Building the Wall Between Advice and Product

The Financial Planning Professional: Part 2 of 6

Non-Intermediating Financial Planning is financial planning that does not involve a product recommendation. In the UK, such financial planning is not a regulated activity and product advice is regulated by the Financial Conduct Authority (FCA’s PERG 8.26.2). Traditional financial planning ties financial advice to the making of a product recommendation. Contemporary financial advice goes much further. It covers a wide variety of topics, such as lifetime cashflow forecasting, tax planning, life planning, residential property portfolio planning, and wealth creation through business planning.

I found when I was a financial adviser who did sell products using a proper financial planning process, that the outcome was seldom a product. When you plan the client before planning the money, there was usually a wealth shortfall. No financial product in the world creates wealth. Wealth is created by the client, and what they needed was a plan.

Products manage wealth. And, if financial advisers are honest they must admit, none of us can manage wealth better than the default arrangements now available. I was head of investments for the world’s largest bank, so I should know.

With investment products commoditised through the introduction of passive retail multi-asset propositions such as Vanguard’s Life Strategy funds being offered on D2C Platforms, and the widespread availability of Workplace Pension Schemes (WPS), the FCA’s recent recommendation that default schemes such as WPS be considered when making product recommendations may render product advice superfluous, further regulation amendments are expected in FCA’s Assessing Suitability Review two, due early 2021.

“Our rules require firms to demonstrate why any non-WPS they recommend is more suitable than a WPS” – FCA’s PS20/06.8.35 (June 2020).

Most product advisers charge asset-based fees which creates: conflicts between the adviser’s interests and those of a client; a strong monetary incentive to recommend one course of action over another; and over time, these charges can have a significant negative financial impact for consumers.

A conflict of interest exists when there is a clash between professional responsibilities and personal (often material) interests. There is a large body of evidence that documents how conflicts of interest play a substantial role in influencing advisers’ attitudes and decision making. Such conflicts can lead advisers to give biased advice. Professor Sunita Sah, Cornell University outlines some of the literature in this report and describe how conflicts of interest can lead to biased opinions, often with the conflicted adviser being unaware of the influence.

To better understand the arguments for change and the potential impacts on the UK industry we may see in the year ahead, we need only look at the Australian market today following the reforms emerging last year from heavy and unexpected criticism at the Hayne royal commission.

Central Queensland University academic Angelique McInnes, who completed her doctoral thesis on conflicts of interest in financial advice, has said the “link between the adviser to an entity or licensee that has a separate profit motive” is the issue from which all of the industry’s woes have stemmed.

As one Australian financial adviser put it: “A puppet would be the best way to describe it.”

“Somebody above me was always going to pull my strings and I was too naive to realise it, or I was too blinded by the incentives”.

In June 2020, The Financial Planning Association of Australia recommended several significant reforms that aim to streamline regulation of the financial planning profession. Advancing the profession is the spirit of the policy framework, which includes the separation of product and advice.

“The regulation of financial advice is currently tied to the recommendation of a financial product, reflecting a history in which a product recommendation was the core component of most financial advice. In a professionalised financial planning sector, this is no longer the case,” Financial Planning Association CEO Dante De Gori said.

“Contemporary financial planning is about a lot more than recommending financial products. There is a wide variety of topics that might be covered by financial advice and many may not include a product recommendation. Regulation of financial advice should reflect the variety of advice that can be provided, and not continue to be tied to financial product recommendations,” he said.

The FPA believes existing requirements to deliver financial advice should be reviewed to ensure they apply effectively to financial advice that does not include a product recommendation.

“Future regulation of financial advice should focus on the broad nature of contemporary financial advice and not limit its focus to financial products,” Mr De Gori said.

“The law should be changed to separate the regulation of financial products from the regulation of financial advice.

The post Major overhaul of AFSL system required to reflect new era of professionalism in financial planning appeared first on The Financial Planning Association of Australia.

In the UK, financial planning is not a regulated activity, although it can become a regulated activity when it is provided in the preparation for or in the process of a regulated activity. For example, a financial plan prepared with a view to intermediate for the buying or selling of investments is a regulated activity, and the financial planning fee may be deducted from a regulated product.

If, however, a member of a WPS asked an investment adviser for advice on carry forward, using tax allowances, and contribution levels to pensions, this service can be non-regulated financial planning. The outcome is likely to be a top up to the default arrangement. The financial adviser is unable to deduct the fee from the default arrangement or a regulated product.

This causes firms who operate on “asset-based” fees to not know how they are to be paid, and that challenge is growing, given these default arrangements are available to every employee in the UK.

One solution is for pure (non-intermediating) financial planning to become a separate service payable by invoice. Either as a separate trading style or a separate company.

Financial intermediaries can currently facilitate deduction of regulated financial planning fees from products, where the financial plans are completed in preparation for investment advice. Nine times out of ten such fees are “asset-based”, and here lies the problem.

If you are ready to launch a non-intermediating financial planning firm, then join us.

Contact us today to find out how the Academy of Life Planning can help you transition from Investment Firm (Regulated) to Non-Intermediating Financial Planning firm (non-regulated).

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