Banking royal commission: here comes the shake-out

With financial advice’s reputation tarnished by the bank inquiry, huge changes lie ahead. But will investors come first?

The reputations of banks are taking a bashing at the royal commission.

Here comes the shake-out. With the reputation of the financial advice sector now officially hitting rock bottom at the bank inquiry, there are going to be huge changes.

The headline-making changes will be banks moving as fast as they can to distance themselves from the executives who led this era.

One way to do that quickly would be for banks to sell off their “wealth” divisions.

It is no surprise then we find out that Commonwealth Bank is planning to sell its Colonial First State operations just hours before an executive at that same subsidiary, Linda Elkins, agrees under questioning at the royal commission that CBA is a “gold medallist” in fees for no service.

It turns out that, in common with AMP, CBA failed to provide annual reviews to financial advice customers but charged them for it anyway. The bank has since paid $118 million in refunds to 30,000 customers.

But, as Ms Elkins conceded under questioning, Colonial made no effort to remove those units from its investor choice menu following the incidents.

That’s because financial advice in our market, in many instances, is not advice but rather the sale of financial products. Worse still, those products are often created by the same organisation providing the advice in the first place.

It’s a hopeless outcome for the investor.

But moving wealth management brands with battered reputations off the books is not an answer for anyone. The heart of the matter is how financial advice is given and who gives it.

The shake-out that has to happen in financial advice is a plan to overhaul the qualifications of financial advisers.

A little over a year ago new agency called FASEA (Financial Adviser Standards and Ethics Authority) was created to reform financial advice education standards. FASEA’s first listed priority is “approving degrees or equivalent qualifications” in financial advice.

Until very recently it was not hard to get adviser qualifications — the so-called “RG146” standard in the industry was much too easy to achieve. The relevant exams were multiple choice questions. (I am RG146 compliant. I passed the exams four years ago and they are not difficult).

But under the new FASEA plans anyone who wants to call themselves a financial adviser will have to pass considerably more rigorous exam procedures where “a bachelor’s degree in a related field” will be the cornerstone. The agency is currently working on establishing new degrees and making decisions on the treacherous area of “degree equivalence”.

The majority of advisers in the industry today do not have degrees. According to the professional representative group FPA (Financial Planning Association), 65 per cent of FPA members have a degree compared to a general level of 35 per cent across the industry.

You would think in the current atmosphere that financial advisers would be rushing to sign off on FASEA’s agenda.

Unfortunately, professional life is rarely so simple. The new qualification regime as proposed does not recognise some commonly-held related qualifications. The head of the FPA, Dante De Gori, says he is concerned the new proposals are “over-engineered and will result in less access to advice for customers at greater cost”.

So there are two big changes afoot — banks hiving off troubled financial planning units and financial planners accepting new, higher standards for their profession.

No prizes for guessing which is going to happen first.