IPA Executive Director John Roskam’s article “Paternalism Enshrined” was published in the Australian Financial Review on 6 May 2011.
In it, he makes some good points regarding the proposed regulation of financial advisers under Future of Financial Advice (FOFA) reforms. He also makes some shockers.
Unfortunately his views typify the ignorance of many regarding the fundamental workings of the Australian financial advice market.
Mr Roskam is, of course, right in saying that it’s the clients who can best make their own financial decisions, and that the proposed legislation greatly enhances the transparency surrounding those decisions. His prediction that, in the short-term – thanks to uncertainty in the market and the current image of financial advice – clients will probably be discouraged from going to see a financial adviser, is probably right, too.
However, Mr Roskam assumes that the current product-based environment actually allows clients to make informed decisions. He also fails to see how the FOFA legislation and resulting competitive pressures provide an opportunity to fundamentally change the landscape in which advice is delivered.
Mr Roskam believes government intervention in how clients engage their advisors and where fees for that advice are extracted is paternal. Idealistically, I think his views are right – the less intervention, the better.
But the reality is that the current environment has not fixed Australia’s chronic under-insurance issue or its under-pensioned workforce.
The reality is that the collapses of Storm Financial, Trio Capital, Westpoint and others are just the tips of large product-based icebergs, not the “isolated instances” Roskam claims they are. Many of today’s ‘advisers’ believe that their best clients are those who unwittingly pay an ongoing fee (often more than their annual mobile phone bill) and never see any ‘advice’ services for their money. These are not isolated instances. Organisations are ‘pushing’ fee-based client offerings, but still measuring adviser performance on products sold. These aren’t isolated instances, either.
Advice clients are simply seeking the right advice to obtain greater certainty in their financial lives.
The current system has not solved the trust problem, so more Australians are “self-medicating” in their financial lives.
Mr Cooper, author of last year’s report on the superannuation industry, was correct in pointing out the dangers of busy people potentially lulling themselves into a false sense of security as they make less-than-objective financial decisions intended to achieve their short- and long-term financial outcomes. They’re using data from marketing-driven product companies in an ever-changing world and local marketplace. This is the equivalent of allowing people access to all the dangerous drugs available on the market without giving them proper advice about when and how to use them.
Is it paternalistic of the government to help forge the emerging financial advice industry, or is it necessary leadership?
I think that – in the same way as the government provided leadership in areas governing drink driving, climate change, tobacco, and even the original compulsory superannuation rulings – this proposed legislation simply provides the boundaries to encourage tomorrow’s advisory leaders to build the much-needed advice profession.