Every few years the Australian Consumers Association (publishers of Choice Magazine), in conjunction with ASIC (Australian Securities and Investments Commission) conduct a survey of financial planners by sending out volunteers to get comprehensive financial plans (without of course telling the adviser that they are part of the survey).

These volunteers are real financial services consumers who get an actual plan prepared according to their own requirements and these plans are then judged by a panel of experts who grade the plans on legal compliance, suitability, clear explanation etc.

You may have seen the news reports on the 2002 version (released February 2003), the headlines blared that half the plans surveyed were inadequate through to very poor and that results are only a marginal improvement on the previous two surveys that also found advisers generally doing a bad job. These results were a slight improvement on the results of the previous two surveys done in 1995 and 1998.

Naturally the Financial Planning Association (FPA) went on the attack, even before the survey was released they protested against "sweeping generalisations" and cried that although half the plans looked at weren't much good that there was still a "professional core" of advisers out there that should not be tarred with the same broad brush.

For the record, we have not yet been tested in an ASIC/ACA survey.

The full report is available at ASIC's consumer web site http://www.fido.asic.gov.au. In brief, the main problems identified were as follows:

• Many planners neglected basic duties such as providing clients with a Financial Services Guide and there were many plans that inadequately disclosed all benefits received including soft dollar benefits such as volume bonuses, equity and option schemes etc.
• Most plans failed to explain why a particular product or strategy was chosen and particularly didn't attempt to justify the high fees of some of the new products recommended. No plans recommended use of low cost industry super funds, only one (out of 124) recommended index funds.
• Plans often ignored simple strategies such as paying off the mortgage first, using the employer's cheap super fund or entering into a salary sacrifice arrangement.
• Often "in-house" products were used, such as the dealer's own master trust or wrap account and no explanation was given for why this product is better than much cheaper products available to the independent adviser market.
• There was a tendency for advisers to recommend existing investments be sold (regardless of the tax and fee consequences of this) and for the adviser to recommend these funds be reinvested in whatever product he was pushing, without adequately explaining why the new products were any better.
• Quite a few advisers gave "limited advice" plans sticking to insurance and investments, ignoring many important aspects of financial planning (or giving generic canned information only) even though the volunteers asked specifically for a comprehensive plan. Many advisers gave what was labelled as "comprehensive" when in reality the document was just a limited advice plan dealing with only a few core aspects such as retirement planning.
• Some advisers ignored or overruled key client requirements because they were inconvenient to the adviser. For example, one planner told the client, "The risk profile survey rates you as 'moderate', but I want to recommend gearing so I will classify you as 'moderately aggressive.'"
• Stock brokers overall performed very poorly compared to other types of financial adviser, banks also were identified as giving below average advice, though on the whole larger firms did a little better than smaller firms.
• Commission based advisers performed significantly worse than fee for service or fee plus commission advisers, 44% of commission only plans were graded poor or very poor.
• The quality of advice from even the same firm was highly variable. Some dealers were approached by several volunteers and while one got a good plan another got a very poor one. This at the very least indicates poor quality management practices.
• CPAs (Certified Practicing Accountants) and CFPs (Certified Financial Planners) gave slightly better advice than advisers with lesser qualifications. Interestingly, on average plans prepared by advisers that have been in the industry for a long time were a bit worse than those by less experienced planners. Getting a plan done by a CFP or CPA was no guarantee of quality though, 14% of CFP plans and 12% of CPA plans were rated "poor" or "very poor". Choice reported that one CFP's "financial plan" consisted of trying to sell the client self-help books and recruit them to Amway!!
• It was a common observation by several judges that a number of strategies were driven by more than just the best interests of the client. Judges referred to this practice as "commission driven product selling".
• Even though the FPA requires members to disclose all commissions (which goes beyond the minimum requirement of the law which exempts insurance and loan products), many FPA members failed to disclose these commissions. Overall there didn't seem to be any evidence that FPA members were any better than non-FPA members, despite the marketing line adopted by the FPA that implies that FPA members are the only honest and competent advisers.

In some ways we find this survey quite embarrassing, after all this is our industry that is being labelled "structurally corrupt" (Louise Sylvan of the ACA said that). It is impossible for a financial planner to enjoy watching news reports saying that Choice just looked at financial planners and found them to be a dodgy bunch of commission taking salesmen.

On the other hand, we don't find particularly surprising. Time and again we have met other advisers who seem more concerned about maintaining the prestige of the industry by presenting a united front and not being critical in public than trying to improve the industry fundamentally.

In other words, to some members of the financial planning industry the best way to improve the industry's reputation would be just to assure the public that shonky advisers are in the minority, but not to actually take any active steps to remove that minority. We get a lot of emails from advisers who have read this site and while most are positive there are some that are highly critical of the opinions expressed here and see them as bringing the industry into disrepute. To the latter we say that the industry has always been in disrepute and the only way out is to raise standards, but many advisers just don't seem to get it.

The response by the Financial Planning Association was vintage FPA spin doctoring. Citing their own surveys they claimed that most clients (70-80%) are "satisfied" or "highly satisfied" and they rejected the findings of the report absolutely. They insist, despite the fact that this is the third survey of this type and only marginal improvements have been noticed over the years, that all is well. One might call this "Caesar judging Caesar". One other point we will note is that the test subjects on the whole were more satisfied with their plans than the judges, it appears that many people who received bad advice did not recognise it as such, bear this in mind when looking at the FPA figures on consumer satisfaction.

