After the demise of FoFA, what are the prospects for financial advice? Perhaps it opens the way for deeper and more sustainable reforms in the financial advice industry. Rather than FoFA we need FIFA: actually fixing financial advice.
At the moment when you walk into a financial adviser’s office too often the experience is something like this. A smiling 25-year-old in a new blue suit shakes your hand and sits you down in front of his computer.
After some small talk he asks for your vital statistics, your income, your assets and so forth. Then he intimates that your current investments, superannuation and insurance are clearly inadequate but he will get back to you soon with a plan.
After you leave, the computer spits out a plan for you to maximise your income over the next few years by borrowing and investing in certain managed funds whose brilliant returns are indicated by the cheery upward sloping lines in the glossy brochures stacked on the adviser’s desk.
Of course, as a prudent person you want to insure your new bright future against any threats, using the policies whose brilliance is elaborated in the other pile of glossy brochures on the adviser’s desk. Another meeting and you are signed up and on your way to your new wealthy future.
There are several problems with this. The first is that the low status of financial advice, somewhere below used car salesmen and real estate agents, means that our 25-year-old is unlikely to be at the top end of the profession.
The ease of making money in financial advice in recent years means success is no indication of ability. Secondly, the training of financial advisers is completely inadequate, as is ASIC’s RG146 requirement to sell financial advice in Australia.
This has been widely recognised, including in the recent parliamentary inquiries, and reforms such as mandating a relevant degree are under discussion.
The main professional body, the Financial Planning Association, has taken the lead on improving the status of the profession by upgrading training requirements. The other professional body, the Association of Financial Advisers, only requires three years’ experience to become a practitioner member.
A third problem is the incentive structure in the industry. As well as plausibly looking like it will maximise your income, the experience sketched above maximises commissions for the adviser, both by churning you on to the adviser’s favoured products, and by gearing you up to maximise the investment base on which the adviser earns commissions. Even where commissions are not involved, the promotion prospects of the adviser are closely linked to the revenue they bring in. This problem has been widely recognised but there is less agreement about how to fix it.
In my view senators Jacqui Lambie and Ricky Muir were right to vote down the proposed change to the requirement that an adviser act in the client’s best interest.
The large financial institutions plead that restricting commissions would mean fewer Australians get financial advice, because they would have to pay upfront for it. Perhaps we could keep some commissions but have more transparency and link commissions to the performance of the investments the adviser recommends. Perhaps advisers could even share in losses. There’s nothing like having your own money on the line to focus the mind; it’s far more immediate and powerful than the threat of prosecution for extreme failures.
However, the biggest problem with the experience sketched above is that the financial advice takes no account of what is most important to people. Maximising income is seldom the main game for Australians. Even among my professional economist colleagues, recent empirical research on the link between income and happiness is showing how tenuous the link is.
Relationships, meaningful work, health and a framework to make sense of life are just as important. Few of us want to accept the life priorities of the computer on the 25-year-old’s desk. The background and training of financial advisers leave few of them with the sensitivity and skills to go beyond the computer program and tease out of what is most important to us, and then to align the financial plan with this.
Moreover, people tend to see financial advisers at turning points or stressful times of their lives such as divorce, death of a loved one or business failure. We need advisers who will not take advantage of vulnerable people at these times, and advisers who have the sensitivity and skills to help the client go beneath the emotional storm to work out what their deepest concerns are and compose a plan on this basis.
I’m not suggesting that financial advisers become the client’s therapist, but enough counselling skills to recognise how the conversation about finances is affected by the current distress, and the skill to recognise when they need to be encouraged to seek other help would be very good.
Paul Oslington is Dean of Business at Alphacrucis College and Adjunct Professor of Economics and Theology at the Australian Catholic University
This article was first published in The Australian. Reproduced with permission.