Ethics and investments


Financial advice professionals should exhibit the characteristics inherent in the twelve standards of FASEA’s Code of Ethics.

Most clients cannot meet their financial objectives without the design and implementation of an investment strategy. Judging by complaint categories, this can be a contentious area and one in which ethical behaviour and absolute professionalism is paramount. This article, proudly sponsored by GSFM, examines the varied investment ‘suppliers’ and examines ethical practices through an investment lens.

In developing its Code of Ethics, FASEA was focused on making sure financial advisers were committed to providing a professional service:

Collectively, financial planners and advisers are members of an evolving profession. As such, while you may have formerly provided a commercial service, you should be committed to offering a professional service – informed by a Code that is intended to shape every aspect of your professional conduct.[1]

That financial advisers act in a way that promotes professionalism in the industry is enshrined in the Code (standard 12). However, it’s in the best interests of everyone across the industry to be recognised as a profession. It’s not just the respect that comes from being a recognised profession, it will help grow your business, improve revenue and be positive for the whole sector.

What is professionalism?

There’s a plethora of blogs written about professionalism – they seem to cover the same ten points as essential ingredients for a professional. Most talk about appearance and demeanour; for some people, professionalism means mean dressing smartly at work, or doing a good job. The blogs also talk about qualifications, as for many people being professional means having relevant degrees and certifications. This is an integral part of the professionalisation of the financial advice profession in Australia.

While professionalism may encompass these elements, it is so much more.

The Macquarie dictionary defines a ‘professional’ as “someone belonging to one of the learned or skilled professions” who is “an expert”.

Professionalism raises an expectation of quality service from someone with high standards of education, expertise and with each client’s best interests at heart.

That is what the financial advice industry is aiming for and, in part, underpins the rationale for the introduction of FASEA’s Code of Ethics.

The attributes of a professional

While wearing an expensive suit or driving a flash car might be some people’s idea of the outside trappings of a professional, the varied definitions suggests that professionalism is comprised of a range of different attributes and attitudes, which include:

Honesty and integrity

These qualities are integral to professionalism; they keep their word, build trust with clients and do not compromise their values. Professionals always act in the best interests of their clients. This notion of ‘best interests’ permeates most of the standards, but is explicitly called out in standards 1, 2 and 5.

  • S1 – You must act in accordance with all applicable laws, including this Code, and not try to avoid or circumvent their intent.
  • S2 – You must act with integrity and in the best interests of each of your clients.
  • S5 – All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances.You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied


Although competency underpins many of the standards in the Code of Ethics, it’s expressly enshrined in standard 9

  • S9 – All advice you give, and all products you recommend, to a client must be offered in good faith and with competence and be neither misleading nor deceptive.

Specialised knowledge

Professionals commit to develop and improve their skills and knowledge and appropriate degrees and certifications. Financial advisers likewise need specialist knowledge and need to keep it up-to-date. Although it is implicit in a range of standards, including standards 5 and six, it is explicitly covered by standard 10.

  • S10 – You must develop, maintain and apply a high level of relevant knowledge and skills.

Ultimately, the importance of professionalism to the advice sector is captured in standard 12.

  • S12 – Individually and in cooperation with peers, you must uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest.

Professionalism is about your characteristics and behaviours, and importantly, the manner in which you operate your business and interact with clients. A chink in the value chain of an advice practice can undermine the firm’s professionalism. At best in might impact your business’s reputation, at worst, it might constitute a breach of law.

While your clients expect professionalism from you, it’s right that you expect the best from your investment providers – the research houses and investment managers, as well as platform and managed account providers.

Research houses

The research house landscape has changed over the past decade, with three dominant players accounting for the largest market share, and several smaller and sometimes specialised players. The value proposition offered by the research houses has expanded over the years and for most, extends beyond investment ratings.

The value proposition offered by most focuses on building the investment capabilities of financial advisers, providing research and insights, model portfolios, approved product lists and in some cases, data and analytics. Managed accounts are increasingly becoming a core offering from the major houses.

Research houses are important gatekeepers in the advice industry for several reasons:

  1. The universe of available listed and unlisted financial products is large and constantly evolving – few advisers have the skill or time to undertake in-depth research on all available products – research houses provide a filtered list of potential investments for advisers to work with.
  2. Many professional indemnity insurance policies require licensees/advisers to subscribe to investment research.
  3. Given points one and two, investment managers generally don’t get adequate distribution of their products if unrated. Ratings are needed for financial products to be used by financial advisers and added to investment platforms and managed accounts.

Each of the research houses in Australia ascribe ratings to unlisted financial products, although some also provide ratings for a range of listed securities. The universe of available financial product is large – approximately 4000 managed funds at the ‘headline’ or ‘parent’ level, and approximately 12,000 funds once tax structures and platforms variants are accounted for[2].

Research houses have processes to filter these financial products to identify a smaller universe to submit to their proprietary research process. Most research houses adopt a ‘user pays’ model when it comes to providing a rating, so research is also reliant on the investment provider being willing to pay the research fee. Given the importance of research houses as a gatekeeper, most do.

Each research house employs a different research process; these may be qualitative or quantitative, or a mix of the two. Accordingly, the rating ascribed to a fund may differ between research houses, as will the definition of its ratings.

This is one of the key points ASIC identified in RG79 – that users of research (financial advisers) needed to be aware of, and understand, the varying meanings attached to ratings across the research house industry[2].

Research house ratings are descriptors or labels which reflect the relative merits of financial products, as determined by each research house’s disclosed ratings process, and consistent with the stated ratings definitions[2].

Importantly, these ratings and research opinions are general advice only. It’s up to each individual adviser to understand the investment product and its appropriateness for each individual client, to ensure it is in the client’s best interest. After all, analysts at research houses do not know each client, their objectives or individual circumstances and cannot therefore determine suitability of a specific investment for a client. Personal advice is the role of the financial adviser.

While clients’ best interests are at the heart of FASEA’s Code of Ethics, the above point is expressly stipulated in standards 5 and 6:

  • S5 – All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances.You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied.
  • S6 – You must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances.

Therefore it’s contingent on advisers to not simply rely on a product rating, a listing on an Approved Product List, or inclusion in a model portfolio. You need to understand the investment you’re recommending, to ensure it will be ‘in the best interests of the client and appropriate to the client’s individual circumstances’ (standard 5).

This is particularly important given the increased complexity of some financial products, such as hedge funds.

Licensees need to understand that providing advisers in your dealer group with access to research isn’t enough – you need to ensure there’s a process by which advisers understand the products they recommend, and understand the effects arising from clients acting on that advice (standard 6).

Case study one: Know your product

In 2007 an Australian licensee, with a large number of authorised representatives, subscribed to research from a major research house. The licensee, Australian Advisers, created an Approved Product List (APL) from the recommended list, using products rated Recommended or Highly Recommended.

Maria and Peter, a husband and wife team based in country Victoria, were licenced through Australian Advisers and used its APL when making investment recommendations to clients. It was a time when term deposit rates were circa 4.5-5.0 percent[3], a rate of return that was insufficient for a number of their retiree clients. These were people with very conservative risk profiles.

Maria and Peter found a recommended financial product providing a high income yield. They transferred a number of clients from cash funds to this alternative product, believing it would provide the retirement income required. It was a successful strategy until the Global Financial Crisis (GFC), at which point the financial product collapsed and investors lost their money.

An ASIC investigation found most investors did not understand what they had invested in. Rather than being a vanilla fixed income product, it was in fact a complex hedge fund, investing in a range of collateralised debt obligations (CDOs), the high risk financial instruments that precipitated the GFC. It was also found that Maria and Peter had not fully understood the product; they had used the income yield and positive research rating as their justification for recommending the product. A number of clients took legal action, which resulted in Peter and Maria losing their licence and having to make financial reparation to their clients.

In this case study, Maria and Peter potentially would have breached the following FASEA standards:



Investment managers

There was a time when financial advice was more transactional than professional. Fees generally weren’t charged; advisers were paid an upfront and trail commission by the product provider. In the early 90s, upfront commissions of 5 percent and a trail of 0.5% were standard, although some managers paid a little more, some a little less. Given it was the adviser’s primary form of remuneration, that amount was important.

At the same time, volume incentives were provided by some managers. They were the heady days of overseas trips for top 10 business writers or invitations to luxury breaks thinly disguised as investment conferences.

For financial advice to become a profession, this had to change. Money no longer flows to those managers where you get the best benefit or are mates with the business development manager.

However, it was highlighted at The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that this behaviour remains in some pockets of the industry. Examples brought before the commission suggested that financial advice practices embedded in vertically integrated organisations, such as banks, were incentivised to recommend in-house financial products (and investment platforms) to their clients. The bans on conflicted remuneration target the effect of these sales-incentives on the quality of advice. Consumers are not necessarily aware of this relationship or the conflicts of interest that will arise. In many cases, these conflicts were not disclosed to clients and today, would be a breach of standard 7.

When the Future of Financial Advice (FOFA) reforms were introduced in 2013, it was suggested it might create an incentive for financial advisers to work more closely with investment managers. The logic for this is advisers would be keen to fully understand the financial products they recommend, to ensure they meet the needs of their clients to ensure that they satisfy the best interest duty obligations.

In the same way that financial advisers must be accountable to their clients, it’s reasonable to expect investment managers to be accountable to advice professionals. To ensure you can meet your best interests duty for each client, you need to have a good understanding of any product you recommend. While this understanding may come from a research report, these are generally updated on an annual basis. In the interim, the investment manager will be the best source of up-to-date data and information.

If you feel that you need more information, different information, or up-to-date data, you have the right to request that and any detail you require to meet your obligations to your clients.

Case study – the incentive

William was a financial adviser employed by ACME Banking Group. He received a modest salary and was encouraged to increase his remuneration by earning volume bonuses. These bonuses were in response to the amount of client money that was invested into in-house financial products, managed by several investment management businesses owned by ACME Banking Group, but each with its own brand.

ACME’s product team created a series of fund of funds for three risk profiles – conservative, medium risk and high risk. The funds within each of these fund of funds was managed by ACME-owned entities, although they had different manager names.

William was generally referred clients by the bank’s teller network. He routinely invested these clients into the medium risk product, irrespective of their risk profile. It was found his fact find was cursory and he adopted a ‘quantity over quality’ approach to providing financial advice. He did not advise clients that all of the financial products within the fund of funds were owned by the bank.

As a result of his approach, William earned a substantial income through the bank’s bonus scheme.

If this approach was to be taken by an adviser in 2020, they would potentially breach the following FASEA standards:



Investment platforms

Platforms have innovated over the years. The term covers master trusts, wraps and managed account platforms, each of which are widely used by financial advisers. In the early days, platforms were used by advisers to streamline administration and reporting tasks. Popularity also stemmed from the fact platforms enable investors to potentially access a broader range of investments, including those not ordinarily be available to retail investors.

Platforms today have a much broader mandate.

Researcher Investment Trends released its 2019 Platform Benchmarking & Competitive Analysis Report, an in-depth study of the investment platforms used by Australia’s financial advisers, earlier this year. It benchmarked the industry’s 18 leading platforms and found the final scoring differentials between the leading platforms across a vast set of considerations were narrower than ever, reflecting the intense competition and rivalry in the space.

According to Investment Trends:

“Many platforms have introduced a host of improvements to help advisers further demonstrate their value add to clients, ranging from fee cuts to improved fee comparison tools, managed accounts functionality and retirement calculators.”[4]

The research also discovered that managed accounts remain a key development area for platforms, as these solutions continue to gain popularity among financial advisers. The functionality improvements noted in the 2019 report largely focused on CGT modelling tools, improved ability to substitute and exclude direct equities, and improved tools to monitor and manage model portfolios.

FASEA’s Code of Ethics requires advisers to remove conflicts and act in best interests of the client; accordingly, advisers need to ensure their platform providers are aligned with this goal. This means that advisers need transparency when it comes to fees.

Issues to consider with using platforms

Shelf-space fees

The take up of platforms meant that investment managers needed to be available through each to build and grow market share. As well as meeting a range of qualitative criteria, the manager generally had to pay a fee to be listed on the platform, known as ‘shelf-space fees’.

Although shelf-space fees were banned under the Future of Financial Advice reforms, a grandfathering arrangement allowed them to continue. For example, it was revealed during The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry that one of the big four banks had collected more than $11 million in shelf-space fees for the financial year ending 30 June 2018.

The Royal Commission also exposed instances where such fees were thinly disguised as reporting or administration costs. Now that shelf-space fees have largely been eliminated, it’s important to understand each platform’s funding model. You should understand how platforms pass on costs to clients and ensure those costs do not outweigh the benefit to each client in using the platform.

The second tranche of the FOFA Bills, the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 banned the payment and receipt of certain remuneration that could influence financial advice provided to consumers. In relation to platforms, these banned payment included volume payments from platform operators to financial advice dealer groups and volume-based shelf-space fees paid by funds managers to platform operators.

Set and forget

Also raised at the Royal Commission was concern that for some financial advisers, platforms were used as an easy ‘set and forget’ mechanism. Because platforms provide extensive administration and reporting, there were cases where an investment portfolio was established and went unreviewed for extensive periods of time.

The requirement to provide ongoing service to clients and the opt in obligation should reduce the likelihood of this occurring.

Many platforms have introduced a host of improvements to help advisers demonstrate their value add to clients. These have included reductions in fee, improved calculators and  comparison tools and managed accounts functionality.

Importantly however, you need to consider each client’s circumstances and, in terms of the cost/benefits trade‑off, ensure the client is better-off using a platform rather than investing directly in individual securities. The benefit to you from an administrative perspective cannot take precedence over the fee load for clients.

Case study – an easy option

Richard has his own practice, CAC Financial Planning, licenced through a national dealer group. The dealer group has badged a major wrap platform and encourages its advisers to use that platform. Richard is aware that sometimes dealer groups may be offered volume-based incentives by platform providers, but he’s not sure whether the dealer group receives a benefit as a result of this arrangement.

The costs of the platform are a flat administration cost of $1000 per annum, and investment fee of 1% of assets and management fees from the underlying investments. Richard starts out using the platform for his higher net wealth clients with high value, diversified portfolios. For those clients, the administration and reporting tools are important.

Another benefit to Richard was the online access that clients had to view their investments; it removed a lot of calls and correspondence with clients and allowed him to focus on higher value activities.

Over time, the ease of dealing with the platform, the simplified administration and streamlined reporting leads Richard to move the majority of his other clients to the platform, even those with smaller portfolio simply invested in diversified funds.

In this situation, Richard would potentially breach the following FASEA standards:



Being a professional is all about having the skills, knowledge and competence in your chosen field of financial advice. Clients have an expectation that you have the appropriate experience and qualifications to deliver financial advice and implement appropriate investment strategies to help them meet their financial objectives.

However, it’s important to remember that professionalism is also about your qualities and behaviours; the manner in which you perform your business and conduct yourself.

True professionals possess act with honesty and integrity, display competence and behave ethically. In short, financial advice professionals should exhibit the characteristics inherent in the twelve standards of FASEA’s Code of Ethics.


[1] Financial Planners & Advisers Code of Ethics Guidance, FASEA

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