Learning about education: The debate around FASEA’s proposals

As the Financial Advisers Standards and Ethics Authority (FASEA) drip feeds the financial services industry information about its proposed education reforms, many advisers are confused and angry.

The reforms themselves seem inevitable though, even if the current consultation period, which ends on 29 June, this year, leads to compromises.

The Minister for Revenue and Financial Services, Kelly O’Dwyer, said last week that FASEA’s regime was vital.

“Repeated instances of inappropriate or just plain bad advice has significantly eroded trust and confidence in the financial advice sector,” she said, saying this made the reforms “necessary”.

For January this year, for example, the Australian Securities and Investments Commission (ASIC) found that 75 per cent of financial advice given was not legally compliant.

According to FASEA chief executive, Deen Sanders, this is evidence of why the reforms are needed to respond to “today’s problem”.

With the Government unlikely to step away from the reforms and, as Mike Taylor has written in this issue of Money Management, financial advisers are low on political friends to fight their battles in Canberra, this suggests the changes are here to stay.

A profession not an industry

Even if the changes are unwanted, they will help move financial advising toward professionalisation.

Currently, Associate Professor at Deakin University Business School and certified financial planner, Adrian Raftery says, financial planning is really an industry rather than a profession.

“If we want to be seen as a profession, then we have to do the things that a profession requires, and that includes degrees and ongoing education,” principal of Berry Financial Services, planner, and former chairperson of the Financial Planning Association (FPA), Julie Berry said.

Financial planning would not be the only industry to professionalise through clearer educational and ethical standards.

As Berry pointed out, both the accounting and legal professions successfully took that path, so perhaps it is the financial advice industry’s turn.

FPA chief executive, Dante De Gori said that while, in that sense, the industry wasn’t trying to create a new path to professionalisation, they were trying to fast-track getting there.

While the industry did make a move toward professionalism in the late 1990s with Regulatory Guide 146 from ASIC, the level of study required had not been improved upon or enhanced since.

Raftery believes that the industry’s treatment of the regulation, and the spate of poor educational programs that cropped up in its aftermath, actually damaged its development.

“Some providers bastardised RG146 and made a farce of it,” he said. “We need to lift our game.”

De Gori reinforced this, saying that “everyone agrees RG146 was rubbish” and the reforms would help the industry start afresh.

For a start, requirements placed on education providers would be clearer, making the low-level institutions that took advantage of RG146 less of an issue.

While Raftery said some elements of the industry could be seen as professional, there was a need for more consistent standards.

Aspects of FASEA’s regime could provide this; the Authority has confirmed, for instance, that all advisers will now need to complete an ethics subject, hopefully providing reassurance for consumers.

Sanders reinforced that such a move toward professionalisation of advice standards could be good for the industry.

“This is an opportunity. It’s a conversation on how we grow the industry,” he said at the 2018 SMSF Association Conference last month.

“Financial advice is extraordinary. It’s a deep relationship with your clients and it’s important. It’s important we get it right.”

Sanders said that ultimately the advice, professional, standards and governmental communities were in “a compact together” to ensure that all Australians could have the confidence to seek financial advice.

Talk it out

A consistent complaint from the industry has been the lack of clarity and communication it has perceived to surround FASEA’s proposals.

Berry, for example, feels that there is a lack of clarity around the proposed professional year.

It’s not clear when people would need to complete it (could it be, for example, part of a financial planning degree or would it need to come after?) or what tasks they would be allowed to undertake during it.

Even how the proposals had been perceived by those they would apply to has been problematic.

Berry said that some more mature advisers had found the proposals insulting, as though the authorities were saying, because they didn’t have degrees, the advice and experience they had given clients wasn’t professional.

While not the fault of FASEA, she does believe that this was an issue of messaging.

“And I don’t think we should have ever let it get like that,” she said. “It should’ve been more like, here’s another piece of the puzzle we want to put in there to improve it.”

More clarity and understanding could have stopped some of the doom and gloom threats from advisers to exit the industry, too.

“I really do think that if we had more certainty [about what FASEA is proposing] there would potentially be less people thinking of leaving,” Berry said.

Sanders agrees that there had been issues in the reading of the Authority’s communications.

He said that a lot of the information sent to stakeholders had been subject to both accurate and inaccurate interpretations.

The rumours surrounding a 10-year rule was one such example, with Sanders clarifying at the SMSF Conference that no such proposal had ever been FASEA’s policy.

Despite industry discussion and media coverage suggesting otherwise, Sanders said the proposal had only been referenced as a note regarding academic policy for financial institutions.

The Authority clarified last week that it would recognise all relevant degrees, no matter how old.

Sanders encouraged advisers to read communications from FASEA themselves in future, rather than relying on the media or other people to provide interpretation.

De Gori went further, saying that to truly understand the reforms’ scope and intent, advisers should read the legislation and explanatory memorandum that enabled their creation.

Sanders also said that the Authority would communicate information more directly going forward to try to prevent further misunderstandings, rather than the “more subtle way” it had been shared in the past.

Traditionally, advocacy and education about reforms as significant as those put forward by FASEA would have been the realm of industry associations.

Synchron director and risk adviser, Don Trapnell, however, believes that representative bodies have failed to do so as they stand to benefit from the reforms.

“They will make a squillion dollars on the courses they promote themselves,” he said.

“Their interest has nothing to do with the education of advisers. It’s got to do with filling their pockets.”

De Gori countered this by saying that FPA’s priority had always been the profession as a whole “first and foremost”.

He said that its role was “very much to set and enforce standards … and advocate for the profession.”

The FPA believed that the best way it could do so was through building up the profession through education.

“A big issue facing [the financial advice industry] is with reputation, image, and how the Australian public perceives it,” De Gori said.

While 2.7 million Australians utilised financial advisers last year, another 3 million needed advice and did not seek it.

Although not the only reason, De Gori said that a lack of trust was part of the reason it wasn’t sought.

By improving education requirements, which the Association has advocated for years, he believed changing this was possible.

Discussion of what shape those changes will ultimately take is still needed though.

As Raftery said, there is a chance that once the reforms pass, the standards will not change for another 25 years.

Should advisers not submit their suggestions to FASEA while the guidance statements are in draft form then, as they are now, there will be very limited scope to change the final rules.

“It’s too late to talk once they have finalised it,” Trapnell said.

Goodbye tension, hello pension

One of the most discussed impacts of increased educational requirements has been the predicted mass exodus of older planners from the industry.

Predictions of the volume of the departure have greatly differed, but a loss of approximately 25 per cent of advisers is expected. According to Deakin University, 21 to 34 per cent is most realistic, while CoreData had more optimistic findings of 16.5 per cent.

The central reason, according to Trapnell, is that when older planners have the option of either retiring or upskilling, most are going for the former. When they are close to retirement already, many wonder if it is worth investing time in further study.

Trapnell said that even with best-case scenario outcomes of a 25 per cent loss, it will still be a disaster.

“All that experience will be gone, and we are so frightened of that.”

Raftery said though, that some negative impacts were inevitable in the push for professionalism.

“The reforms aren’t perfect and it’s very hard to legislate for all. There’s going to be some casualties along the way.”

He said that the need to undergo further training should not scare or surprise planners.

“The amount of moaning they’ve [planners] have been doing, in some ways its unprofessional,” Raftery said. “If you want to be a professional, sometimes you have to do the hard yards.”

Lifting education standards has been discussed since the late 90s, and the current reforms have had a lead-in time of nearly a decade since the legislation was first drafted.

As a result, Raftery said, planners should’ve been prepared for the reforms and have ample time before 2024 to become qualified.

He also said that the study itself would not be too arduous for planners, so they should not be frightened off doing it.

“I don’t think advisers should be spooked about the study – the graduate diploma is fairly easy content and is in an area that they should have knowledge on, so it’s merely confirmation rather than trying to teach them something brand new.”

In an announcement last week, FASEA confirmed that many planners would be needing to get a graduate diploma.

There would be greater recognition of prior experience to gain subject exemptions though, and some planners with appropriate qualifications would need to only do three birdging courses, on the Corporations Act 2001, FASEA Code of Ethics and behavioural finance.

These are not bad things for planners to have to learn about; according to Berry, corporations law and ethics are topics that financial planners work with every day, so they do need to be well understood by the industry for it to be a profession.

As De Gori pointed out, advisers are going to be bound by the FASEA Code of Ethics, so they ought to be sure they understand it.

De Gori said that an example of the benefit of the reforms was in the corporations law requirements, which would hopefully clarify how advisers understood the best interests duty.

“There is a big gap between what that obligation is and how advisers actually [view it].”

In reality, it is not what advisers may perceive ‘best interests’ to be, but rather a statutory duty, the elements of which are prescribed by legislation.

With ASIC releasing guidance on meeting the duty and case law increasingly developing in regard to its interpretation, it’s vital that advisers clearly understand the obligation it imposes.

Raftery is also keen to work with the authorities to create ways for more experienced planners to become qualified through study that may actually prove useful to them.

If FASEA could be persuaded to move away from treating a graduate diploma as its instrument of choice for qualification of existing planners though, which prescribes broad subjects at a basic level, planners may be able to get more out of their education.

Raftery said that alternatives such as specialised subjects at higher levels and research projects that utilise current planners’ knowledge bases and expertise could be more useful.

This could help mitigate some of Trapnell’s concerns, which reflect those of many in the risk advice sector, that they would be required to learn about areas which were irrelevant to their work.

De Gori disagreed with this, saying that all people working in financial advice could benefit from learning more about the various sectors.

Whether superannuation, risk, planning or even aspects of investments, advisers’ clients would have an interest in them all, even if that was not the topic on which they were seeking advice, so those assisting them should understand their effect.

‘But I’ve already studied’

An obvious point of contention is the extent to which past experience, including continuing professional development (CPD) points, should count toward the new requirements.

While experience is near-impossible to quantify and could therefore not be reliably counted, De Gori believed that more education needed to be recognised.

Improving this is a priority for the FPA while the reforms are still open for consultation.

“We need a way of demonstrating respect and acknowledgement of what people have already done,” De Gori said. “We are not questioning that we need to get to a degree standard, but how is one’s existing study … being counted towards this.”

Although some study, such as much of what occurred under RG146, should not be considered, the FPA said that many advisers had undertaken work that could and should be taken into account.

Even what qualifies as a ‘relevant degree’ under the reforms is not clear. Will it, for example, actually resonate with what people have studied and universities offered?

De Gori said that this was unclear, but it was important to use the consultation period to look into this and other prior education acknowledgement.

What about the clients?

As planners and advisers get their heads around the reforms, and either upskill with further education or leave the industry, there will be clients who still require their services.

There may be a gap then, between the old guard leaving or further qualifying and new recruits picking up their roles.

“Who looks after the clients when the mature planners step off and the newly educated planners aren’t ready?” Berry asked.

This impact of the reforms could be worsened if young people are not entering the industry at the same rate that more experienced planners are leaving.

According to Trapnell, no-one decides to go into risk advising when they are 17.

Rather, “most people drift into it as they gain understanding and information” about the sector from working in different roles.

Under the current proposals, he said that there would be limited scope to train in something outside of commerce and then swap easily into insurance or financial advising.

Raftery said that Deakin University was trying to talk up the employment options of financial planning, especially in comparison to more traditionally popular ‘vocational’ pathways such as accounting or law, to try and encourage people to take up planning earlier.

While it was not always their first major, he said that many were adding it on to their degrees as a second specialisation once already at uni, with Deakin experiencing a 57 per cent increase in undergraduate enrolments in the discipline since 2016.

Berry pointed out that even having financial planning options available and visible at universities might help increase the amount of young people entering the field.

“Nobody is going to wake up and want to do it if it isn’t there, but if it’s on offer … maybe, just maybe, they might pick it and we might see some younger people come through.”

There will inevitably be a gap though, as new planners need to gain experience to be able to capably replace their seniors, and this may offer an opportunity for organised planners.

Raftery observed that there could be cheap financial planning books on offer when the reforms come into force, with the chance to acquire very cheap businesses with clients that are free, as advisers leaving the industry will be leaving them open.

Advisers need to be sure not to leave their own education too late to take advantage of this break though.

“If they’re busy studying because they left it to the last minute, they’re going to miss out on growing their own business exponentially,” Raftery said.

You get what you give

Ultimately, the worth of the reforms to advisers will depend on the approach with which they personally take on the new requirements, considering that reform is inevitable.

“You could go into it with the attitude that you’ll get something from it” and you probably will, said Berry.

Raftery believes that the education options on offer will contain “nuggets of gold for individual advisers” and soft skills such as writing and problem-solving that could improve what they offer clients.

Those that embrace the opportunity will be those who become the best professional advisers.

“Any true profession is only as good as the people [in it], and I think that those who stay the journey and truly embrace the standards in trying to be the best advisers they can be … will collectively lift everyone up,” Raftery said.