Failure to provide a Financial Services Guide is sloppy and unprofessional, not to mention illegal, but we can't be sure that forgetting something like an FSG at the initial interview is a reliable indicator of disreputability. We think the survey was too harsh on this point, for example there were several incidents where the clients later found Financial Services Guides among their paperwork proving that they had had one all along. Several plans had been failed for this one point alone and one plan was re-marked in light of the refound Financial Services Guide from "very poor" to "good"! Although obviously a Financial Services Guide is important we think that the marking scheme was clearly too harsh and possibly excessively weighted toward paperwork being presented in the proper way rather than the quality of advice, it would have been interesting to see how the results would have changed if plans had been scored on quality of advice and technical compliance separately.

In many ways the primary finding of the survey was that advisers are tending to focus too much on selling their product and not enough on advice.

Unfortunately, advisers often don't have a choice about the selection of funds they have recommended, primarily because of restrictions to their recommended product list. This is a real problem for non-independent advisers, a common observation in the survey was that planners were recommending expensive in-house products and not explaining why clients need to pay 3%pa in wrap fees when there are wraps out there that cost under 0.5%. Tied advisers often can't explain to clients why they should pay 3% instead of 1% because their recommended product list doesn't allow them to recommend the cheaper product.

More to the point, recommended product lists often force advisers to recommend you sell your old investments. If you are invested in a product that the adviser doesn't know about because it isn't on the recommended product list, the adviser is often prohibited either explicitly or implicitly from giving you a hold recommendation on that investment. Telling you to hold is telling you not to sell. It implies that the product is ok, which it can't be if your dealer's research department has not approved that product. The system is set up in such a way that advisers often have little choice but to recommend clients sell everything and invest the money in the in-house master trust. This is a basic flaw of the business model where advisors are employed by product providers.

Another major reason why advisers recommend you sell or roll over all your previous investments and put the funds into their products, or inappropriately recommend gearing is so commissions and asset based fees can be maximised. We believe that this introduces a significant bias so we specifically adopted a fee model that does not reward us for telling clients to invest large quantities money.

It is common for financial planners to include some recommendations that are more for their own benefit than that of the client. For example we have had numerous talks with young financial planners who report multiple incidents where their employers have chastised them for not recommending enough products.

For example, the best strategy for a client might be just to pay off a mortgage and then to arrange to salary sacrifice some money into their employer's super fund. This is, for most people, a very sensible and tax efficient and highly effective wealth building strategy. We have heard from several young advisors who wanted to recommend the above strategy but were overruled by their employers who insisted that managed funds be used "because we don't work for free". The result is that despite mortgage payments often being a better bet, many planners will recommend a retail master trust and often some gearing. The main reason for this, in many cases, is because the advisor's commission or asset based fees would be maximised this way. Strategies are clearly being compromised by self-interest, the fee system does have an impact on the recommendations.

In our opinion fixed fees are the most logical, "professional" and impartial way to be remunerated for financial planning. We have the option of telling clients to leave all their investments where they are, to use their work super, to use nil-commission index funds or direct stocks or even to tell clients just to pay their mortgage off as quickly as possible while we work on other financial planning strategies which don't involve buying investments.

By having a fixed fee for service which is charged for preparing a plan only and is payable to me regardless of whether products are involved or even whether you decide to implement the recommendation we am completely free to be genuinely impartial. If a plan takes $2,000 worth of time to prepare we will charge $2,000 for it. We won't sell such a plan for a few hundred dollars and make the rest in commissions. If the advisor is charging a fee for preparing plans which is not commercially viable and being forced to compensate themselves via inappropriate recommendations designed to create commissions then obviously the business model is flawed, both from the clients' point of view and that of the planner.

It isn't surprising to us that advisers who've been planning for a long time were rated as producing inferior plans than more recent entrants into the industry. "Veterans" of the industry are often former insurance salesmen who remember the good old days of product flogging when high commission superannuation and savings products (the ones with the big exit fees) were sold door to door. They have a mentality that this is still a sales profession and they place far more importance on honing their salesmanship than their technical skills. Within the industry this generation of adviser are not very respected for their knowledge, despite their long experience. Twenty years of selling insurance policies and savings plans does not equal even one year of comprehensive financial planning. Over the next ten years much of that generation of adviser will reach retirement age and hopefully they'll be gone, but there are still lots of them around.

Finally we're really not surprised about the finding that stockbrokers gave the worst financial plans. Even more so than regular financial planners stock brokers have a product to sell (shares, ETFs, options, bonds) and the plan is just 40 pages of cut and paste sales justification. Our personal experience with stock brokers has never been all that good, Travis once applied for a financial planning position with a very large high profile stock broking firm and after a grilling on my investment strategies was told he was "overqualified" and urged to go into funds management instead!

Professional advisers start from a need, design a strategy to address that need and finally find a product to implement that strategy. Less professional advisers start with a product and try to make that fit, or appear to fit, a need by concocting a strategy designed to help sell that product. By definition stock brokers and the new generation of real estate agents who are moving into financial planning are starting with the product first and trying to find a need for that product. Somebody once said that to a man with a hammer every problem looks like a nail, this is clearly the case with brokers and agents.