If you were to have open heart surgery, you would want to know that your surgeon was qualified. Or, if you were going to court, that your lawyer was an expert in the relevant area of law.
Should you expect less from a financial advisor, to whom you can entrust your savings and your financial security?
Even before the revelations of the Hayne Royal Commission on misconduct in financial services, the need for greater professionalization of financial advisers was recognized.
In 2017, the Turnbull government made reforms which included a code of ethics, a requirement to pass an exam and the need to hold a “relevant degree” – meeting financial adviser standards set by the Treasury and covering 11 areas of knowledge (see table below) .
This has been expected of new financial planners since 2019. Those already in the business have until 2026 to comply.
But now the federal government is considering weakening those standards.
A Treasury consultation paper proposes to remove the requirement for advisers with at least ten years’ experience and “a clean record of financial practice”. This will fulfill the Labor Party’s election promise to create a ‘course of experience’.
The document also proposes to lower educational requirements for everyone else.
Instead of an approved degree that must cover 11 areas of knowledge, it will only cover five – dropping the areas of retirement, retirement, estate planning, insurance, investments and building financial plans .
The intention, according to the consultation paper, is “that a wider range of degrees become eligible as entry routes into the financial advisory profession.”
The motivation isn’t specified, but is almost certainly due to a huge drop in the number of financial advisers — by almost 40% over the past three years, according to Rainmaker Information, a research firm specializing in the financial services industry.
But it’s hard to see how this move will help the industry become a profession, with standards similar to the rules that govern doctors, lawyers or accountants.
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Rainmaker’s report, published last month, says the number of financial advisers in Australia has fallen from 26,500 in 2019 to around 16,700.
In February, Deputy Treasurer and Financial Services Minister Stephen Jones (then still Opposition spokesman) blamed the decline on a mismanaged “tsunami of regulatory change”.
Some, like the degree requirement, predate the Hayne Royal Commission. Others flow from it.
The Association of Financial Advisers, which represents several thousand advisers, says the extra compliance imposed by the Australian Securities and Investments Commission following the royal commission has “broken” the industry.
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One of the direct revenue effects is the ban (since January 2021) on receiving ongoing commissions from companies for the sale of super, investment and insurance products from these companies.
Banning such payments, known as “grandfathered commissions”, was a key recommendation of the Royal Banking Commission. They were worth $800 million to financial advisers the previous year.
Revenues will be further reduced if the government goes ahead with a proposal to ban commissions on life insurance sales.
Specialized knowledge required
The reduction in degree requirements will somewhat reduce the burden currently faced by financial advisors. The question is whether this will compensate for the other factors that make the job unattractive.
Lowering education standards will certainly do nothing to give the community more confidence in the industry.
Given the increasing complexity of financial products and the interconnection of the different areas of advice, specialist knowledge is increasingly necessary.
When recommending insurance coverage, for example, an advisor needs to know more than coverage types and products. There are rules regarding the naming of beneficiaries, which is also part of estate planning. There are options to pay for insurance from your retirement pension, which may affect your retirement balance. There are different tax consequences for different options.
Reducing education requirements in these areas is unlikely to improve the overall quality of advice.
Hitting the brakes on professionalization puts customers at greater risk and lays the groundwork for another royal commission on financial services.
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In his final report, Commissioner Kenneth Hayne endorsed the 2017 education reforms. “Preventing bad advice starts with education and training,” he said, adding:
I believe that as they come into force, the new education requirements will improve the quality of advice given and improve the way financial advisers deal with the conflicts of interest they face.
Watering down these education requirements as proposed will not improve the quality of financial advice. This will only slow the way to professionalization of the industry.