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Disclosure is back on the regulatory agenda again, and the rules will undoubtedly be changing yet again. There is no doubt in my mind that disclosure of costs, fees and conflicts enhances trust and professional credibility. However, there is also no doubt in mind that disclosure can be taken so far that it becomes a barrier to establishing trust and professional credibility.Regardless of how “the rules” end up being defined and regardless of whether those rules end up being bloody stupid (as some mooted rules certainly are) I am just as sure that it is not a good strategy for advisers to try and find a clever line that is just on the “right” side of the law (you hope), and then try to make the case later on that you are an honest person.
Honesty in the advice relationship is there right at the beginning, or it is never there at all.
In this part of the world we do not have uniform disclosure rules applying equally to all market participants. That is poor, and unhelpful to consumers. That will change shortly however, and that is good. Whatever new or additonal disclosure rules do come into force must apply universally across the market if the market is to be truly transparent and assist consumers in making good and well-informed choices.There will be resistance from some segments of the industry, but how can the industry build trust in the adviser-client relationship if some participants are not willing to be direct, specific and transparent from the beginning?Having said that, the rules need to be sensible and fair if the regulators and policy-makers hope to avoid creating a whole new loophole-finding-consulting gig for the lawyers and institutions.Informing consumers of their total and actual costs in purchasing a product or obtaining advice should be a non-issue. Disclosing actual material conflicts should also be a non-issue. Disclosing indirect conflicts (such as acting for two competing parties simultaneously) where the only conflict management choice really is to withdraw and avoid the conflict should be a non-issue too.There is a tendency for policy-makers to draft rules which do not actually disclose the benefits which may arise from a product sale or the delivery of advice though. Instead they focus upon the simplistic disclosure of one part of the transaction only.In the sale of product or advice there are essentially three possible parts to the transaction. There is always “the possible gross revenue which can be generated” and then there is also always “the actual cost to the adviser of delivering that product or advice“. The third aspect which will be involved in some transactions (but not all) is “conflicts created by the remuneration structure“.By NOT insisting on all three aspects being covered in disclosure there is a substantial risk of incorrect disclosure resulting in a reduction of trust and participation by consumers as an inaccurate portrayal of the advisers conflicts are being delivered.That is unfair to industry, and just as unfair to consumers.Consider the following;
- If I disclose that providing a mortgage product to you generates $4,000 in brokerage then you form a certain view of my incentives to place you with that product. Of pertinence too should be that (in this example) that $4,000 is by no means guaranteed once it has been paid either. The party paying it reserves the right to take it back from me if the consumer ceases to use the product within the next 18 months (for example), so this income remains at risk for some time.
- If I subsequently disclose that my costs in delivering brokerage services to each client (excluding personal remuneration or income which may arise from doing so) is $1,500 per consumer whether they follow my advice or not, then a different picture of my potential conflict emerges.
- One can assume at this point that I should disclose perhaps $2,500 as being what is available to me as the business owner? Except for that awkward stuff called company tax, and the GST/sales tax too of course….and that leaves the adviser-business-owner with something closer to $1,500 gross available for personal earnings….from which they pay personal tax of course too.
- So what should be disclosed?$4,000?$2,500?$1,500?Would the difference in these numbers change consumer perception, and therefore participation in the use of advice?I believe so.While I used an example of a brokerage-based product here, the same situation fundamentally arises with fee-based advice. That is especially true when one considers that very very few fee-based transactions are entered into at full time/cost recovery prices up front. Putting together a comprehensive financial plan for instance will take many advisers a solid 20-22 hours of labour time – about one-third to one-half of which is creating compliance-focussed documentation. Naturally consumers do not wish to pay for that stuff, and advisers do not want to try and charge them for it either, so it becomes a sunk cost to be recovered hopefully over time with further work.The point is that there are real costs in delivery, and real business risks which the adviser must assume, and they all impact upon what the actual conflict is for the adviser. But not all elements are disclosed….because we are usually forbidden to do so by “the rules”.When thinking about disclosure rules let’s try and create a system which is actually honest for all.Can’t be more fair than that, surely?