Advice reforms cause petulant outbursts

It was left to former financial planner, chartered accountant, and financial educator Robert M.C. Brown to point out that the advice industry has scored an own goal with the government's Future of Financial Advice reforms.

Most investors will be aware that, far from embracing the measures to clean up their image, the bulk of financial planners have been screaming blue murder at the upcoming reforms. Anti-reformers argue they will put planners out of business, price advice out of the reach of consumers, interfere with normal commercial arrangements, even that they're some sort of communist plot to give the unions control of our retirement savings.

But in an article for the industry magazine, Charter, Brown points out the obvious. The industry did too little, too late to clean up its act and is now paying the price.

At no time during the long consultation process, he argues, did it show more than a modicum of contrition for past sins, or concede the reforms might just be an own goal caused by its lack of willingness to comprehensively self-regulate its vertically integrated product distribution structure in the face of a blindingly obvious need to do so.

"Instead, we've been told that the financial planning industry (like all industries) has a few bad apples, which must be removed from the barrel by a regulator which has been too slow to act, after which all will be well," the article says.

"Not only have we observed emotional and at times petulant criticism of the proposed legislation, we have even observed brazen public statements by industry leaders that their own organisations will re-invent themselves to avoid the parliament's intentions should this misguided legislation ever see the light of day. They would do this by, for example, taking commissions on direct real estate and "white-labelling" product platforms within financial advisory groups, effectively allowing those organisations to sell their own products (which is clearly not the intention of the proposed law)."

The government's frustration with planner intransigence was evident in the recent draft legislation that included a new requirement (not previously raised with the industry) for planners to disclose their fees to existing clients.

Planners have been fiercely resisting its opt-in reform, which will require them to ask new clients whether they want to keep getting advice on a two-yearly basis.

Brown tells the Herald that while some planners had good intentions for reform, others are resisting change because they still see themselves as product distributors. He says they want to build trust by telling people they are professionals but resist obligations such as doing away with conflicts of interest such as asset-based fees and commissions on insurance.

"How much better would it be for planners and consumers if the industry's leaders would publicly accept that the industry is structurally flawed and that FOFA is sending a message to financial planners to not only embrace proposed minimum legislative standards but also to voluntarily evolve an advice-based professional approach to planning (rather than one which is still fundamentally built on product sales and the accumulation of funds under management)?" he asks.

Ironically, the Accounting Professional and Ethical Standards Board has issued a proposed ethical standard for accountants engaged in financial planning that bans commissions, asset fees, volume bonuses and other sales incentives. That goes much further than the despised government reforms.

If it is adopted it will be intriguing to see how the planners respond.

IT COULD be that markets have cried wolf just once too often but there's a sense some investors are becoming inured to dire warnings of financial doom and gloom.

However, you'd need nerves of steel not to approach a report on the "extreme risks" facing the global economy without at least a degree of trepidation.

The report was put together by consulting firm Towers Watson and ranks what it regards as the 15 most extreme risks to global economic growth. Top of the list is a depression, followed by sovereign debt default, hyperinflation, another banking crisis and a currency crisis. A major war and killer pandemic rank further down the list, which also includes climate change, the break-up of Europe and a resource shortage. But before you dash off to look up the Beyondblue helpline, it's worth noting that Towers Watson is not predicting all these horrors will happen. By their nature, it says, extreme risks are things that are very unlikely to occur but could create havoc if they did.

Its point is that when investors are thinking about managing risk, they can't simply stop at those risks that are highly probable. If you're serious about protecting your investments, you also need to give thought to these infrequent though high-impact extreme risks and the possibility of an "unknown unknown" - unforeseen events that come out of nowhere and leave strategies in tatters.

The report, for example, rates depression as a low risk even in the current shaky economic environment. It's something that could be expected once in 10 years based on current conditions, though if it did occur, it would have a significant impact on most investments.

Hyperinflation and sovereign debt default are both rated as very low risks (something that could happen once every 20 years from current conditions) but would also be high impact if they did occur.

Fortunately the report ranks a major war or killer pandemic as very, very low risk (likely to occur once in 100 years) though it notes these risks can't be seen in isolation.

A shortage of a critical resource, for example, would vastly increase the risks of war or a political crisis.

The report suggests a range of measures investors can take to mitigate some of these risks from holding more cash to diversifying or using derivatives. You can't protect your finances from all the bad things lurking out there and, let's face it, most of them will probably never happen. But it is important to be aware of the possible nasties and have a plan to deal with them.

Towers Watson says prioritising the risks and focusing on the "ones that can kill you" is a sensible first step - in the same way that most of us automatically insure our homes against events such as fire, even though they are unlikely to happen.