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Financial advice problems not uniquely Australian

Glenn Freeman  |  02 May 2018Text size  Decrease  Increase  |  
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Australians have watched with horror as the Banking Royal Commission uncovered findings of adviser misconduct at some of Australia's largest financial institutions.

Countless column-inches have been dedicated to this, from financial planners charging fees to dead clients, to billing fees for no service, and victims of poor advice fighting back tears in the witness box.

Sadly, we've seen this all before – on a smaller scale – with the Australian Securities and Investments Commission (ASIC) slapping major banks including Commonwealth Bank, National Australia Bank and Macquarie Bank with Enforceable Undertakings.

It could have been much worse. The Future of Financial Advice (FoFA) reforms introduced in 2014 put in place the Best Interest duty and introduced minimum education standards for financial planners. Though given the historical nature of most of the cases heard in the Royal Commission, these changes and others will come too late for the current cohort of mis-advised individuals.

While the efficacy of ASIC is a topic of ongoing debate, Australia's financial advice industry is one of the most highly regulated.

The FoFA reforms were first proposed by one side of government back in 2012. Some of its strongest consumer protections were very nearly removed by a new government, only remaining after the proposed changes were rejected in an eleventh-hour move by several cross-bench senators.

A key outcome was the removal of adviser commissions for investment advice. And while similar measures are in place in the UK, other markets like the US are more laissez-faire in their regulation of financial advisers.

In his latest column for Morningstar.com, John Rekenthaler wrote about the Securities and Exchange Commission's (SEC) new rules on financial advice. With some confusion even among the SEC's commissioners themselves about exactly what the lengthy report's recommendations entail, he asks what hope others have in understanding the US financial advice industry.

"The issue that prevents advisers from being viewed similarly to doctors and lawyers is education. Doctors attend medical school for four years, then enter residency. Lawyers undergo three years of law school. Brokers ... not so much.

"It is true that financial advice also carries a poor ethical reputation. However, although…ethics are not the primary problem. When polled, the public views lawyers as being just as ethically challenged as brokers," Rekenthaler says.

He also grapples with the distinction between the terms "broker" and "financial adviser". There is similar confusion in Australia, with the term "financial planner" not legally defined at law.

Rekenthaler believes there should be two tiers of financial advice, defined by education.

"The top level would likely not require as much training as a law degree and surely not as much as obtaining a medical license. "

Talking directly to the situation in the US, he argues the second, larger level of financial adviser would resemble that of today's brokers, "albeit with stiffer ethical standards".

"I see no problem with the current, modest educational requirements. Such advisers could mostly (or entirely) give solutions that were packaged by the home office. However, the fiduciary requirements would need to be raised to match those of the higher-end advisors.

"People don’t expect nurses to act any less in their interest than doctors do. The same logic should apply to financial advice," Rekenthaler says.

He suggests the line between these two tiers "must be clearly marked and made widely known to the investment public…and sanctioned and enforced by the SEC".

In closing, he proposes a "top tier of adviser" with minimum education standards and a single fiduciary duty for advisers to uphold clients' best interests – measures already contained in Australia's FoFA reforms.

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Glenn Freeman is senior editor, Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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