FASEA – Financial Advisor Standards and Ethics Authority

Having heard about some rather questionable activities on the part of some banks, market talk is that the Financial Advisor Standards and Ethics Authority (“FASEA”) has been established as an alternative to a Royal Commission into the behavior of the banks, which various groups and political parties have been calling for, and will be funded initially by the “big 4 banks” and AMP.

These large organisations are unlikely to have agreed to provide this funding without setting or at least agreeing to the scope of the FASEA’s mandate, which according to the Minister for Revenue and Financial Services, Kelly O’Dwyer, will be responsible for governing the conduct of professionals in the financial advice sector, by setting mandatory educational and training requirements, developing and setting an industry exam, and creating a Code of Ethics that all advisers will be required to adhere to.

I accept that there could well be plenty of room to improve the education and training of individuals in the ‘financial advice sector’, but doing so will not solve the problem. FASEA’s mandate is a distraction from the real issue facing the sector.

The real issue facing the sector is a structural one.  The sector purports to provide “financial advice” to individuals but merely provides a sales function for the funds management industry.  In fact its function is more restricted than this. The so-called financial advisors are restricted to promoting managed funds on their employer’s (or some other) platform. They are therefore unable to promote any of the many managed funds that are not listed on their platform.  So in reality they only provide a sales function to the fund manager whose funds are listed on their platform. (A platform is basically a restrictive list of managed funds from which the financial planner may recommend. He/she would not be permitted to recommend any others.)

As the so-called financial advisors are not paid by their “clients” (the recipients of its so-called advice) but paid sales commissions by fund managers on financial products sold to the individuals, they are more inclined to promote financial products where they earn the highest commissions.

This has been going on for more than 2 decades. When I first arrived in Australia (22 years ago) I was put in contact with a financial advisor, who I foolishly assumed would provide me with financial advice.  In other words, make recommendations that would be in my best interest.  He recommended that I invest in an agri. tax scheme. I took his advice and what a mistake that was!!  That was not a suitable investment for me at the time by any stretch of the imagination. As I later discovered the real reason why that scheme was recommended was because he earned a 6% sales commission. In making his recommendation he was motivated by the sales commission. I learnt my lesson the hard way!

Over 20 years later the problem still exists.  The politicians, the corporate regulator and competition watchdog have sat on their proverbial hands. They have allowed and are still allowing an entire sector to mislead the market – by falsely purporting to provide financial advice and falsely purporting to act in their client’s best interests.

The vast majority of so-called ‘financial advisors’ are an incentive based and outsourced sales function for the funds management industry. They do not provide financial advice and their interests are not aligned with those of their so-called clients.

The solution is an easy one. If a party purports to provide financial advice it must be prohibited from receiving a sales commission or any other income on any product or service provided to the client by another party. And any party that receives a sales commission or other income from a fund manager (or associated party) should be required to state ‘loudly and clearly’ that it acts for the fund manager, not the individual investor.

While there could well be room to improve the financial education of the participants in the sector, this is not the real issue. The issue is the sector falsely purporting to provide financial advice when in reality it merely provides a sales function for the funds management industry.

The time for our politicians, corporate cop and corporate watchdog to step up and make the necessary changes is long overdue.

By Mark M.J. Morris