Simon's Blog

This event, a world first, is to be held in Taipei in April 2010.  It will coincide with the 11th (I think – there a re two a year) meeting of the FPSB Council.  It has a website: http://worldfpsummit.org/, and I understand this summit will definitely not be the last.

FPSB stands for Financial Planning Standards Board (http://www.fpsb.org/), a not for profit that controls the CFP (Certified Financial Planner) marks, sets standards for, and promotes professional financial planning outside the United States.  In the US the CFP Board of Standards does the same thing.  The two bodies work closely together and are very important to the 126,000 CFP professionals (about half inside and half outside the US) who are permitted to – and proudly – use the marks.

The Summit?  A small first step maybe, but another sign that financial planning (that is professional financial planning), whilst still in its infancy or childhood, is not going to stay there - like Peter Pan, addicted to the self deluding ‘make believe’ of children’s – or indeed these days adolescents’ (but that’s another blog) – games.

Financial planning is about helping clients achieve their life goals by helping them manage their finances.  Professional financial planning is doing this whilst – transparently and unequivocally placing their interests first.  The ‘client first’ rule is still a new one for FPSB, and a mind shift for many.  But it is vital for the journey towards adulthood.  We all love to laugh and play – and treasure these precious legacies of our childhood – but when it comes to business, adults mean business.

The business of a professional is knowing your stuff (competence), keeping that knowledge up to date, sticking to what you do know, inviting your peers to critique your work (avidly learning from their scrutiny), contributing to the development of others, all while earning a good income.  But more than any of these, more than anything else, the business of a true professional is the interests of their client.  Above and beyond any other consideration: first, last and always!

I’d love to be there in Taipei – but it’s a long way from Kiwiland.  Nonetheless I’ll be there in spirit: willing my global colleagues to accept those frightening and truly difficult challenges, to grin and bear the growing pains, the awkwardness, the self doubt of emergent adulthood, to ‘do what it takes’ to continue the all important journey from its confused and conflicted infancy to the rarefied air of high ground - and well-deserved recognition.

May I live to see the day!

It may be a big ask; but there may be no other way for the financial advisory profession to earn the trust it needs.  Ban commissions for investment advisers.

For as long as financial advisers accept commissions and other rewards from third parties for (supposedly) meeting the needs of their clients (a Tui ad coming on?) real and perceived conflicts of interest will destroy more trust than can ever be built up by the efforts of good advisers who refuse to be tempted to do the wrong thing.

 You may have seen an article I wrote addressing the historical cases and some of the worst effect of this conflict in the weekend press: http://www.stuff.co.nz/sunday-star-times/business/3083791/Heres-some-free-advice-for-the-advisers.

Sure: commissions are not the only source of conflicts of interest for financial advisers.  Fee-chargers who pad their hours, employees who oversell to hit their KPIs, and employers who put profits before people – all of these can be just as guilty of setting aside their first responsibility: to care for clients.

And sure: financial advice is not the only conflicted profession.  Lawyers and builders can also pad their invoices, dentists and mechanics can do unnecessary work; politicians – even bishops – can allow their focus to move from those they serve to lining their pockets or climbing to power tree.  Even doctors get referral fees from specialists, and are constantly wooed by the drug companies.

But in the financial services profession conflicts of interest can be particularly pernicious, and commissions are the largest source of these. 

Every profession faces a “knowledge gap” that separates the professional from the client.   The professional knows more than their client; otherwise why would they come?  This information asymmetry opens opportunities for professionals to abuse the trust placed in them.

But there are added opportunities for financial advisers to give in to self interest. You usually go to see your lawyer, your doctor, your mechanic or your accountant because you have to.  Not doing so can have very nasty short-term consequences.  And you know pretty soon afterwards if their advice was useful.  But it can be decades before the quality of financial advice can be judged – if ever.   This means that a good financial adviser also needs persuasive (sales) skills – at various times a financial adviser needs to make clients aware of needs they didn’t know existed, and risks that may never eventuate.  So the profession naturally attracts more than its fair share of persuasive types.

Where investments are concerned the opportunities for conflicts escalate.  Short-to-medium-term results are often greatly influenced by market conditions. The resulting volatility (up and down) tends to mask the effects of high fees and commissions for a long time – especially when things are on the up.  Human nature makes clients and advisers more interested in investments at these (usually wrong) times – and a 10% annual return after costs can look pretty darn good, even is the costs have eaten another 5%.  You might think the problem would show up when returns go the other way – but that’s when a persuasive adviser might be able to convince his or her unwitting client that this is all a result of market misfortunes – and that the best strategy will be to stay put. 

Which of course it might be, provided that the strategy is a good one, and the costs are not too high….   And how many investors really know what the costs and the risks are in the investment products they use?

All these things multiply opportunities for conflicts of interest to interfere with the objectivity required for truly professional advice.

In the end the only truly effective defence against conflicts of interest is the professional’s personal moral code.  So we will never see the end of them.

But surely it’s time the regulator got involved where suppliers and advisers have shown they are not able to make the change.  There may be nothing wrong with an tied agent or an execution only broker to accept commissions – it may be the most efficient way for this part of the market to operate. 

Ban commission for those who claim to make some or all of their living by advising members of the public about their investments.

It’s great to see financial literacy in the spotlight following the release (June 2009) of a second major survey commissioned by ANZ and the Retirement Commission (see http://www.financialliteracy.org.nz/). Financial literacy is ‘the ability to make informed judgements and to take effective decisions regarding the use and management of money’. But a meaningful improvement in levels of financial literacy may prove harder than expected. As an essential survival tool for today’s world school is the right place to start.  But (as others have said) people don’t usually become financially literate until they have some money to look after. What do you think?