Address to the Financial Planning Association’s Small Principal Conference 2010, Melbourne

March 19, 2010

It is a pleasure to be here at the Financial Planning Association’s Small Principle Conference this morning, and be speaking to you about the Coalition’s perspectives on financial planning and the investment sector. I’ve been told that my speech today is worth .05 continuing professional development points. I was very flattered with being able to contribute to your professional development – until I found out that most other programs in this conference are worth a whole one point!

But on a more serious point, today’s conference brings together two sectors that are of great importance to the Coalition – the small business sector and the financial planning sector.

Planning how financial products can suit an individual’s circumstances is a professional skill. Today, more than ever, people need expert financial opinion and advice on the thousands of investment and financial products available in the market. Today’s complexities of investment products increase the necessity for plans to be made by professionals with a diverse knowledge of the industry. As we all know, history is full of plans gone wrong.

I’d like to take a detour from financial policy and tell you about a moment in history that I was reading recently - the German Army’s Schlieffen Plan during World War One. In 1914, generals in the German Army under the original plan of General Schlieffen planned how they were going to initiate victory. The generals devised an enormous flanking movement that would encircle Paris and cut the country in two. The French army would be driven eastward where the waiting German artillery would cut them to pieces. The plan needed to be undertaken at a rapid speed to encircle Paris.

What interests me about this plan is that the generals had arranged everything down to a minute detail. 300,000 soldiers were expected to march for 42 days at a speed of 12 miles each day.The problem with the plan - not foreseen by the Generals with all their military training - was that they were basing the speed and time of the operation on elite, professional soldiers. Because Germany was at war, it had called up its Army Reserve for the operation and the Army reserve were less fit when compared to Germany’s elite forces. The Army were unable to keep to its timetable because the troops were too slow and both Belgium and Russia were able to advance and limit Germany’s movements, preventing the planned occupation.Of course, this led to a four year war involving the whole of Europe and the World.

Now, what this piece of history shows is three things:

Firstly, planners must be alert to changing circumstances – the German command should have realised quickly that the advance was not going to achieve the required pace.

Secondly, planning needs to respond quickly to changing conditions – the Germans should have revised their plan when it was clear that they were not able to maintain their timetable.

The third thing is that planners need to overcome the changed situation. The failure to devise a strategy and to overcome the fact that the triple entente was able to mobilise quickly and halt the German advance meant that the original 6 week campaign degenerated into a 4 year campaign involving the entire world.

Sometimes, the failure of professionals to plan these differences can lead to absolute success or failure like in the case of Germany in World War One.  In the financial industry, the Global Financial Crisis was a fantastic example of an unforseen circumstance which forced investors to adapt to changed conditions and device plans that would overcome those conditions. The profession of financial planning was formed to address individual needs in planning for a person’s financial future and overcoming these challenges. Every investor needed a difference plan to suit their needs.

My reading tells me that the financial planning industry started in the United States in 1969 and has grown worldwide into a profession with over 120,000 professionals with a Certified Financial Planning Licence. The industry was started in Colorado by two men. One was a motivational writer who was once a door to door vacuum salesman, and the other was an insurance and school-supply salesman with a Masters Degree in psychology.

These two men organised meetings with those involved with financial investments and stock-broking. The first meeting involved 13 representatives from the financial industry, who began discussing the standards and practices behind financial panning and how they could be flexible enough to suit individual plans. Through teaching financial planning principles to new members, the meetings led to the college of financial planning and the creation of the CFP qualification. Over forty years, this qualification has spread around the world.

The start of financial planning has been called a ‘revolution intended to help ordinary people gain control over their financial destinies’. So the principles of financial planning were based upon individualised advice that was structured to meet the diverse needs of the individual. This should also be a principle of Government’s approach to the regulation of the sector. This is why I am so concerned about some of the things the Rudd Government is doing in the financial planning and superannuation industries.

Cooper Review

I will firstly discuss the Cooper Review and the implications of what has been released so far.

As you all would be aware, the Cooper Review has proposed a so called ‘choice architecture model for superannuation’ in its review of phase one. The Model would put disengaged members into a ‘one size fits all’ universal fund, where the fund must provide a single diversified investment strategy and minimum levels of insurance offer. There will be limited advice for advisers because advice would be embedded in the product and no choices will be made by the member.

Some in the industry are advocating for a universal default fund model because they believe that the number of disengaged superannuation members is a market failure. Because the market has failed to engage employees in their superannuation, a standardised fund needs to be established to provide them with minimal benefits that may or may not meet their long term needs. I argue that this approach is the wrong attitude to bring to superannuation and investment policy.

