8 minute read

Professional examines ‘provocative’ question surrounding Code of Ethics

Published on
August 16, 2023
Ben Walsh
Head of Research

Researcher and speaker Dr Katherine Hunt has posed a “provocative” question on her LinkedIn page, probing the legitimacy of the Code of Ethics.

“If the Code of Ethics is so cool, then why are all financial planners with all clients breaching standard four and five?”

“Bit provocative, but it’s kind of true,” she wrote.

Standard four of the Code of Ethics says: “You may act for a client only with the client’s free, prior and informed consent. If required in the case of an existing client, the consent should be obtained as soon as practicable after this Code commences.”

Standard five says: “All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances.

“You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied.”

Dr Hunt noted that while these standards don’t look “so hard”, there are two key reasons as to why they are.

Reason one, she noted, is that “it’s impossible to understand complex holistic financial advice as a lay client”.

“Professional financial planners by default know things and do things clients don’t and can’t. If clients could and wanted to, they wouldn’t see a financial planner.

“Logic 101.”

Reason two, she explained, is that “it’s impossible to consent to something you don’t understand”.

“The medical professional even struggles with this. Real informed consent requires understanding. Same for financial planners and for doctors,” Dr Hunt added.

According to Dr Hunt, “with so much chitter-chatter about the ethics of financial planners”, it would seem that “some structural issues” are present.

“The structural issues have nothing to do with the actual ethical behaviour of financial planners.”

“What am I missing?”

Responding to her post, Ben Walsh, the head of research at Padua Solutions, suggested “for clarity”, “you need best practice to be defined by professional standards”.

“Australian consumer law lends itself for ‘market practice’, which would fail in financial planning.

“Best practice would ensure all reasonable efforts are made and documented,” Mr Walsh said.

“If best practice, as defined by the profession, is spelled out, then innovative technology can help ensure the problem is solved at scale,” he added.

Mr Walsh also shared that “quantitative models” are being developed for capturing the psychological aspects of the client’s picture.

“Initial research is quite promising, as is the aspect of including religion in that picture.”

Late last year, the then chief executive officer of the Association of Financial Advisers (AFA) Phil Anderson said he wants to see the Code of Ethics fixed in 2023.

To mark four years since the Financial Planners and Advisers Code of Ethics was first instated, Mr Anderson at the time voiced the grievances shared by many advisers in a lengthy article posted on LinkedIn.

“It would have been ideal if the entire profession had been able to get behind the code back in 2019 and fully support it. That would have been a really important outcome and given us all a level of focus and direction for the future. That, unfortunately, was not the outcome and it remains the case today,” Mr Anderson wrote.

Much of the dissatisfaction with the Code, he said, has been directed at the “idealistic”, but “completely impractical” requirement in standard three that, “You must not advise, refer or act in any other manner where you have a conflict of interest or duty”.

“We all know that it is impossible to remove all conflicts of interest,” Mr Anderson said.

That, he explained, “would stop a surgeon from recommending an operation and also doing the operation”.

“We also know in financial advice that charging an hourly rate or even a flat fee does not remove all conflicts,” he said.

Ultimately, Mr Anderson stated that a “supported and agreed code is important”.

“I fully appreciate that being recognised as a profession bestows certain privileges and obligations on financial advisers, and acting in the interests of clients and considering the interests of the community as a whole are very much central to that,” he said.

“It is important that the Code of Ethics is fixed and that we can all get behind it and encourage a strong emphasis on the behavioural outcomes that it demands. I am sure we would all like to see the Code of Ethics Version 2 designed and delivered in 2023.”

The original article by Maja Garaca Djurdjevic, Independent Financial Adviser can be viewed here: