A serious rift has developed between representatives of consumers and the financial planning industry over the release of a damning report criticising the quality of financial planning advice.
The report, released this week, is the result of a year-long investigation into the planning industry by the Australian Consumers’ Association (ACA) and theAustralian Securities and Investments Commission(ASIC).
The chief executive of the ACA, Louise Sylvan, says the report’s findings prove the overall quality of financial planning advice available to consumers is “abysmal” and that urgent reform is needed to protect investors from major structural weaknesses in the industry.
But the chief executive of theFinancial Planning Association(FPA), Ken Breakspear, has accused the ACA of colouring the report with an unsubstantiated “implied negative motivation” on the part of advisers, and has rejected all calls for a major overhaul of the industry.
The investigation involved the ACA and ASIC recruiting consumers who secretly approached advisers to obtain financial plans, which were then tested by a panel of industry experts.
The report says only two out of a total of 124 plans were considered ‘very good’, while 23 where considered ‘good’ and 36 ‘okay’.
The remaining plans were considered ‘borderline’ or worse, including 33 which were rated ‘poor’ or ‘very poor’.
The report says those plans rated ‘poor’ or ‘very poor’ were grossly inadequate, while some in the ‘borderline’ category contained major deficiencies.
“I think it is really an abysmal set of results. I am basing that on the fact that the industry has had a considerable amount of time to get itself together in terms of meeting the expectations of consumers,” Sylvan says.
None of the planning groups involved in the investigation were good enough to recommend, Sylvan says, although she is especially critical of the big four banks.
The banks, which dominate the financial planning industry, did not feature heavily amongst plans rated either ‘good’ or ‘very good’.
“The point of this test was not to have the industry running scared. We wanted to be able to direct consumers to advisers who would do good by them. But based on these results, we are unable to make any recommendations,” she says.
“This is not about emotion or hyping the results. Your chance as a consumer of getting a very good plan is something like 50 to one,” she adds.
The report found too many planners put their own interests ahead of those of their clients by producing generic plans with careless errors and insufficient attention to detail.
Others made fundamental mistakes by not meeting basic regulatory requirements, like failing to provide consumers with an Advisory Service Guide (ASG) — a failure that cost planners 15 per cent of their score in the study.
The FPA has questioned the high weighting given to the ASG in the marking of the plans.
Breakspear says the failure to provide an ASG is a “breach”, but questioned whether it was a “critical error”.
Sylvan disagrees.
“If planners are prepared to break the law, you have to wonder what is happening in the industry. If they are saying that [the ASG is minor issue] then the industry has a serious attitude problem,” she says.
The ACA has also hit back at the FPA’s record of policing its own self-imposed standards. The FPA requires its members to comply with its Rules of Professional Conduct, but the study found there was significant non-compliance with the rules by FPA members.
“The FPA has not disciplined anybody and maybe that is sending a message to the industry that it does not take standards seriously,” Sylvan says.
ASIC came out strongly this week to back the report and its findings.
The regulator’s executive director of consumer protection, Peter Kell, issued a stern warning to anyone looking to downplay the report.
“Anyone out there in the industry who is not taking the results seriously would not be understanding the issues seriously,” he says.
Kell says the report raises serious regulatory issues for financial planners and their dealer group, particularly given that the quality of financial plans was shown to vary greatly across different advisers working for the same group.
“The survey is a wake-up call to the financial advising industry that improvements are needed and in particular, that more consistent quality needs to be achieved,” he says.
The regulator is also planning to act on individual financial planning groups directly as a result of the report’s findings.
Kell says ASIC will examine each of the 10 groups that were named in the report as having produced ‘very poor’ plans.
According to Kell, ASIC is already in talks with at least one group about “significant compliance issues”.
The FPA has cautiously welcomed ASIC’s use of the report’s findings as part of its supervision of the industry.
“It is constructive to give feedback to firms that have been named in the survey. Our view would be that there should be a constructive conversation with the purpose of understanding better the systems that the firms have in place. I am confident that ASIC will take a constructive approach and give feedback to individual firms,” Breakspear says.
However, ASIC has indicated it is prepared to go beyond just constructive feedback with groups named in the report.
“In the past two years, ASIC has removed 62 financial advisers from the industry, and a further 10 have received jail terms. We will be carefully assessing the information from the survey to determine whether any enforcement action will be taken,” Kell says.
ASIC has also launched what it calls a campaign to improve the quality of financial planning advice coming from stockbroking firms. The report found that financial plans prepared by stockbrokers scored poorly compared to other industry sectors.
But the ACA is calling for even more definitive action as a result of the report, and plans to use its findings as a platform to campaign for radical reform of the financial planning industry.
One of the report’s most damning findings is that too many planners recommend investments without justification. The ACA says this was “seemingly to earn the planner commissions”.
The FPA has rejected this claim.
“There is no evidence as far as I can see in the report that demonstrates that particular motivation. There is an injection of implied negative motivation, which cannot be substantiated without talking to the advisers themselves,” Breakspear says.
“I see no urgency for reform at all. The Financial Services Reform Act (FSRA) is soundly structured. We’ve had our reform. It is now about implementing and applying that,” he adds.
But Sylvan says the fact that planners “who earn a living selling products also act as impartial financial advisers” is a sign of serious “structural corruption” in the financial planning industry.
She says the entire industry needs to be overhauled, with the process of product selling separated entirely from the idea of independent financial advice.
“I think consumers at the moment can’t go and see a financial planner with any confidence of getting a good result,” she says.
“This test, which has produced a disappointing result, raises the question of whether the industry can continue to be structured the way it is.”
