Mr Harvey Kalman, head of corporate fiduciary and financial services at Equity Trustees Limited (EQT), said that this view is even more critical in the operating environment that now exists following the US credit crisis of 2007 and which is to change even further with new regulations.

“Fiduciary care is not simply something that is a nuisance and which now has to be adopted because of the new regulatory framework for advisers.

“Most advisers have always tried to act in the best interests of clients.  The difference now is that the ability to show that due care is taken will be essential protection for when things go wrong again, as they inevitably will.

“It is as certain as night follows day that there will be another investment crisis – the only unknowns are when it will happen and what form it will take,” he said.

Mr Kalman said that a significant development in Australia that has happened separately to, and mostly since, the US credit crisis occurred, is investors’ ability to take class action much more easily than ever before.

“It has always been an option for them, but the recent emergence of aggressive litigation firms actively seeking clients in class actions makes it much easier for investors to take action when they have suffered investment loss.

“For such reasons advisers need to fully understand and embrace their fiducial duty of care – including that they know their clients’ risk profiles, act accordingly, and have confirmed that clients themselves understand how the recommendations the adviser makes fit with this, and what the ramifications are.

“It certainly adds another level of difficulty to the adviser role and creates an unenviable balancing act for them, between seeking returns and managing risk with a number of new considerations now needing to be taken into account.”

Mr Kalman said that with the increased risk of litigation, the structure and role of the Responsible Entity (RE) when selecting fund managers to invest with, and their investor protection capabilities, is a good example of the considerations that need to be taken into account.  

“Investors and their legal advisers pursuing capital losses incurred because of a fund collapse, or inappropriate behaviour by the manager, will look for someone with deep pockets they can sue.

“When a small fund collapses with an in-house responsible entity that also disappears, it could be subsequently argued by an investor that the adviser shouldn’t have recommended the fund because of the additional risk of an in-house RE.

“While ASIC is currently looking at improving the financial strength of in-house REs, this may not be enough to ensure their survival in fund collapses, and I believe such relationships should take on more importance in investment decisions.”

Mr Kalman was quick to add that this belief does not mean that advisers can, or should, only recommend funds offered by large financial institutions.

“Some of the best returns are provided by boutique managers where the principals’ interests are aligned with those of investors, and long-term performance should always be the main consideration.

“However, the strength and structure of the RE for such funds is an increasingly important risk consideration, and ownership, independence, size and strength of the RE should now be taken into account.

“Boutique fund managers can use an external specialist RE which offers both performance and risk management equal to or better than that of the largest fund manager,” he concluded.

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Well the answer is yes – around the financial planning world most if not all regions are facing similar issues albeit they may be further advanced or behind on the journey. In the US it is the big question of planners operating as a fiduciary which sounds very similar to Australia and the one of the recommendations from the FOFA proposals. The only difference is that in Australia we are not sure how to define what fiduciary will mean to clients and planners while in the US they seem to know this but are very concerned about the potential liability to the planner from working in a fiduciary capacity. Could have something to do with the litigious environment that exists in US.

The other topic that is clearly on the agenda for all countries is what to do with commissions.   The position taken by Australia to ban commissions on wealth and investment products lead by the FPA and FSC has positioned us strongly in the eyes of the rest of the world. There was great interest as to how we are making the transition and the potential effect on planners. The fear in other jurisdictions is that planners will see their economic business model flounder and this will lead to a strong reduction in planner numbers at a time when the need for advice will grow strongly. The strange point of this view is that it hasn’t been the experience where planning groups have made transition to a fee based business. The fear is alive and well however around the world.

And what of the mood of the planners at the event – it was only 2 years ago in Boston at the same event that planners watched the Dow plunge below 10000 points and the whole system teeter on collapsing fueled by the likes of some big names like Lehman Bros. Well their mood hasn’t completely recovered and some nervousness remains. They are clearly looking for more certainty in the US economy and equity market and would look to attend any workshop at the event that may give them that hope.

How do Aussie planners compare to their US colleagues. Well clearly there are some very good planners in US and the same can be said about Australian planners. Do American consumers get better quality advice that Australians. I don’t think so – if anything one gets the feeling that there is more consistency in the planning model in Australia simply by the fact we do not have the plethora of advice models that exist in US ( broker dealers,wire houses, IRA, IFA, life agents etc etc) which have the ability to confuse the consumer as to the breadth and quality of advice being provided.

At conferences like this there are always a few quotable quotes – Denver 2010 is no exception.

• goal is for FPA members to thrive not just survive in a fiduciary environment.
• there is a difference between being trustworthy and being trusted.
• hurricanes are now caused by people and the credit crisis was an act of god.
• the issue for clients is not risk tolerance it is loss tolerance.
• some consumers hire planners to take the risk out of planning which they cannot do.
• planners must prepare clients financially for the certainty of uncertainty.
• need to prepare clients for uncertainty not getting them to buy what is emotionally easy for them to buy.
• overtime investments work better than Investors.
• through the eyes of the client the financial planner must be a leader.
• may not know the question but the answer is of course you need to be a fiduciary.

What is clear is the passion for financial planning to be recognized as a profession around the world – for planning to be recognized and regulated as a profession. The journey has started and how fast we arrive at the destination will be determined how quickly reform and change is embraced by industry participants.  We will get there – hopefully sooner rather than latter.

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