The superannuation process is already too remote and disengaging, particularly for a young person just out of school who doesn’t want to think about retirement and only wants to think about earning money. A universal default fund that operates without any choice from the employer or employee will simply increase the remoteness of retirement to many Australians, particularly young Australians. The focus on the Government should be on how to engage these employees rather than admitting defeat and quarantining their money off into default funds.

The CEO of the FPA, Ms Bloch, was spot-on when she raised concerns that “a narrowly defined default superannuation structure would further remove decision making and choice from consumers”. Government needs to be focused on creating a culture of saving and engagement in financial planning.

Number of Reviews

And this brings up my next criticism of the Government’s current approach to financial planning and investments. To encourage savings and engagement in planning, investors require confidence in a strong stable regulatory environment. Tony Abbott said to me long before he became opposition leader that “this government hit the ground reviewing.”

It is difficult for investors to have confidence in the market when the Government is pursuing over 20 reviews in my areas of Financial Services, Superannuation and Corporate Law. Just this year, the Minister has announced 6 reviews. There has been a discussion paper, a public consultation, submissions invited to draft regulations, a proposals paper, a consultation paper and an options paper.The Minister has even started announcing future reviews. The industry has been told to expect exposure drafts at the end of the year into market misconduct and superannuation reporting that will be reviewed.

I believe that investors deserve the right to enter a market without worrying what the regulatory environment will be in six or twelve months time from now. And of course, we also have the Henry and Cooper reviews, which will generate long debates on the correct regulatory approach to investment markets and Australia’s superannuation structure. Australians will be forgiven for thinking twice about making private investments before regulatory certainty is provided by the Government.

For the principals of financial planning businesses relying on investments, this is an important point. I would be particularly be interested in the increase and decrease in private investors requiring financial planners over the past three years.

Ripoll Report

Of course, the industry has been placed under pressure by the cases of Storm Financial and the Westpoint collapse. You all know that Storm in particular led to the Ripoll report into financial products and services from the Parliamentary Joint Committee on Corporations and Financial Services. I’d like to go through the main recommendations from the Ripoll Report and give you my thoughts of them, because the Report is creating a lot of debate in the industry, as you well know.

Firstly, recommendation 1 suggests that a statutory fiduciary duty be included for financial advisers operating under an Australian Financial Services Licence. But there are a number of legal precedents which say that financial advisers already have a fiducial obligation to their clients. For example, in the case of Daly v Sydney Stock Exchange in 1986, Justice Brennan said: “Whenever a stockbroker or other person who holds himself out as having expertise in advising on investments is approached for advice on investments and undertakes to give it, in giving that advice the adviser stands in a fiduciary relationship to the person whom he advises”.

So the question to be asked for investors and advisors is simply – what difference will a statutory fiduciary duty make? Many law firms think that the statutory requirement will make absolutely no change to how the industry operates. The firm Mallesons Stephen Jacques is saying to the legal profession that “it follows that the imposition of a statutory fiduciary duty should, in most cases, have no substantive impact on the advice provided by the adviser or the way the adviser is paid for the advice”.

As such, I personally do not feel that a statutory fiduciary duty is absolutely necessary, but the Coalition will review any future Government legislation that gives effect to this recommendation.

The report’s next important recommendation is recommendation number 4, which would require the Government to consult and support industry in developing the most appropriate mechanism by which to cease payments from product manufactures to financial advisers. This refers to the debate about commissions paid to financial advisers. I do not have a problem with commissions where the fee is genuinely for advice received and can be linked directly to that advice.

In my opinion, a commission needs to be directly linked to the advice provided. There needs to be a sunset clause on the commission and the investor needs to have the opportunity to switch the commission off when advice ends. I’m encouraged by steps from the Financial Planning Association and other bodies involved with managed funds, such as IFSA to move towards a ban on trailing commissions. This has been an appropriate response by the sector following the debates last year on the merits of trailing commissions.

On commission more generally, as you would be aware, a big issue is how investors and workers from low income backgrounds can afford financial advice without paying through commissions. I believe that we need to encourage the availability of financial advice to all Australians. A blanket ban on all commissions without allowing alternative incentives for Australians to receive advice is not desirable.

That brings me to the next recommendation of the Ripoll Report – Recommendation 5, which suggests that Government should consider the implications of making the cost of financial advice tax deductible. Unfortunately, the implications of this recommendation will be placed on the Commonwealth Budget. As you would be aware, the Labor Government has plunged Australia into record levels of debt and deficit. The Commonwealth Budget Accounts show that net debt will peak at $153 billion in 2014-15. This is after the Coalition left the Rudd Government with net assets of $42.9 billion in 2007.

The Budget position is going to limit the Government’s options to improve the taxation treatment of financial advice. However, I believe that Recommendation 5 of Ripoll is well worth considering by the Government to improve access to financial services, particularly for those that cannot currently afford up-front fees.

The final recommendation from Ripoll that I will discuss is Recommendation 10 – that a statutory last resort compensation fund be investigated by the Government to essentially ‘bail-out’ investors in failed investment schemes. The Coalition believes that such a recommendation will have impacts upon market risk and the level of return for investors willing to place their money in riskier ventures. Further unintended consequences of this is recommendation are that companies may be less inclined to do everything possible to succeed if they have the safety of a fund of last resort to pay out investors.

But the Coalition do not know where the Government stands on the fund of last resort in Ripoll, and the Report’s other recommendations, because the Minister has refused to consider the Report until after the Cooper Review is finished. So once again, investors and financial planners have been left in the dark about how the Government plans to proceed. And, as I have discussed, Government needs to provide the sector with certainty if it is asking investors to have confidence in the market and to continue investing and backing the Australian economy.

Johnson Recommendations

I also think that the Government should be taking the Johnson Report more seriously, because it contains some innovative measures to encourage international financial trading in Australia – particularly by reaching out to Asian investment markets.

The Johnson Recommendations are examples of reforms that will push Australia’s Financial Services forward rather than simply rearrange the rules through uncertain regulations. The initial enthusiasm for the Report by the Minister was dampened by Prime Minister Rudd, who indicated that reforms to the sector might impact upon how well ASIC and APRA performed during the Global Financial Crisis. So, the Prime Minister is more worried about regulation and the role for Government, rather than improving international competition in Australian’s financial services market.

Financial Planners as Tax Agents

Finally, on the issue of uncertainty, I’d like to discuss the recent moves towards requiring financial advisers to be listed as tax agents. This is an example of a Government unaware of how its reforms will impact upon the Australian investment industry.  As you would be aware, the Government implemented a requirement that financial planners who provide tax advice will need to be registered as a tax adviser with the Commonwealth. Registration as a tax adviser will require the practitioner to hold tertiary qualifications, a diploma, and admission to legal practice or relevant work experience.

Financial Planners who have gone through separate requirements to receive a financial planning license will have their business put at risk if they cannot legally give advice with taxation implications.  Senator Sherry has said that “the only time a financial planner would be required to be registered is if they are providing tax advice in circumstances where the recipient of the advice can be expected to rely on it to satisfy their tax obligations”.

But doesn’t all financial planning advice have taxation implications? Deen Saunders of the FPA made a good argument when he said that “there is ambiguity…and this is certainly the issue that we are concerned about. We want to make sure that the information is clarified for our members”.  The Government have promised to review the requirements on financial advisers this week. But we are still waiting to hear from them.

I believe that there needs to be some degree of balance between the taxation and financial advice that advisers give. Financial advisers giving advice on taxation issues do need to be suitably trained through bodies like the FPA to give that advice.  The Government needs to clarify its intent with relation to the legislation and thereby give the financial planning industry some certainty. The many small businesses here today deserve to immediately know what the regulatory arrangements are.

Conclusion

In conclusion, I’d like to restate how I started my speech by asking: what makes a good plan?  In order to meet a client’s needs, plans must firstly account for changing circumstances; secondly, plans need to respond quickly to those changed circumstances; and thirdly, plans must be adapted to overcome those circumstances and continue meeting the client’s objectives.  The problem with the regulatory environment today is that financial planning needs to take account of an uncertain regulatory environment, where the Government is more concerned about reviewing rather than giving certainty to what it plans to implement.

A Coalition Government will take the light touch on the wheel approach to regulation. Like how I have outlined my views with relation to Ripoll today, the industry will have no doubts as to where we are headed, and reforms will be designed to improve the market, rather than impede it.  The Financial Planning Association has a big role to play in advising the Coalition and myself on current and future issues in the sector. We hope to have direct engagement with financial planners, rather than requiring you to write endless submissions to endless reviews.

Thank you for the opportunity to speak today. I look forward to working with you in Government.

 

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