Friday, November 7, 2008

What is wrong with FPA's direction on PROFESSIONALISM?

What is wrong with FPA's direction on PROFESSIONALISM?
8 November 2008
In Summary: The FPA is defining PROFESSIONALISM in terms of FORM and PROCESS. Unfortunately for a CONSUMERS, FORM and PROCESS do not deliver what they really need which is SUBSTANCE. CONSUMERS needs SUBSTANTIVE good advice which is in the CONSUMER's INTEREST.
So if the FPA's path to defining professionalism is not about serving consumers, whose interest is it in? The only answers that become obvious are:
That they are defining professionalism in terms that will enable a product sales business have the appearance of professionalism and respectability. Why might this be the motivation of the FPA? Because product distribution businesses dominate FPA membership.
That they are defining professionalism in a manner which fits the compliance needs of product distribution subsidiaries of product manufacturers - it is fits the way they run their businesses. In contrast to small dealers, these distribution businesses need tight PROCESS CONTROL to manage consistency of advice and compliance.

So in summary, what is wrong with the direction of FPA regards professionalism?
It encourages misleading and deceptive conduct as it will promote QUALITY in terms of PROCESS and FORM - rather than SUBSTANCE.
It enables unethical and poor advice providers to dress themselves up in the semblance of QUALITY advisors - which is very dangerous to consumers. Again misleading and deceptive.
It is will seek to define many forms of good advice found small dealers, whose environment allows for informal processes to deliver very high quality highly tailored advice.

Discussion:
My concern is how I suspect FPA defines what we do as financial planners. My impression is that I define my job differently to how I think the FPA does (if I take recent proposed FPA professional standards documents a guide to FPA thinking.)

I think the FPA thinks in terms of producing financial plans – the concept of which in my book is largely a product sales proposal which is very fitting for a product distributor – who largely did once-off product sales. That is not my business at all.

I give financial advice. When a client comes to see me, I seek to solve that part of the financial planning problem that the client is ready to solve. Over time:
Firstly, the way I solve it changes – because the client’s knowledge has changed to a degree that he needs and is ready for a more sophisticated solution AND
The scope of my advice broadens, as the client is ready to look at the broader dimensions of their financial trajectory.
And very often, the relationship with the client involves many many interactions each year – for some clients more than 50 interactions per year depending on the client’s needs. This aspect of the relationship changes dramatically the nature of the problem of how the strategy is conveyed to the client – and how it is recorded – which is an interesting challenge from a Corporations Law compliance perspective – that is an interesting problem in itself that I suspect FPA have never contemplated – because largely FPA lives in a different world – solving a different problem – or looking at compliance for a different style of client relationship.

So my concern is:
That FPA is in the process of trying to define what is good advice in terms of processes & form which creates outputs quite removed from what I do - AND
My impression is that FPA will be saying that this (FPA’s creation of how good advice is defined) is good – and that this will be something that is very comfortable for the product distributors AND FPA will be saying that everything else is bad.

So I think:
there are a bunch of very good competent, ethical financial planning businesses out there that are complying very well with the principles in Corporations Law etc and providing a great service to their clients, who will probably say that where FPA is heading does not fit the needs of their clients.
That there are a range of forms of good advice
That the key elements of good advice are found in law
the common law requirements re negligence, misleading and deceptive conduct, due care.
FSRA requirement that there was a reasonable basis for the advice AND the advice was reasonable in the circumstances. S945A.
FSRA requirement that SoA was “clear, concise and effective" s947B(6)
FSRA requirement "do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly" s912A(1)(a).
The ASIC Act 2001
Misleading or deceptive conduct. Section 12DA.
False or misleading representations. Section 12DB.
Requirements to apply due care and skill, and that advice is fit for the purpose. Section 12ED.
PLUS disclosure of commissions and information that might influence the advice, as required under FSRA - helping consumers make informed decisions and helping consumers recognise conflicted advice.
PLUS disclosure of any associations or relationships between the providing entity, any employer of the providing entity, the authorising licensee or any of the authorising licensees, or any associate of any of those persons, and the issuers of any financial products that might reasonably be expected to be or have been capable of influencing the providing entity in providing the advice.

The weakness in the direction that I see FPA travelling is that:
Is that it will seek to define good advice in ways that in effect it defines some forms of good advice as being bad. This is bad for consumers – and ultimately will be bad for the FPA.
That it focuses on FORM not SUBSTANCE. This is the same trap that FSR fell into, which is why FSR has been so problematic – taking us to the point where it appears Nick Sherry recognises the problem and will take a large knife to FSR.
That it would create a situation where potentially highly tailored advice is more expensive than it needs to be – and it seeks to impose a huge additional compliance burden on small dealers that leads to no consumer benefit.

Bruce Baker, Puzzle Financial Advice PH: 07-3371 8112 bruce.baker@puzzlefinancialadvice.com.au

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