Conflicts of interest so dogged Annemieke De Boer that in the end they consumed her. A woman who once commanded her own advice practice in the leafy Perth suburb of Subiaco is facing criminal charges, has been shunned by the industry's professional bodies and is being chased by angry investors who have banded together to track her down. She is accused of pumping the Westpoint's high-risk products through her business, Centro Financial Synergy Group, by promising investors - some who she had known for years - a secure, low-risk investment.
Not only are grave questions being asked about the quality of advice, De Boer is also accused of forging a signature and pocketing $48,000 of a client's money, never to be seen again. De Boer is on the hit list of so many people it is hard to say who has pursued her with the most zeal. Perhaps it is ASIC and the major fraud squad of the Australian Federal Police, who launched a joint investigation and charged the planner with stealing.
Perhaps it is the FPA, who expelled De Boer for disgracing the profession. In February, she was found guilty of 29 out of 35 charges and fined $47,000 - one of the most serious actions the FPA has ever taken against one of its members. However, it is her clients who are most angry at the actions of someone they trusted their life savings with. Pensioner Deryck Williams, 75, and his wife, Zenaida lost $350,000 - half of their superannuation - through Westpoint. The Williamses relied on De Boer's advice because they thought she was highly qualified to provide it - licensed not only by ASIC but also as a principal member of her industry body, the FPA.
"We assumed because she was so qualified, she'd done her job properly," Deryck Williams says. "She was obviously hiding the risk." She also made no mention of legal action by ASIC against Westpoint the previous year over its Emu Brewery scheme. When the group came crashing down in late 2005, they say De Boer stopped answering her clients' phone calls and letters and moved her offices across town.
The Williams, like the 4000 investors who collectively lost $320 million through Westpoint, took it badly. The couple nearly lost their home and their marriage became severely strained. They have lost all trust in the financial planning industry. "The whole thing is a disaster. Confidence doesn't exist now," Williams says. On instructions from their client, De Boer's lawyers refuse to talk to the media. Ethics is not a place in England
Clearly, De Boer's actions are at the extreme end of the scale. While many large planning groups were exposed to Westpoint, the vast majority of planners do the right thing by their clients. But some industry experts think more needs to be done to ensure planners are bound to act ethically and free of conflicts. Financial services lawyers Peter Townsend and June Smith are leading a debate about when and in what circumstances planners should be called fiduciaries.
"In its 2005 paper on managing conflicts of interest, the FPA referred to every financial planner's fiduciary duty," Townsend wrote in a recent column in IFA. "For the association, the argument over whether planners are fiduciaries appears over. But in fact is it? And if planners are fiduciaries, what sort of fiduciaries are they and what rules apply to them?" Townsend says it is one that needs further exploration for the financial planning industry. He says the most basic duty of a fiduciary is a duty not to act for your own benefit or for the benefit of any third party, but rather to act only in the interests of the beneficiaries for whom you act. Avoiding conflicts of interest is paramount. "Put simply: the client comes first - totally and completely," Townsend says.
Smith says there has been a significant increase in the standards expected of financial planners as well as the expectations of stakeholders. "To my mind a financial planner is in a position of a fiduciary relationship to clients. It is a higher level of obligation and duty and it very much impacts on this industry," she says. Smith predicts the fiduciary debate will have ramifications. "Planners will need to deal with conflicts and put the interests of their clients first. That's a debate that has to be had," she says. "There will be a debate on the use of in-house products, services and platforms and how financial planners can give advice while acting in the best interest of clients."
FSR - what went wrong?
ASIC defines conflicts of interest as "circumstances where some or all of the interests of people (clients) to whom a licensee (or its representative) provides financial services are inconsistent with, or diverge from, some or all of the interests of the licensee or its representatives. This includes actual, apparent and potential conflicts of interest". It is a tall order and has lead to widely differing opinions on what is a conflict and what is not. ASIC says the following is a conflict: a licensee has an interest in maximising trading volume by its clients in order to increase its commission revenue, which is inconsistent with a client's personal objective of minimising investment costs.
As is this: a licensee has an interest in encouraging a client to invest in higher risk products that result in high commissions, which is inconsistent with the client's personal desire to obtain a lower risk product. As law firm Blake Dawson Waldron puts it: ASIC believes that when the interests of the licensee conflict with that of the client, the licensee is more likely to take advantage of the client, cause them harm and diminish the confidence of the licensee; that is, conflicts increase the potential for bad advice. When FSR swept in during 2001/02 it brought in tough new standards. These included compulsory membership of external disputes resolution schemes, uniform regulation and disclosure requirements, one licensing regime and minimum standards of conduct.
But FSR is a slow-moving beast that, as every licensee can attest, has caused a sharp rise in compliance, costing time and money. The Federal Government, through Treasurer Peter Costello's right-hand-man Chris Pearce, is trying to slash red tape through a series of simpler regulatory measures. Statements of advice (SOA), for example, are no longer needed for amounts under $15,000. When Corporate Law and Economic Reform Program 9 (CLERP) came into effect on January 1, 2005, all Australian financial services licence (AFSL) holders became required by law to manage conflicts of interest. Licensees needed to be aware of conflicts and to control and disclose them.
