 currently, so it would be a reasonable price to pay.

The Government would also check that no one was using the name Professional Wealth Adviser who was not entitled to.

What about consumers?

The new regime would give consumers more transparent choice: they could be confident that Professional Wealth Advisers were independent and had met a prescribed standard of education.

What about commission-based financial planners?

Nothing changes for them. Commission-based financial planners who do a great job for clients, would be free to keep building their business and continue as they have. There is absolutely no threat to their business or business structure.

The $10 million a year being spent on advertising the Professional Wealth Advisers is coming out of those advisers' own pockets - it is not as though the Government would be making any grants to advertise a competing service.

Can it happen?

Absolutely! The Government already spends millions licensing and supervising the financial services industry. Why not move those millions to a two-tier licensing system that provides an immediate solution to consumers who are looking for fee-based, independent financial advice?

After health, family and friends, money is an important part of everyday life. A Government policy that provides access to well qualified and independent Professional Wealth Advisers for those consumers who want it -without having to throw out the commission-based system - must be worth considering.