Financial advice regulation: well-intentioned red tape costs public choice

By Patrick Carvalho

March 31, 2015

The much-anticipated Financial Advisers Register is a true milestone in the financial services sector, and part of the ongoing implementation of the Future of Financial Advice (FOFA) reforms. However the milestone’s impact is in danger of being subsumed by a triad of reports attempting to build a requirement for qualifications without a solid foundation.

Under the Register — being launched today by the Australian Securities and Investments Commission — Australians will be able to easily check online important details about financial advisers: employment history, specialisations, and even any recorded bans or disqualifications. And consumer access to information will be broadened further by the end of May, when the advisers’ qualifications and professional body memberships will also be listed.

This public accessibility of information will be a valuable asset when deciding to hire your next financial advice services. And such innovation is vital to strengthen the — still reasonably fledgling — financial advice industry.

Despite this reform progress, the Financial System Inquiry report still recommends for main financial advisers to have a relevant tertiary degree. The same requirement is advocated in the Parliamentary Joint Committee on Corporations and Financial Services report. And intense debate will be fostered by the Government having just released a consultation paper calling for submissions on ways to lift the professional standards of financial advisers.

Increasing education standards among financial advisers is a laudable cause. But restricting the avenues to achieve that goal is not.

If implemented, a mandatory tertiary degree requirement will largely increase the costs of financial advice across the industry as well as usurp consumers’ discretion and responsibility for their financial decisions. Worse: the implementation would come with no guaranteed improvement to the quality of services.

As even recognised by the Financial System Inquiry report:

“For individual advisers and firms, the cost of undertaking further and ongoing education would be significant … raising the minimum competency standards may increase the cost of advice for consumers … the requirement for higher education standards may cause some existing advisers to exit the industry and may deter some from entering, potentially causing an ‘advice gap’ for some consumers.”

A formal three-year bachelor degree costs tens of thousands of dollars to attain. Yet, to date, there is no formal body of theory regarding financial planning that could serve as the basis for tertiary education on the subject. The only end result might be an education-related debt mountain for financial adviser individuals to climb, pushing up accordingly the financial advice fees to consumers.

A better solution would be for ASIC to closely work with industry to revamp the minimum standard of knowledge financial advisers should master, and let the market create different degrees and certifications. Content, not format, should be the compass.

Transparency and choice are the key drivers towards a competitive environment, where consumers can freely choose — and pay accordingly — for the services. Different accreditations lead to different pricing. And with the new Financial Advisers Register, consumers will have better information to make their own judgements whenever hiring a financial advice.

The financial industry is getting the hint and has already started adjusting.

On the one side, competing professional bodies are implementing what each considers to be the right balance of professional and education standards. For instance, the Financial Planning Association of Australia offers Certified Financial Planner certification that demands, among many other requirements, an approved tertiary degree — and which more than 5,500 Australian financial advisers have already attained. The Association of Financial Advisers has recently opened for consultation its draft Principles of Practice; and the Independent Financial Advisers Association of Australia has its own Gold Standard of Independence.

Financial companies, on the other side, are also trying to differentiate themselves by self-requiring their financial advisers to hold higher education and professional standards, with major players in the Australian financial sector voluntarily inclining towards stricter codes of practice and qualifications.

Consumers — not regulators — should have the ultimate sovereign saying on which financial advice standards they are willing to pay.

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