1.7 Further Observations

The proposed changes to lift the professional, education and ethical standards of financial advisers represent a further important step towards making financial advice a profession. Once these changes have taken effect, it may be possible to ask again whether the financial advice industry has truly changed from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice.

But, in my view, without more being done, the answer will be no.

In the next three sections of this chapter, I deal with three matters that will need to be addressed before the provision of financial advice can truly be regarded as a profession.

First is the charging of ‘fees for no service’. As I said in the Interim Report, charging for what you do not do is dishonest. Although this should have been obvious to everyone, the practice of charging ‘fees for no service’ has been endemic in the financial advice industry. Until satisfactory steps have been taken to deal with those involved in the charging of ‘fees for no service’, and to ensure that it does not happen again, the financial advice industry will lack the public respect and trust that is a necessary aspect of any profession.

Second is poor advice – which, too often, is the result of the conflicts of interest that continue to characterise the financial advice industry. Other professions are not so pervaded by conflicts of interest and do not have such a high tolerance for the continued existence of conflicts of interest. Other professions do not have such faith in the notion that conflicts of interest and conflicts between duty and interest can be effectively managed. Until something is done to address these conflicts, the financial advice industry will not be a profession.

Third is the disciplinary system for financial advisers. One hallmark of a profession is the existence of a credible and coherent system of professional discipline where the ultimate sanction is expulsion from the profession. While ASIC now has the power to ban financial advisers from providing financial services, the existing disciplinary arrangements for financial advisers are fragmented, and hampered by inadequate sharing of information.

Making financial advice a profession is important not merely for its own sake. It is a necessary step to protect those who seek financial advice. As I said above, clients place their trust in advisers on the basis that they will behave like professionals.

Two different solutions present themselves. The first is to have advisers act as salespeople, and be clearly identified as such. The second is to have advisers act as professionals. Past reforms have favoured this second course, and it is now too late to undo those reforms. Even if it were not too late, it is the course that I favour. Leaving the sale of complex financial products entirely to intermediaries who have no obligation to act in the interests of customers is likely only to lead to further poor outcomes for consumers of financial products. It will also leave Australians without access to financial advice. While finishing the transformation of financial advice to a profession will take time and effort, it is not impossible.

I therefore turn to consider the three matters that I believe will need to be addressed before the provision of financial advice can truly be regarded as a profession.