Last time we looked at the issue of alignment and the pros and cons of being aligned or not under the generally accepted use of the term. An alternative definition of alignment, based on “ownership of the client” (whether the adviser is able to retain his/her client book if they move to another licensee) was mooted by Paul Tynan in 2014. In a straw poll conducted by Riskinfo relating to this definition, asking “Should the term 'financial advice' be classified as either 'aligned' or 'non-aligned'?” 74% of respondents answered “Yes”, 22% said “No” and 4% were “unsure”. The associated commentary noted that:
"The term ‘non-aligned’ can be closely associated with the concept of independence, while the term ‘aligned’ cannot. But if the client receives appropriate advice, regardless of whether it derives from an aligned or non-aligned source, does the issue then become one based mostly in perception, rather than in reality?"
Let us turn to look at the issue of perception. With the advice industry and finance in general continuing to take a battering in the media, does the political maxim that “perception is reality” then increasingly apply to financial advice? Is it unfair to say that continued (and in many cases not undeserved) negative coverage of industry failings, such as the recent Fairfax/4 Corners investigation into Comminsure or the rate rigging allegations at ANZ, is bolstering a negative view of Finance in general that in many cases unfairly tarnishes advisers?
At Adviser Ratings, we have evidence in the form of thousands of reviews that many Australian’s are overwhelmingly happy with their advisers and that these advisers are making tangible, positive differences in the lives of their clients. However, this individual positive validation has a hard time competing with national headlines to the contrary.
The negative perception tarnishes both aligned and non-aligned advisers. It is hard to put blame on an adviser if an insurance company refuses to pay out a claim because of that company’s unethical and/or illegal behaviour. The adviser acts in the best interest of their client, but the institution does not. Does the fiduciary duty of the adviser include making it known to the client that there may be a culture of behaviour within an institution that may undermine the clients best interests? How feasible is it to think advisers could easily stop recommending a particular providers products?
A few bad apples or a problem with the tree?
ASIC chairman Greg Medcraft was quoted in the recent Fairfax report on revelations of disturbing internal practices at Comminsure as saying he thought something was amiss in the culture of the big banks in Australia.
“Sometimes it might be just a few apples... [but at] what point do you have so many bad apples that there’s a problem with the tree?”
Furthering this metaphor, the sweet fruit of a great adviser will eventually be lost if the tree itself is rotten.
Fairfax reported that ANZ had agreed to settle the rate rigging case with ASIC for $50 million but refused the key demand of admitting they manipulated the particular rate. ANZ went on to say ASIC simply misunderstood the way the rate operates and that they (ANZ) had acted in a way “consistent” with market practices. And they layperson askes “if you’re doing nothing questionable why offer up $50 million?” Maybe the way the market operates and "market practices" are part of the problem and the “tree” is very rotten indeed.
These most recent “scandals” continue a theme that reflects badly on the ethical dimensions of the industry. With banks working overtime to bolster their ethical credentials like CBA’s “Ethical Bank” campaign and ANZ bolstering super for its female employees (a commendable action) it would seem that operating ethically is an important concern for these organisations. Or at least being seen to operate ethically.
The friction between the profit motive and operating ethically is at the heart of the issue. A business is there to make profit. In massive organisations those making managerial and day-to-day decisions are often divorced from the real life situations of those they are actually in the service of. People are reduced to policy numbers, assets and liabilities and the mundane bean counting of bureaucracy and managerialism come to the fore. It has been shown that "hierarchy exacerbates obedience to authority and the displacement of moral agency onto organisational superiors". If superiors determine that the bottom line is the guiding light, and if profit trumps ethics at every turn, as sure as night follows day these damaging scandals will continue to proliferate and efforts to promote the industry will be constantly undermined.
How a company operates will depend in part on which factors relating to profit and ethics are dominant and this itself will inform, and be reflected by the culture of the company. This “cultural” issue is often raised but hard to pin down.
“Culture dictates planner behaviour. Not education, not compliance, not legislation and not ethics training.”
An article in the AFR last year explored the issue of profit vs ethics by drilling down to more concrete terms relating to advisers with the following question – “Are a sales focus and the provision of honest, high-quality advice mutually exclusive?” This question tackles directly the profit (sales focus) vs ethics (high quality advice) conundrum.
It says that we may have “have misunderstood the central flaw of the institutionally owned advice business” and points the finger directly at “the corrosive impact a transactional banking mentality has on the culture of a non-transactional, relationship-based advice channel.” It comes down to the “intent” as practised by the individual adviser and promoted by their institution. Is the intent to sell or to serve? It finishes by noting that while many of the proposals to improve advice in the current tabled legislation may have merit (higher qualifications, increased compliance and “training” in ethics), the real solution is “more obvious but far less easily implemented. It is to change the sales culture to a service culture…culture dictates planner behaviour. Not education, not compliance, not legislation and not ethics training”.
But how can you measure culture? Such an intangible seems to get lost in a bureaucratic, number focussed business management style where blunt instrument KPI’s and measurable business outcome are prioritised over service. This is not to say these indicators do not have a place, but we have to redress the pendulum that has swung too far in their direction. We do have to measure, we do have to benchmark, but if you subscribe to the view that culture is the biggest determinate of behaviour then we surely need to focus on it more and get the culture right.
The right culture is the keystone that will ensure that a client’s best interests will be looked after, with education and regulation providing support. To this end promoting and advertising “ethics” may foster the perception in the general public that advisers and institutions have the right “culture” and this is certainly a step in the right direction. But unless this outward projection is accompanied by a transformation of the outdated sales culture to a true service culture, the industry will continue to be exposed by profit and greed driven malpractice and the service of a client’s best interests will continue to suffer.