Financial Planning Ethics

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Financial Planning Ethics - from a financial planner's point of view.

It’s Philosophy Friday, so let’s spend a moment or two musing on the place of “Ethics” in the world of the financial planner.

Financial Planning Ethics

It may seem obvious that there is a place for ethics in financial planning. Financial planning scandals of one type or another have peppered the front pages of newspapers, websites, newsletters and magazines with stories of fraud, deception, non-disclosure, illegal activities and the impacts on the victims of these unethical activities. The Global Financial Crisis triggered huge losses for investors around the globe – losses made all the worse for people who received advice that turned out to be faulted or biased or fraudulent or simply wrong. While there has been universal agreement on the need to highlight ethics in financial planning following these losses, actually putting in place measures that are likely to help enforce appropriate advice has turned out to be much more difficult than expected, and anything but obvious.

financial planning ethics and bias financial planning perth michaels musings

What guides ethics in financial planning in Australia today?

Following these very public calls for higher ethical standards to be put in place to help protect people from unethical advisers, Executives at Australia’s major banks have volunteered higher ethical standards for planners that operate under the various bank planning group banners. That helps, as the Commonwealth Bank, Westpac, ANZ and NAB own a large swathe of the brands and licences under which financial planners operate in Australia. If we add in the listed company AMP Limited then these sort of initiatives can effectively bring about guidelines and enforcement strategies to thousands of financial planners. In fact, they even apply to little me – as the business in which i am a principal, holds it’s licence through RI Advice Group Pty Ltd, which is in turn owned by OnePath, which is itself owned by ANZ bank. So minimum standards agreed to by the large institutions can help place a floor under the expectations of those who seek financial advice. It’s no guarantee of course but it does mean that someone, somewhere has to take responsibility for the actions of the financial planners under their licence.

financial planning bias the regulator

The MoneySmart website is an excellent resource for those seeking independent information on financial planning. [click to go to the site]

The regulator for financial planning in Australia is the Australian Securities & Investments Commission, othewise known as “ASIC”. Their website can be found here. The ASIC website contains a number of professional registers, and following recent legislation there will be a register of licensed financial planners from June 2015. There have been disagreements about the level of detail to be included in this register but it is only a new initiative, and can therefore be expected to be fine-tuned and updated over time.

So let’s now ponder some of the practical issues surrounding ethics, as it applies to the world of financial planning in Australia today.

Can you force people to be ethical?

This question is not as silly as it sounds. While it may be eminently logical to ask people to be ethical, and to legislate that people must act ethically, and to create ways of monitoring ethical or unethical behaviour, it is patently NOT POSSIBLE to force people to actually be, ethical. This concept takes some pondering before its full impact will become clear.

Thou shalt be ethical

In much the same way that the 10 Commandments set up an ethical framework for Christians, it is possible to mandate a set of standards that financial planners must adhere to.

financial planner ethics commandments can only be giudelines

Standards, rules or guidelines can only direct – they cannot guarantee an outcome.

Professional associations such as the Financial Planning Association of Australia (“FPA”) hold their members to a Code of Professional Practice that is set out in 40 pages of fine printed documentation here. This code sets out how a planner should act within each of the recognised areas of in the provision of financial advice. All members of the FPA are expected to hold to these standards.

A broader statement of ethical standards can be found on the professionalplanner website and their ethical standards statement.

Yet there are questions as to whether these standards are able to actually STOP unethical conduct. They can provide guidance for those well-meaning planners who are trying to “do the right thing” or terms under which sanctions can be applied when planners fail to act in the mandated way but they are not likely to stop people who are setting out to act unethically.

Membership of a professional association could be seen as a good starting point for helping to filter out advisers who are not prepared to conform to the standards of that association. Yet it is not in itself a complete filter, as there may be other reasons a person may not be a member of a particular association. In some professions or industries there are different bodies competing for the role of primary representative body, so failing to be a member of one group does not mean that a planner doesn’t belong to another professional body. Financial planning includes the FPA mentioned earlier, as well as the “AFA” or Association of Financial Advisers, whose website can be found here. The website includes a very easy-to-use look at their Code of Ethics and associated principles for providing financial advice.

financial planner ethics planners are human with human frailties

financial planner ethics planners are human with human frailties

Financial planners cannot escape Nietzsche’s declaration of being “Human, all too human”, which brings with it all of the political intrigue, discontent, disagreement and conflict embedded into human relations since the dawn of history. Some financial planners may have had disagreements with the people or policies of one or more professional bodies that cause them to not want to be part of those bodies. This may not even involve an ethical consideration, so failing to be a member of a particular planning body does not necessarily mean a planner is more or less likely to act in an unethical manner. IF a financial planner is torn of their professional association membership, can they still act ethically? Clearly they can. We will return to the point of human frailties a little later.

