The controversial decision by the Federal Government to water down the Future of Financial Advice (FOFA) legislation highlights a series of misunderstandings about finance.
At first glance, the proposed wind-backs seem extraordinary. As Peter Martin commented in the Sydney Morning Herald the Government is proposing to remove the catch-all requirement that advisers act in the best interest of their clients. He adds that the changes 'will also re-allow sales commissions and other forms of conflicted remuneration where advice is general in nature'.
The major banks will be the beneficiaries. Four out of five of Australia's 18,000 financial planners are owned by a bank or insurance company. In effect, they are salespeople for the banks' wealth management platforms. Making this explicit to the clients, and requiring financial planners to act in the interests of those clients rather than of the platform provider, is apparently a step too far.
The fact that the industry's lobbyists are pushing for these changes, and will probably get them, demonstrates that this is not a profession. Imagine if a doctor wanted the right to act in the interests of pharmaceutical companies rather than patients. It would be grounds for sacking. For lawyers, not acting in a client's interests is grounds for disbarment. Accountants have similar legal requirements to do what is right for their clients.
This action confirms that financial advisers, like stockbrokers, are just bookies in nice suits. They are spruikers rather than people possessing any special knowledge. There is no point establishing a professional code of conduct for them. They are not professionals.
In a sense, that is a welcome revelation. Perhaps the best thing to come out of the current controversy would be for clients to understand that they are not receiving 'advice', but a sales pitch cloaked as advice. Much of the problem derives from people believing that their financial advisers have some privileged knowledge about the markets and investments. Financial advisers are only too happy to promote the fiction, using complexity to create the illusion. Clients are gulled into believing that because the advice sounds technical, it must be right.
It's worth asking what kind of service financial advice is. Financial advice falls into two very different categories. One is the administrative requirement, mainly tax and accounting law. This kind of advice is black and white, either right or wrong. Financial advisers may be able to give sound directions to clients, but it is really a role for