Opinion: School’s out

In 1960, infamous Ponzi scheme operator Bernie Madoff graduated from Long Island’s elite Hofstra University with a degree in political science, before going on to law school. He is now serving a 150-year sentence in a North Carolina federal prison.

Meanwhile, former Enron CEO Ken Lay was studying advanced economics during those same years in the early 1960s, eventually earning a PhD from the University of Houston. He died in 2006 after being found guilty of six counts of fraud and conspiracy.

True, Adolf Hitler famously failed the entrance exam of Vienna’s Academy of the Fine Arts. But do you really think had he passed and matriculated that the Third Reich and subsequent horrors would have been avoided?

Education might be important, but it has no causal relationship with ethical behaviour.

And yet, more education is consistently offered by politicians, executives and the industry associations as a panacaea to the industry’s perception problems, even though that reputational crisis has everything to do with ethics and almost nothing to do with lack of technical knowledge.

Let’s take a blunt stroll down memory lane. Of all the bans, scandals and crimes that have contributed to marring the reputation of the wider advice industry in recent decades, what percentage do we realistically think occurred because the adviser in question had insufficient knowledge of the derivatives market, or should have spent more nights studying for his next CFP assessment?

Maybe a few, but the vast majority were either out-and-out crooks or – more likely – acting in accordance with the in-house product flogging KPIs set by their dealer groups and owner-institutions.

Indeed, the industry largely finds itself in this unenviable position: where government and consumer advocacy groups feel they need to intervene with mandated standards – because of the sales-focused 'boiler room' culture that led to the major scandals in the major wealth managers.

Ironically, the institutional wealth management arm bosses are likely more educated (in the formal textbook sense) than many of the advisers under their control. It was a bunch of MBA graduates that developed the vertically integrated model that turned advisers into salesmen and clients into customers (and often ripped off customers at that).

So why then is education so readily agreed upon as the solution to this crisis of confidence?

Well, as all journalists are told from an early age, you just have to follow the money.

For the industry associations – sorry, make that 'professional associations' – education is the primary cash cow, with fees for some of the certifications in the market upwards of $1,000 per year in perpetuity.

Much of that education coin then flows on to the political party machines, either in direct donations or to third-party lobbyists to advocate on their behalf. Given the two major advice associations did a deal with the FSC over risk advice commissions, I’ll leave it to you to decide how well that money is being spent – but that is a rant for another day.

Moreover, education is a convenient PR tool. Mandating higher standards makes government look like it has consumer interests at heart without irking anyone except for a few veteran advisers. For the institutions, it briefly appeases a cynical news media, allowing them to pump out some positive spin on a band-aid solution that does nothing to address the incentives at their rotten core.

Don’t get me wrong, investing in further education may be wise for a financial adviser. It will give them a broader and deeper understanding of their clients' financial lives and allow them to more critically engage with the sales pitches of BDMs and licensees. It could also possibly give them a competitive advantage over their peers.

But business owners should decide how educated they want their staff to be, and the quality of the services they offer – not politicians in Canberra or the boardroom bandits that caused the problems in the first place. These VIPs might be armed to the teeth with degrees and certifications but are hardly in a position to be lecturing anyone on ethical behaviour.

And we should be especially sceptical of pro-education solutions coming from the very organisations that make their money out of education fees. Talk about conflicted rem!

With new standards heading through the Parliament this coming sitting and due to apply from 2019, advisers will probably have no choice but to comply, with this just the latest aspect of their business they no longer control.

But next time you see a financial adviser banned, don’t be surprised if he has a higher degree.

Aleks Vickovich is contributing editor at ifa