(Click here to see CPD: Professional Ethics #1  and here for CPD: Professional Ethics #2)

Bruce and Anna are partners in a financial planning practice with around 180 clients between them. For several years they have been receiving irregular client referrals from a local accounting firm resulting in a dozen or so new clients in total.

To this point it has been a very informal arrangement – the accountants have trusted Bruce and Anna to provide ethical, professional, advice for the clients they referred. To this point, by all accounts, the accountants have been very happy with the way in which Bruce and Anna have cared for the mutual clients.

No referral fees or share of revenue takes place between the firms and both parties have believed this to be the most appropriate way to conduct the arrangement.  However, the accounting firm has been undergoing some changes in recent months and Anna recently took a call from one of the partners who arranged a lunch meeting with her and Bruce.

As lunch progressed the accountants explained how they had recently taken on a practice manager who was now running the firm on a day-to-day basis and that it had allowed them to think more strategically about their business. The senior partner explained that they had decided to grow the self-managed superannuation fund compliance section of their business.  He went on to say they were in fact very keen to grow that side of their operations.

From previous conversations the accountants knew that Bruce and Anna had around 90 SMSFs under management.  As the clock approached 2:00pm, the waiter took the coffee order and the senior partner nudged the conversation toward the matter of referrals. He went onto explain the partners had decided that in order to keep referring clients to Bruce and Anna there will need to be reciprocal referrals back to the accountants for SMSF accounting and audit work – that they could not keep referring if there was “…nothing coming back.” The senior partner ‘sugared coated’ the ultimatum by saying they would look to more actively refer to Anna and Bruce if the reciprocal referrals were made.

The comments took Anna and Bruce by surprise and Anna stumbled into a half-hearted acceptance of the ultimatum. “Oh OK – well that’s something new, isn’t it? I guess we can see our way clear on that.” while quietly being very taken back by the statement from the accountants.

The senior partner leant back in his chair and then said: “You know – we’ve been thinking of going into financial planning ourselves and we’d be interested in speaking with you about a merger of sorts one day.”

On the way back to the office Bruce expressed concern about the referral ultimatum saying that he felt very uncomfortable about it. “I know you said we can probably do it but we know they’re expensive – I mean, we know their fees are demonstrably higher than what the other firms we have dealings with charge clients.” He said. “And they’re work is no better than other firms – remember when they missed the three years of interest on the Smith SMSF’s cash account and the tax returns had to be adjusted – and the clients paid for the adjustments?”

Anna knew full well what he meant; in order to gain more referrals from that accounting firm, they would have to begin referring clients back to them knowing it would, on a straight cost basis at least, be detrimental to their clients.

“But then again” said Bruce “I guess if they want to talk mergers this could be our succession planning in process.”

Several weeks went by and during that time Bruce and Anna had only discussed the issue briefly. With the day-to-day pressures of client meetings and advice preparation, even their weekly Practice Meeting had not allowed time to have a more lengthy discussion.  In the back of their minds however, was the nagging thought that they needed to have a detailed discussion to make a decision and respond to the accountants.  Privately, they both had concerns about the offer that was made and they knew it was both an offer and an ultimatum.

One morning Anna took a call on her mobile phone from the senior partner at the accounting firm who firstly enquired if they had given the offer any further thought. She went on to explain that they were yet to formally discuss the matter but were hoping to do so soon. The accountant then said: “Well we’ve been thinking about this some too and we’d like to arrange another meeting with just you – in other words without Bruce.”

Later that week Anna attended the accountants’ office and the senior partner opened the meeting in a more formal manner than the earlier luncheon meeting. “Thanks for meeting with us today, Anna – our purpose is to let you know that we’re going to set up our own financial planning service under license from ABC Financial.”

He hesitates for a moment then gathers his thoughts: “This is a rather awkward part of the conversation we need to have with you, Anna. The bottom line is we’re keen to merge the two firms however it’s you we want to come across to us as the adviser. We know that you meet with most of the clients and we feel that it’s mostly your presence in the business that keeps the clients happy. Bruce must be close to retirement and we think it makes good sense for all parties ”

Anna is again taken aback by the topic of conversation. She and Bruce have been in business together for more than a decade and on the whole it’s been a very good working relationship. “And we’re prepared to pay you a year’s salary as a sign-on bonus if you agree however we would require you to sign a confidentiality agreement in that regard.” The senior partner went on to say.
 

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If the proposals get up then from July 2013 new members will only be accepted if they have an approved degree or higher qualification. The proposals also look to establish a ‘professional year’ program of supervision and as one who proposed this in 1997 – during my work on the then FPA’s ‘Towards Professionalism Taskforce’ – I’m glad it’s finally being recommended to members.

The other perhaps more controversial proposal is to discontinue to the ‘Principal Member’ category which will more fully align the association as a practitioner focused. This is not semantics – a key weakness of FPA since its 1992 birth has been the perception that outwardly FPA is all about professional standards but inwardly it’s all about what’s best for members and licensees’ commercial interest.  For many perception is reality and when the media force feeds such perceptions to the community it’s not rocket science to work out what the community will think of financial planners generally and the association.

The ultimate destination for FPA is to become a standards setting body – not a hybrid of member services and professional standards setter. A pure standards setter will implement and monitor professional standards expected of members who are granted the right to use professional designations such as CFP.  Practitioners who breach such standards are dealt with by various disciplinary procedures including, ultimately, dismissal, and the integrity of the organisation and the standards it represents are much better protected.

As for an abolition of the Principal Member category, such former FPA members would still be able to insist that their advisers comply with FPA professional standards and in terms of the ‘member services’ issue for such businesses, for the big end of town their natural home is probably more closely linked to the Financial Services Council (formerly IFSA).  It’s the so-called ‘small’ Principal Members which might suffer most but I have great confidence that the entrepreneurial spirit embedded in such businesses will see opportunities to not only perhaps gather under another purely member services ‘association’ type structure but also to find ways to refresh their commitment to the highest professional standards.

The proposed changes are a good start and in time should arrest the lamentable slide in the otherwise good name of the association in the industry.

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