Look… I’m an ambassador for transparency!
Should I flag the need for greater transparency, accountability, and consumer protection in the financial advice industry? Many may agree that these issues must be addressed to improve the industry’s reputation and better serve clients.
However, some may feel that criticism of the industry is unwarranted or unfair, mainly if they believe that they are already providing high-quality advice and acting in the best interests of their clients.
Additionally, there may be some financial advisers who are resistant to increased regulation or who feel that additional transparency requirements may be overly burdensome. They may also feel that the focus on regulation and compliance removes the core purpose of financial advice, which is to help clients achieve their financial goals.
Here is how one financial adviser responded when I raised an issue recently.
“Steve, I’ve been following you for a while on LinkedIn but note of late that your comments having become more of a Victor Meldrew-like ‘rant’ against anything that you don’t agree with. So, I’ll have to consider un-following.”
Here’s the thing. We need the debate. If not me, then who? If not now, then when?
The issue I raised yesterday.
The UK Department for Work and Pensions (DWP) is proposing to auto-enrol low earners into pension schemes under the Pensions (Extension of Automatic Enrolment) (No. 2) Bill backed by the Government on Friday, to improve retirement savings for those who may not have access to a workplace pension. The proposed changes would require employers to automatically enrol workers earning below the lower earnings threshold of £6,240, requiring an 8% contribution on the first pound of earnings, into a pension scheme, including those working part-time or temporarily.
Regarding the impact on earnings, the DWP has estimated that workers may see an initial reduction in take-home pay of around 8%. Still, the benefits of long-term savings and the employer contribution to the pension scheme would offset this.
Regarding the potential loss of universal credit and council tax support, it is essential to note that these benefits are means-tested. Any additional income earned in retirement could affect the support received. However, the impact on each individual will depend on their circumstances and the amount of income they have in retirement.
For the tax year 2022-23, an individual needs to have earned at least £6,240 in a year to receive one qualifying year towards their state pension. This figure is the lower earnings limit (LEL) and applies to employed and self-employed individuals. Individuals earning below this amount may not receive a state pension.
Here’s my point…
If an individual received take-home pay from non-state pensions of £6,240 per annum, this would effectively be taxed at 64% in retirement through the loss of means-tested state benefits.
As for whether the Financial Conduct Authority (FCA) would permit an adviser to recommend the sale of a pension without referencing the potential pitfalls in a suitability report, the answer is no. The FCA requires financial advisers to follow strict rules and guidelines when recommending financial products to clients. This requirement includes thoroughly analysing the client’s financial situation and needs, explaining the risks and benefits of different investment options, and ensuring that the investment suits the client’s specific circumstances. Any failure to follow these rules could result in regulatory action and potential penalties.
Other issues I raise.
Why is a practice considered perfectly acceptable in one country when it is banned in the next?
For example, in India, mutual fund distributors are not allowed to call themselves financial planners because of regulations put in place by the Securities and Exchange Board of India (SEBI), which is the regulatory body that oversees the securities market in the country.
SEBI’s rationale behind this regulation is to prevent potential conflicts of interest when a distributor acts as a financial planner. Suppose a distributor is also a financial planner. In that case, they may be incentivised to recommend mutual funds unsuitable for the client’s financial goals solely to generate more commission for themselves.
SEBI’s regulations require that financial planners hold a separate certification and register themselves with SEBI, which helps to ensure that they have the necessary qualifications and are acting in the best interest of their clients.
Overall, the decision to prohibit mutual fund distributors from calling themselves financial planners aims to promote transparency and protect the interests of investors in India.
In the UK, a financial planner is viewed with suspicion unless he is a mutual fund distributor!
In the US, there are proposals that only mutual fund distributors can call themselves financial planners!!
In the US, proposals are currently being considered that would restrict the use of the title “financial planner” to only those registered with the Securities and Exchange Commission (SEC) as investment advisers.
The North American Securities Administrators Association (NASAA), an organisation representing state securities regulators in the US, Canada, and Mexico, has put forward the proposals. The proposed rule would require individuals who use the title “financial planner” to be registered as investment advisers with the SEC or state securities regulators or to hold a recognised financial planning designation, such as the Certified Financial Planner (CFP) designation.
The proposed rule is intended to address concerns about potential consumer confusion around the titles and designations used by financial professionals. There is no uniform standard for using the title “financial planner” in the US, making it difficult for consumers to differentiate between different types of financial professionals and their services.
The proposal is still in the comment period, which runs through April 28, 2023, and is subject to further review and potential revisions before it becomes final. If adopted, the rule would be enforced by state securities regulators. It could result in fines or penalties for individuals who use the title “financial planner” without the appropriate registration or credentials.
Another example is discussions and consultations around the practice of deducting advisory fees from wrap platforms in Australia due to concerns around conflicts of interest, lack of transparency, and consumer protection.
One of the key concerns is that when financial advisors deduct their fees from wrap platforms, it can be difficult for investors to understand the total costs they are paying for the investment products and advice they receive. This lack of clarity can create opacity in the fees charged and give rise to conflicts of interest for advisers who may be incentivised to recommend investments that generate higher fees for themselves.
The Australian Securities and Investments Commission (ASIC) raised concerns about these issues in a 2016 consultation paper, which proposed changes to deducting financial advice fees. The proposed changes aimed to improve transparency and accountability in the financial advice industry by separating advice fees from product fees. This move would mean financial advisers must provide a separate invoice for their services rather than deducting their fees from the investment product platform or wrap account.
The Royal Commission also highlighted these concerns in Misconduct in the Banking, Superannuation and Financial Services Industry, established in 2018. The commission’s final report included a range of recommendations related to the financial advice industry, including the need for greater fee transparency.
Overall, the discussions and consultations around deducting advisory fees from wrap platforms in Australia reflect a growing recognition of the need for greater transparency, accountability, and consumer protection in the financial advice industry.
It’s important to note that there is a wide range of views among financial advisers, and not all advisers may feel the same way about these issues. Ultimately, the goal should be to work towards a financial advice industry that is transparent, accountable, and focused on the needs of consumers. This aim requires ongoing dialogue and collaboration between industry stakeholders, regulators, and consumer advocates.
Academy of Life Planning 