But disclosure alone does not always satisfy the regulator. It is also a major stumbling block for consumers when faced with a 90-page SOA they neither read nor understand. They need to be able to trust that the adviser is acting in their interests. And all the disclosure in the world is of limited value when the advice is conflicted or inappropriate. Consumer watchdog Choice believes significant problems remain post-FSR. It says there is now too much emphasis on disclosure rather than fair contract terms and workable remedies when a planner breaches the law. Choice also protests loudly about conflicts of interest that flow from commission payments to advisers and when revenue is tied to product sales.
"Choice believes remunerating advisers such as financial planners and mortgage brokers through commissions has significant risks. We are particularly concerned about the effect of trail commissions and 'soft dollar' payments," it says. ANZ Financial Planning for one says it plans to do away with trail commissions in the near future. National Australia Bank-owned MLC was among the first large groups to offer a fee-for-service model. Unlike most of its competitors, MLC does not give volume rebates to dealer groups for using its MasterKey platform. This is despite considerable pressure being put on the wealth manager by at least one powerful dealer group to fall into line and do so. Disclosing the conflict within
The launch of the FPA's conflicts of interest principles, effective July 1, 2006, brought in another set of rules for licensees. The FPA frowned upon alternative remuneration (soft dollar) arrangements, buyer of last resort and the favouring of one product or platform over another. All principal members are required to adhere to the code. The FPA is conducting fieldwork to assess their progress and says it is heartened by the commitment that members are giving to changing processes.
"We are impressed with the seriousness our members are giving the issue," FPA professional standards director Deen Sanders says. "Of course we are also concerned where practices are slower to take up the implications of the principles and further guidance will be issued to assist member compliance." The association has spend the past few months discussing the impacts of conflict of interest with members and has held discussion forums with a number of principal members. It is also introducing online training. But small business owners, such as Queensland's Puzzle Financial Advice principal Bruce Baker, believes all the safeguards of recent years are fundamentally failing to do what they were designed to do - protect consumers.
Baker, who is compliance committee chairman of the Boutique Financial Planning Principals' Group (BFPPG), says bad advice is being allowed to hide behind the veil of compliance. "Many of the factors that might influence advice are not being disclosed in a clear, concise and effective fashion," Baker wrote in a paper circulated around the industry by the BFPPG. "Product providers, of course, have a vested interest in seeking to influence advice so as to maximise distribution of their product. "Many AFS licensees have a vested interest in influencing advice to ensure [representatives] recommend the products of a related entity [or] to recommend a platform that maximises the profit to the AFS licensee." Former High Court chief justice Sir Anthony Mason agrees with this sentiment.
"The adviser who is product selling - for which he may be remunerated by commission or bonus - is also acting as adviser," Mason told a conference of self-managed superannuation fund advisers earlier this year. "This situation may well lead to a dominant culture of selling to which the role of advising is subordinated." The Investment and Financial Services Association is currently conducting its own six-month investigation into disclosure in financial planning. When the Government tried recently to get the industry to accept a split of product sales and financial advice, its proposals were howled down in protest. Most objected to the cumbersome solution being put forward of a two-hat system whereby advisers and sales staff could not cross over into the other's role. The Government has backed down on the proposal but is still pushing for acceptance of some form of the sales/advice split. The advantages of scale
De Boer was a smaller player who appears to have made catastrophic mistakes. But the big end of town is battling its own conflicts of interest. Count Financial is one of Australia's largest non-bank aligned dealer groups and one of the fastest growing financial planning groups in the country. Group executive chairman Barry Lambert is a critic of some of the practices of institutionally-owned dealer groups. Lambert points the finger at major institutions involved in the manufacturing of financial products then distributing that product to the consumer. "Why do banks have financial planners? Distribution. They jump up and down when someone asks about that [but Count has] always preached the independent thing," he says.
"We're in a situation where we don't have our own products ... we think in the advice market you can't be flogging your own product." He says another major source of conflict for planners is research houses that make their money from businesses paying them to rate financial products. "People go out and 'research shop' and find research that supports a commercial transaction," he says. "That's a conflict. You've got a problem, in my view."
MLC boss Steve Tucker, who runs one of the banking dealer groups Lambert is critical of, has his own counter views on the debate. Tucker says not only are consumers being deterred by commission models, but dealers that are highly reliant on product sales cannot say with certainty that the customers' interests are paramount. He is trying to phase out those MLC products that give commissions to advisers. Tucker gives the example of the preferential treatment Westpac's fund manager BT gives dealer groups such as Count through the Wrap Advantage scheme. Dealer groups such as Count rely heavily on product-related volume rebates.
"If some of this fee is paid to the adviser or their licensee ... like it or not it has the ability to influence the decision on where advisers choose to invest the client's money," Tucker says. "We've got a view that conflicts of interest is a reputational issue for the industry and that we should be careful to set up business models that don't create more conflicts." But Lambert says those who hold those views should stop complaining and pass on their robust profits back to clients. "We use our size to get a better deal," he says.
The cautionary tale of AMP
It is AMP's 1233 planners that are bearing the brunt of the financial group's alleged failure to manage conflicts of interest. The regulator found numerous examples of conflicts of interest in the way it advised clients to change super funds. Twelve months on, AMP has made huge efforts to clean up its act and has dramatically increased the compliance and supervision of its planners. Earlier this year it decided to stop giving bigger volume bonuses for selling in-house products in an effort to adhere to the FPA's principles.
Critics could argue it is a hollow gesture - the majority of products on AMP's approved list are manufactured in-house. Soft dollar is still a feature of AMP's corporate culture - its top-performing planners are rewarded with free overseas trips and education vouchers. Now it is just out in the open. The debate continues.
