Is experience worth more than a degree in financial planning?

21 September 2009

Amid the push to boost education standards in the financial planning industry, Ray Griffin argues maturity and experience will remain central to protecting the interests of clients.

As he stooped to avoid hitting his head on the overhead instruments on the ceiling, the cockpit lights reflected off barren ground. Instantly I thought: ‘That’s what I like to see — grey hair and not much of it.’

He was the pilot in charge of my latest Sydney to Tamworth flight and embedded within the grey matter under that shiny Friar Tuck crew cut was, presumably, very many thousands of flying hours in, I further assumed, all manner of conditions.

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Instantly, I felt more comfortable knowing that while the first officer was flying us up to Tamworth that Friday night, the more experienced captain was sitting in the left seat ready to take over if necessary.

That afternoon I was fresh from an initial meeting with my new Sydney clients, and as I considered my reaction to seeing the balding pilot take his seat, I wondered what my new clients’ very first impression was on meeting me for the first time a few hours earlier.

Would they have thought that I had the maturity and experience to manage their quite sizeable retirement portfolio? Had the very first sight of me in person met with their expectations? Indeed, what had they actually expected?

While the Australian Securities and Investments Commission (ASIC) very belatedly contemplates much higher minimum standards for financial planners and makes overtures in search of greater licensing powers — both extremely important pursuits — no amount of legislation can instil budding financial planners with the experience that only comes with time — years — in the job.

Make no mistake, much tougher minimum education standards are long overdue and really cannot come quickly enough. But there is no ‘bachelor of experience’ that could be installed into the curriculum of financial planning degrees.

So how does the financial planning industry better protect clients from planners with the educational ‘ticket’ but very little or no experience?

A perfect solution is elusive, but I can reflect on the early years of my career as a financial planner, which began in late 1989.

The licensee who first authorised me to practise conducted what would still be a quite stringent initial training and continuing professional development regime.

In addition, all advice had to be in writing — note this is 14 years before the Financial Services Reform Act — and planners were not permitted to sign advice letters to clients until they had been signed first by a director of the licensee.

As a so-called ‘boutique’ licensee, it had around 30 representatives and was particularly concerned with the quality and integrity of the advice that went out on the company letterhead.

Having deferred university after leaving high school to pursue a sporting career, I was not degree qualified.

Note that in 1989 ‘degree qualified’ meant a commerce, economics or accounting degree because there were no financial planning degrees anywhere in Australia.

Yet one of the greatest good fortunes of my life was being appointed a representative of that licensee in 1989 because of the professional grounding and guidance I received while working with them for more than three years.

In many respects, that company protected clients better and looked after me through the strong supervision and mentoring resources it provided.

In the intervening 20 years, sadly, way too many financial planners have had nowhere near enough supervision and mentoring. This has to stop.

For a long time now terms like ‘mentoring’ and the medically analogous ‘internship’ have been proffered, however, nothing of any real substance or scale has emerged.

One-week courses for RG 146 can only exist because it is the minimum required by law.

At one ridiculous extreme, RG 146 notes that a trainee planner — someone who does not need to meet the already low minimum training requirements — is able to carry out certain client-related functions, such as data collection and prepare Statements of Advice, as long as a person who does meet the minimum training requirements remains responsible for the advice.

In theory, someone with a week’s so-called training could supervise a trainee with no training completed.

In the list of nine ‘skill requirements’ within RG 146, there is no reference to experience or supervision. In relation to ‘proposed new advisers’, RG 146 requires that they are ‘properly supervised’, but what does that mean in practice?

The legislators have taken a clinical, prescriptive approach to product knowledge within RG 146, yet fallen short of defining what supervision actually means and for how long a new planner must be supervised?

To be fair, while I suspect there is little real world, face-to-face financial planning client experience resident within the regulator’s ranks, it is extraordinarily difficult to prescribe what supervision really means.

One planner’s adequate supervision might be inadequate for another new planner who is more about product sales and commissions than what is right for the client.

That notwithstanding, there is a fix for that: ban all commissions on investment products.

Product knowledge is important.

However, it alone is fundamentally inadequate to properly prepare a new planner to give professional advice to clients.

The skill and knowledge required to interpret changing economic conditions and their impact on client portfolios are not detailed within RG 146.

Knowing when, as a planner, you need to ask more probing questions of a potential client — when the answer to a question leads to more searching questions — is not part of RG 146.

Gaining the knowledge and experience to carefully counsel clients who always think they should have more in the share market when it’s rising and less when it’s falling, really only comes with time and learning how to do it properly.

These are just a few random examples of professional skills that cannot be learned through training courses.

In their quieter moments, I suspect compliance managers for large licensee institutions with capital city head office departments would admit they cannot confidently supervise all their representatives.

A planner in suburban Melbourne is as remote, from a supervision perspective, as a planner in Broome, Western Australia — it’s impossible to look over every shoulder and monitor every client meeting, every day.

But for the sake of their current and future clients — and for the sake of the reputation of the financial planning profession — licensees need to devote more resources to mentoring new planners.

There is a lot that financial planning businesses can learn from the law, medicine and, indeed, commercial pilot training.

Those professions have planned, graduated levels of practitioner advice or involvement. In the case of medicine, education requirements alone are not enough before being permitted to single-handedly treat patients, and a trainee pilot cannot be let loose to fly a planeload of people.

There are parallels in financial planning — a person’s life savings should not be entrusted to someone who only has product knowledge and who only knows how to sell investments, even if head office is ticking the compliance boxes.

Even if it were possible for the regulator to do so, licensees should not be waiting for it to define what adequate experience really means.

Establishing adequate supervision processes for new planners should be a standard feature of a firm’s culture — a feature of its business values.

Responsible officers and principals should be instilling supervision and mentorships as principles that rank high in the ways in which a firm sets out to protect clients. Note that this is about protecting clients in the first instance, not about protecting the firm’s licence.

The cultural issue here is that by getting the quality of advice right for the client, as a fait accompli the licence is better protected. The rush to get new funds under management should rank as a distant second to the need to deliver quality professional advice.

This is something financial planning licensees should be instilling as part of their business culture.

A failure of culture is almost always evident in business failures, and when the entrails of the collapses of groups, such as Storm Financial for example, are eventually exposed, there is little doubt that the firm’s culture will be questioned.

Clients expect their financial planner to know a whole lot more about matters financial than they do themselves.

They expect their financial planner is not fresh out of a one-week product knowledge course or, for that matter, newly graduated from a year of study. They really want to know that their planner has some ‘grey hair’, metaphorically speaking.

Really, that’s no different to what they expect of the people who give them health advice or command the aircraft they fly in. Clients instinctively know that experience counts — and counts even more when uncertainty arises.

Granted that balding, grey heads appeared to inhabit the ranks of Storm executives, and admittedly, grey hair is no cure-all for gaining knowledge and wisdom in any profession, financial planning is yet again behind the proverbial eight ball of public perception.

We owe it to the community to begin to get things more right than we have in the past — getting planner supervision and mentoring right is an extremely good place to start.

Ray Griffin is a director of Capricorn Investment Partners.

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