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The Professional’s dilemma – service versus profit

Being a professional in business raises a number of dilemmas. To what extent are you obligated to serve the needs of your clients above your own? The first FAIS Ombud, the late Charles Pillai, suggested that a key aspect of being a professional is to serve the public interest. But what about making a profit, and doing what’s right for yourself, your business and your family?

There is the argument that making a profit is not what business is all about. Rather, it’s about meeting a need, doing that well, and reaping the rewards thereof. Peter Drucker, affectionately referred to by many as the “father” of modern day management spoke of the purpose of business being to “create a customer”. Steve Jobs, if he were alive today, would probably agree with this. He famously argued that people don’t really know what they need. Who for example knew they needed an iPad until it miraculously appeared on the iStore shelf?

But when it comes to financial planning, things are both similar and different. Often people don’t know what they need. Which is why the industry as we know it today was built on the back of the selling of insurance to people who didn’t know they needed it until they were sold it. But the industry is now different as it undergoes a shift from selling to advice. As a business, this means a shift from being an intermediary business to a professional advisory business. But what does this really mean?

Financial planners are obliged to put clients’ interests first

As an intermediary the primary incentive is to make transactions happen. Their role is to match the product to a client, or more bluntly, to act as a distribution agent for a product manufacturer. A professional however is different. They act first and foremost in the interests of the client. They are a fiduciary who looks after someone else’s assets as if they were their own. The notion of selling something to a person for personal gain is alien to being a professional.

It is no surprise then, that the first principle in the Financial Planner’s FPI Code of Conduct is “Client First.” As the Code puts it: “Placing the client’s interests first is a hallmark of professionalism and is a core value of any profession.” The Code suggests that financial planners who put their clients first, need to “act honestly at all times and not place personal interest or advantage, in any form, before their clients’ interests.”

The Code does acknowledge that this is not as simple as it sounds, given the realities of being a professional in business there are many pressures such as “client needs; employers’ expectations; the expectations of principals or franchisors and the like; and their own need to grow and maintain a successful and sustainable business.”

Nevertheless, the Code suggests that “The client’s interests must, however, be served above all these competing demands.” So whether one is an FPI member or not, financial planners have an obligation as the Code puts it: “to maintain an ethical practice, regardless of their manner of compensation and as such advise their clients based on what is in their best interest”. As a professional it is clear that the client’s interest come before that of the financial planner and/or any other party.

Easier said than done. How does one achieve this? Particularly given that being a professional comes not only with a responsibility to serve the public and clients first, but in fact comes with regulatory obligations. The dreaded C-word, “compliance”, is now a reality of a financial planner’s daily life.

Compliance is important but can be a distraction from what really counts

In my experience, complaining about compliance probably gets more airtime in financial planner gatherings than concerns over politics or markets. But in a recent meeting with a financial planning business, I was reminded how compliance can be a distraction from what a financial planning professional is tasked with.

This task is well articulated by the FPI Code of Conduct: “Financial planning is the process of developing strategies to assist clients in managing their financial affairs to meet life and financial goals. The process of financial planning involves reviewing all the relevant aspects of the client’s current situation and comparing them with the client’s desired situation and designing a plan to assist the client on this journey of financial independence.”

Worrying about ticking boxes not only serves as a potential distraction from the task of taking clients on a journey to financial independence, it can even undermine that journey. The ongoing debate about a risk profile is one example of this. The FAIS Act requires financial planners to complete a risk profile of their clients before recommending and implementing an investment solution. But that is not always in line with “the process of developing strategies to assist clients in managing their financial affairs to meet life and financial goals.” A person’s risk profile may have very little to do with helping a person meet their life and financial goals.

I have seen businesses with an incredibly thorough process of understanding their client’s life and financial goals, and then insert into their process, a risk profile exercise that adds no value to an already robust process, but simply ticks the compliance box. This highlights the dilemma of being a professional in business. Meeting your regulatory obligations so that you don’t lose your license, whilst trying to provide a great service to your clients, which is key to building a successful business.

Compliant businesses are not necessarily successful businesses

A successful business is not one that ticks all the compliance boxes. A successful business is one that has loyal clients who are profitable for a business. So what are we to make of this?

I remember having a conversation with Charles Pillai, in which he said if financial planners simply did the right thing for their clients, they would not need to worry about their compliance obligations.

Now defining what is the “right thing” is not simple.

In effect Charles Pillai was acknowledging that simply being compliant does not necessarily guarantee the best outcome for clients. The use or abuse of the risk profile is clear evidence of this. This presents a big challenge for financial planning businesses. What box do you actually need to tick?

The C-word that really counts is Culture

The answer to this question ironically does come from the regulator, but not, at this stage, from the law. It is in the form of Treating Customers Fairly. The first outcome of TCF is that clients should be confident that they are dealing with a business where the fair treatment of customers is central to the business culture. What this guidance suggests, is that Culture is more important than Compliance. TCF provides further insight into what this means.

First, it suggests that the attitude of the business starts at the top. The leadership of the business must demonstrate the desire to treat customers fairly. Second, the attitude needs to be inherent to the strategy of the business – TCF must be reflected in the formulation of strategic plans. Third, it recognizes that financial planning is a people business. So to be sure that you are treating clients fairly, you need to have appropriate recruitment and training. Recruit staff with appropriate values and skills, and train new and existing staff on TCF. Finally, ensure that the business has appropriate rewards and recognition. To treat clients fairly, the rewards framework of your business must support TCF. There can be no greater incentive not to do the right thing for a client if a financial planner is under pressure to generate revenue from an interaction with a client.

Effectively the regulator is saying that the C-word is important, but it’s not the C-word you thought. In the same way that being ethical doesn’t necessarily mean obeying the law, so too, Culture trumps Compliance as a means of ensuring that you effectively help your clients on their journey to financial independence.