In these articles, two experts provide their (sometimes divergent) views of topics with which licensees and advisers sometimes struggle. They offer their opinions, experience and occasionally some insight. Feel free to join the debate and offer your commentary.
A clearer view of conflicts
“Speaking on a panel as representative of the Ethics Centre and not in his capacity as a FASEA board member, Longstaff made sense of the Code of Ethics and its position next to law and that is that as an adviser you cannot have a conflict of interest…. ” — Sharpe, T (2020) Code trumps Corps’ Act on conflicts: Longstaff Professional Planner June 9,2020
MARIA: Standard 3 of the FASEA code of Ethics expressly states that an adviser must not advise, refer or act in any other manner where you have a conflict of interest. In the words of Dr Simon Longstaff, it was intended that the Code of Ethics go beyond existing law, in order to address what was seen as shortfalls. Whilst I accept that the FASEA code of Ethics is itself a legislative instrument that has a force of law, prior to January 1st 2020, Corporations law on its own, allowed for a conflict of interest to be managed.
I think Dr Longstaff’s view is somewhat draconian.
Small to medium licensees are being punished for the cultural failures of the large institutions and what was perceived to be cosy relationships with the regulator. Had the existing laws been applied over time, rather than the significant number of ‘undertakings’ issued, the industry wouldn’t be in the situation it is.
Whilst I’m not opposed to the code, and I can see many benefits, another costly statutory body which does not allow advisers to manage their conflicts of interest I am convinced is also not the answer. The removal of egregious conflicts was no doubt warranted however, introducing a blame system will mean that we end up with a code that will serve everyone, but not service everyone well.
SEAN: I hear you, but I don’t think it’s reasonable to suggest that small to medium licensees are being “punished for the cultural failings of large institutions”.
I agree that large institutions failed – profoundly and publicly – to manage conflicts of interests and duties in a practical and effective manner, but the broader advice industry has manifestly failed to consistently reconcile commercial imperatives and professional obligations.
It’s not just at the larger licensees.
The Royal Commission and the popular press have highlighted numerous examples – from Henderson to McMaster to Nguyen – where clients’ interests appear to be less important than the commercial interests of the licensee or adviser.
I think that we won’t restore trust in the advice profession more broadly unless we more practically, and more effectively, identify and address conflicts of interests and duties.
Back to your point though, do you think conflicts are generally well managed?
MARIA: I take your point about our industry, but I do think conflicts are generally better managed than Longstaff acknowledges.
For example, I recently reviewed advice provided by a Financial Adviser who was also a Mortgage Broker.
He was contacted by a single mother who was working full time, trying to piece her life together post-divorce.
The adviser worked with her over a period of years to establish a workable budget, extinguish consumer debt, save a deposit for a home, restructure her personal insurances and ensure that the investments in her low balance superannuation fund were optimised.
He also arranged her loan and committed to provide her with ongoing service.
The revenue generated from her loan paid for the ongoing advice on her super, insurance and debt-reduction strategy.
In this instance, the adviser managed, rather than avoiding the conflict, and the client is significantly better off as a result of his advice.
Isn’t this a good example of a conflict which can be a force for good?
SEAN: In the hubbub of the Royal Commission, the public lost focus on the fact that most financial advisers work ridiculously hard to improve their clients’ lives and help them achieve their goals and objectives.
I see innumerable examples of this happening and I remain convinced that advice changes lives.
FASEA Standard 3 won’t compromise that commitment; it simply requires advisers to avoid any conflict between their personal interests and those of their clients.
It’s dangerous to generalise from specifics, but your example is a good one. It seems to suggest that conflicts can be managed in a way that benefits clients.
Unfortunately, the financial services industry has profoundly failed to properly manage systemic conflicts. As Commissioner Hayne observed
“too often conflicts between interest and duty are ‘managed’ in a way that coincides with the interests of the party who owes some conflicting duty or has some conflicting interest”
— ROYAL COMMISSION INTO MISCONDUCT IN THE BANKING, SUPERANNUATION AND FINANCIAL SERVICES INDUSTRY INTERIM REPORT, 28/09/2018 PAGE 323
Advisers, and Licensees, can successfully manage the conflict between their personal interests and their duties to their clients, but unfortunately it does not appear to be the norm.
The Code is an aspirational standard designed to be a lever to move financial product advisers beyond compliance and disclosure.