Professional association membership however, does entail a level of peer pressure, broad monitoring, and potential for punitive action in the event of acting outside the association guidelines – so that is at least some comfort for those seeking a few extra layers of protection against unethical financial advice.

Thou will be ethical or else!

And so we move on to laws, regulation and legislation. Australia has a well developed legal code for guidelines under which activities will be deemed to be illegal or inappropriate and therefore subject to some form of rebuke, revocation or penalty. The extent to which that code should apply to financial planners has been the subject of huge public debate, leading to the implementation of very strong legislation to protect people who seek financial advice in Australia.

Financial planning ethics is a minefield!

It can certainly seem that way, and many people have suggested to me that it appears to them that this is the case. The very public debate on financial planner ethics and obligations that preceded and followed from the Future of Financial Advice (“FOFA”) reforms reinforced the areas in which unethical behaviour or bias can come into play in the financial planning process, which scared a lot of people. That is a natural reaction, and one that will reduce over time, as the impact of the new regulations flows through the system.

financial planning ethics image from binarymoon co uk

financial planning ethics – it can be a minefield for the uninitiated [image source binarymoon.co.uk]

Understanding is helped by education, and there are some excellent publications and information areas available today.

The National Information Centre on Retirement Investments (Inc) website includes this rather fantastic overview of the financial planning process. It is easy to read, and yet comprehensive enough for a person to study and ponder before they venture out to seek financial advice.

The new laws place a legal requirement on financial planners to act in a client’s best interest. This may seem obvious but this single requirement is a “catch-all” from which a financial planner seeking to acting unethically will have a great deal of trouble escaping. In other words, the idea of “commercial reality” which has underpinned a great deal of the bias inherent in the financial planning world, will gradually be eroded by this particular aspect of legislation. That is only my opinion of course but it is one that i hold to very strongly. You can’t force ethical action but it certainly IS possible to act to reduce bias and some of the ethical conundrums that exist within the financial planning world in Australia today. Which leads us very nicely into the world of bias…

Ethics and Bias

This is a topic that we won’t go into today but it is one that gets to the heart of much of the discussion about ethics as it applies in Australia today. Is the holding of one type of bias or another, an unethical act in itself and furthermore, should that bias be put aside when providing financial advice? The answer may seem obvious – that all bias should be put “disclosed” and preferably discussed so that the person seeking financial advice can better assess whether it is important or relevant or material to their objectives. Unfortunately, this is a Gordian Knot level conundrum, as much of the bias in financial planning today is entrenched and almost hegemomic. That is to say, some forms of bias as so woven into the financial planning world in Australia that they are virtually invisible, and often are not even seen as being a form of bias.

This is a topic for a post all of its own, and will have to wait for another Philosophy Friday…


Notes and Disclaimers and Thoughts

  • Remember the Great Disclaimer – nothing in this post or on this site is to be taken as personal financial advice. It is general advice only as it does not take into account your personal position, objectives, risk profile nor does it cover a sufficient range of options or information to even be considered general advice, really. It’s just my thoughts and musings on the question of ethics as it applies to financial planning today.
  • This is the first of what i intend to be a long line of posts on ethics and the huge scope of ethics as it applies to financial planning in Australia.
  • I am a member of the FPA, mentioned above.
  • I am an authorised representative of RI Advice Group Pty Ltd, which is owned by ANZ through a series of brands, including Onepath. So you could consider me to be biased as well. Bias is something i’ve covered a number of times on this blog, so feel free to trawl around other posts for more thoughts and musings.
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  2 comments for “Financial Planning Ethics

  1. May 31, 2015 at 6:12 pm

    A really good read Michael, I am very challenged by the inability of our profession to manage bias well, in general, and how the human condition means you cannot regulate away unethical people…

  2. June 2, 2015 at 3:40 pm

    Thanks for the comment, Ryan.

    Perhaps bias is poorly managed because planners feel constricted on what they can or cannot say without rebuke from other planners, institutions or regulators? Or perhaps it’s just that planners are too busy getting the job done to be prepared to put aside time to discuss the nuances of bias?

    From my point of view, bias is an inherent part of every advice transaction, so lingering on it is a fairly good idea, as well as being helpful to anyone trying to make a prudent decision. This post is focussed on ethics more than bias but bias is definitely something that i will return to in later posts, after flushing out more of the ethical aspects of financial planning.

    Thanks for taking the time to comment.

    Michael

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