Initially, the blame was directed at the Financial Markets Authority (FMA) but after due consideration the consensus now seems to be that some of the blame lies with deficiencies in the Code of Conduct for Financial Advisors which the FMA inherited.
Mr Ross was apparently an accountant and the Society of Accountants seems to have prevailed upon the Code Committee arguing that accountants did not need to pass one of the key examinations to become an Authorised Financial Adviser (AFA).
The examination was known as Standard Set C. It involved a practical assessment of a financial adviser's abilities and may have flagged some warnings. In effect, Standard Set C was designed to show the FMA whether advisers could do their job or not from a practical view point and given that financial planning is not one of chartered accountants' core competencies it beggars belief how the Code Committee could have come to this decision. It also raises concerns that there can be laws for some and not for others - lots of others.
But it gets worse - a number of other groups managed to somehow avoid doing Standard Set C including stockbrokers and planners with the CFP "qualification" many of whom are members of the Institute of Financial Advisers. At the time Gareth Morgan called this ridiculous scenario "industry capture" and the chickens are now well and truly coming home to roost. Not only have many AFA's avoided doing Standard Set C by virtue of their "qualifications", in all too many cases they were "grandfathered" into their CFP qualifications so virtually have never had to sit any exams at all.
Contrast this with the Code's treatment of people like Gareth - he had a PhD in economics, majoring in investment analysis, had never bought a finance company debenture in his life yet would have had to sit virtually all the exams, just like I did, including Standard Set C. That the Code Committee could let this happen is, at best, an indictment of their knowledge of the industry.
Regular readers will remember that the Code Committee got off to a rather bad start when Consumer did a mystery shopping exercise on several Code Committee members businesses. They got bad ratings and resigned. This episode was particularly humorous because a function of the Code Committee was to determine a Code of Professional Conduct for authorised financial advisers, including a minimum standard of competence, knowledge and skill along with requirements for continuing education and training.
As bad as the RAM business was, the losses are nothing compared to the damage done on an ongoing basis to the investing public by industry-wide bad advice. Much of the blame for the continued poor state of affairs in the financial advisory world is due to the initial poor selection of people for the Code Committee.
For sure there are some good people on the Code Committee but one wonders how many really know what happens in the retail investment advisory world. As a result, the industry successfully captured the process of improving the standard of advice with the effect that not enough has been done.
The sad fact is that many of the new rules for the financial advisory sector were determined by the industry, which is very much like putting a fox in charge of a hen house.
Now the FMA, which came along after the Code Committee fiasco, has to clean up the mess. How best to do this? One alternative as set out in the last column of 2012 is a more prescriptive approach from the FMA setting out very broadly what is and what is not good advice. There has been some criticism of this idea by academics and others who say the government doesn't know what's best.
This misses the point. The FMA doesn't need to know what's best - it just needs to observe the average strategies of relatively unbiased pension funds and follow their lead. This wouldn't involve much effort because despite the hype about dynamic asset allocation, things don't change much.
Briefly, it means a base position for an average risk portfolio of 40 per cent in bonds, 10 per cent in property and 50 per cent in shares with 95 per cent of the bond portfolio investment grade, all the property exposure via listed funds and half the equity exposure via index funds and the rest through low-cost actively managed funds.
In the UK, the FSA, with its RDR regime, is trying to do the same thing by a different means. It is forcing advisers to choose from the full range of products which in effect makes advisers include passive funds and other low cost instruments and be prepared to explain to the FSA what they have done and how it is in the best interests of the client. So a prescriptive approach can be very simply implemented. And the payoff is we would have avoided numerous disasters including finance company debentures, CDOs, Feltex etc etc. I suspect lower fees across the board would be a bonus side effect and it would thus also be a small step towards a much-needed downsizing of the finance sector in the economy. Expect lots of reasons from the industry as to why it won't work.