It’s important to appreciate that although advisers need to comply with Standard 3, the FASEA Standards don’t apply to the Licensees. Licensees can continue to manage conflicts in accordance with the law while their advisers are obliged to avoid those same managed conflicts. In my view, as difficult as implementation might be, we need to move beyond systemic conflicts if we’re to be successful in restoring trust and building an advice profession. The FASEA Standards seem to tacitly acknowledge that advisers, and not Licensees or their management teams, are the gatekeepers best placed to deal with conflicts of interests and duties.
The previous example aside, why do you think conflicts need less attention than FASEA suggest?
MARIA: I’m not suggesting that conflicts of interest aren’t a problem, I’m just concerned that Simon Longstaff’s approach is a counter-productive over-reaction.
Consider this real example.
A business owner meets with his adviser to discuss his specific issues: his business has grown substantially and needs new premises and his investment portfolio has outgrown his capacity to manage it himself. The client and the adviser have a long-standing relationship and the adviser has looked after his superannuation and insurance strategy for years. It’s a relationship of trust and reliance.
The adviser is a director of his own financial planning business, a shareholder in the accounting firm where he works and also a director and shareholder of an associated MDA business (established with 2 other partners).
After consideration, the adviser recommends that his client set up an SMSF to purchase the premises that will house the expanding business. The client understands the costs, duties and implications, but believes it’s an elegant solution because the accounting group will do the SMSF administration meaning that the adviser will be across the client’s broader structures and tax planning, and well-placed to manage the liquid assets in the SMSF via the MDA.
I think it was an excellent solution given the client’s needs and circumstances but, under the FASEA code of ethics, the adviser would have had to turn this client away.
Why should the adviser trust his client to a lesser skilled adviser?
Where’s the benefit of making it harder for the client to receive comprehensive advice or optimise their capacity to grow their business or become self-sufficient in retirement?
If the conflicts are well managed, would this not be another example of a conflict having a positive benefit for the client?
SEAN: I won’t for one moment suggest that the examples are cherry-picked and unrepresentative, but we don’t have to go very far to find many more examples to support FASEA’s position.
In the past few years, NSG, Westpac, Financial Circle and a host of other adviser failures have reinforced the popular view that where the interests of the provider and the recipient conflict, it’s the recipient’s interests that suffer.
As business owner, I understand that conflicts of interests are endemic in any commercial enterprise.
As a lawyer, I understand that my compliance with my duties and obligations (and not my commercial interests) must be the foundation for the advice and services I provide to my clients.
I think most advice professionals take a similar approach.
But, returning to your example, and accepting that conflicts can be managed, I don’t necessarily agree that avoiding the conflict would have a worse result for the client.
Why is another adviser less-skilled?
Perhaps another, more objective adviser, might have identified options and strategies that would have achieved a similar or better outcome.
Perhaps another, more objective adviser, might have recommended the same strategy with more cost-effective implementation.
In my experience, the best way to assess the real impact of a conflict of interests and duties is to quantify the real and immediate benefit received by client and compare it with the real and immediate benefits received by the adviser and the adviser’s associate. Then consider costs. Where the real financial benefit received by the client (not the proposed or theoretical benefit) is less than the financial benefits received by the adviser (or associated party) then a conflict can be presumed.
Of course, “who benefits?” is only the start and the clients’ relevant personal circumstances need to be considered, but it’s a useful start.
The challenge with managing conflicts in financial services is that it is far too easy to rationalise conflicted advice on the basis of qualitative aspects and potential benefits. I’ve no doubt that, over time, we’ll take a more mature and more nuanced approach to conflicts than avoidance, but perhaps a heightened awareness (and an abundance of caution) is a useful first-step towards professionalism. Over time, I expect that FASEA will refine their Standards to consider materiality, consequence, immediacy and the precise nature and effect of the conflict, but they’ll start with a less ambiguous position to nudge advisers towards their vision of an advice profession.
I understand your reaction to Dr Longstaff’s position, but given your extensive experience in retail and wholesale advice, do you really believe that conflicts aren’t an issue?
MARIA: I think that we’re too quick to assume all conflicts work to a client’s detriment, instead of acknowledging that sometimes, these conflicts, provide considerable benefits.
Deanne Stewart, CEO of First State Super recently stated that Super Funds can manage their potential conflicts of interest in a vertically integrated business by being “alive to them” and having the best interest of the members in mind.
listen to market narratives below (episode 35)
Representing the largest fund in Australia, she believes managing, and not avoiding, conflicts benefits members most and she identified group insurance as an example.
Group insurance is an affordable and effective option for fund members but, without cross subsidisation of premiums, group insurance wouldn’t exist or would simply be too expensive for members who need it. If their advisers don’t recommend it, or recommend retail insurance, then the group cover becomes unsustainable and the members suffer.
Isn’t this another potential conflict for good?
What about where an adviser has the opportunity to invite clients to a market briefing by an independent expert hosted by a fund manager featured in a model portfolio utilised by their Licensee. Because the valuable and relevant event is provided at no cost to the adviser or their clients, it’s in contravention of Standard 3.
This is unreasonable and undesirable; both the adviser and client receive highly relevant information, investment education and market updates from a well-qualified and reputable speaker.
Who benefits from Standard 3 in these examples?
SEAN: They’re good examples. First, I don’t believe that Standard 3 would prohibit the seminar you outline in your example.
If we accept that what FASEA, Regulators and Legislators are trying to prohibit are conflicts that pit advisers’ interests against their clients’ interests (and the advisers’ duties to their clients) then you can see why the substance of the conflicts needs to be carefully considered. FASEA acknowledge that it’s complex and their recognition of ancillary benefits seems to demonstrate a willingness to constructively address the substance, rather than the appearance, of conflicts of interests and duties.
Broad brush responses are simpler to apply and administer, but they’re seldom useful for specific incidents.
In respect of group insurance, while I’ll defer to risk specialists rather than argue technical elements of the cover provided, I would suggest that there’s a fundamental difference to how Trustees and Advisers observe their best interest duty.
In most cases, Trustees only need to consider the best interests of the members of the fund – a group or class – and don’t need to consider individual members. Their obligation is to serve the collective interests, so cross-subsidisation works for them. An adviser has a duty to an individual client, and an obligation to consider their best interests and their relevant personal circumstances.
While the advisers employed by the Fund might understand the advantages of group cover, and the collective benefits recommending it provides, recommending group cover, or failing to recommend a better alternative, may contravene Standard 3 depending on the client’s relevant personal circumstances.
MARIA: I don’t want to burn the FASEA Code to the ground and salt the earth that sustained it but we need a code that fosters generosity and flexibility and not a draconian system which produces unintended consequences and stops advisers from helping good people.
Bringing in a view too fast and too hard, as I believe they have done with Standard 3, sends the message to advisers that conflicts can no longer be managed. In my view, more consultation and consideration is required before FASEA should take that position. 71% of working Australians don’t access advice and most people don’t seek retirement planning advice until they’re 55 or over, and for many people this is far too late. Financial advice isn’t the kind of thing people shop around for, and most advisers only have one shot at making a tangible impact in the lives of these vulnerable people. My concern is that Standard 3, and the uncompromising position taken by Longstaff, will have significant and undesirable outcomes; it may make some businesses unsustainable, reduce choice and hamper advisers’ efforts to improve their clients’ lives.
I just think that avoidance, and prohibition, of conflicts might not be in anyone’s best interests.
SEAN: I don’t disagree that the Code should enable advisers to help their clients and provide good advice, I simply believe that advisers have to be more conscious of the conflicts and biases that compromise their ability to do so.
Individual examples aside, I don’t think that we, as an industry, have been terribly successful at identifying and successfully managing conflicts.
Despite the criticism levelled at them, I don’t think FASEA is a quixotic organisation; like most political organisations it may struggle to grasp practical issues and reconcile competing objectives, but I think it’s focused on supporting an advice profession. In fact, I think that FASEA is well aware of commercial realities and the challenges of constructing an advice profession from the ruins of product distribution.
They are, in the long-term interests of advisers, trying to restore trust and confidence by moving advisers from perceived self-interest towards community obligations, from relying on compliance and disclosure to embracing professionalism. I don’t believe that FASEA is ignorant of the tension between commercial imperatives and professional obligations but it is simply trying to ensure that advisers consistently demonstrate objectivity and financial disinterest in the outcome of their advice.
Conflicts of interests is complex and disputed territory, so it’s natural to be worried.
If you have any questions in relation to conflicts, or would like our help, reach out to us at help@assuredsupport.com.au
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