Jerry Parwada

The debate about a national exam for financial planners misses the point that there is already a benchmark for professional standards for the profession.

Universities across Australia offer undergraduate qualifications in financial planning.  Some, such as UNSW, offer a master of financial planning. In fact, the Business School at UNSW was the first among the Group of 8 universities to offer the course when it began three years ago.

While the focus of the present political debate is around the need for an exam at all, I suggest the Australian Securities and Investments Commission (ASIC) take advice from universities and other neutral bodies that do not have a vested interest.

Evidently, ASIC is not the body to ensure that a national exam reflects state-of-the-art financial issues and industry practice. Nor can it keep up to date (or deliver) the examination content and training required to meet minimum professional standards.

To this end, it should do two things – establish an education council (spearheaded by universities and with significant industry participation) and hold a summit to seek input from across industry and education providers into the training systems required.

The federal government (and ASIC) should avoid pandering to the market. The present debate is polarised by vested interests and taking place in a poisoned atmosphere where the industry is controlled by the big planning groups and players lacking higher qualifications are resisting professionalisation.

Financial planners with a university master’s degree that focuses on longer-term planning will ensure a higher level of professionalism.

As individuals, financial planners need to decide if they will make a long-term investment in higher qualifications or pander to the short-termism that is the practice across much of the existing industry.

That future is coming. It might not be today or tomorrow, but it is definitely coming. Investors are becoming more savvy, markets more attuned to international best practice and there are massive amounts of assets under management, mainly because of compulsory superannuation.

This makes the outcome of this debate a significant economic issue for Australia – it is no longer about just convincing mum and dad investors to seek financial advice for their retirement. It is about an investment management industry that is about the fourth-largest in the world (behind the US, UK and Japan) – a behemoth that needs professional advisers that add value and not just feed from the lucrative fee trough.

In the long term, a parallel system could operate, with graduate and postgraduate qualifications sitting alongside a requirement for national entry exam. This would be similar to what already occurs elsewhere in the financial services industry where upwardly mobile professionals complete a CFA exam but often also undertake a master of finance.

In Australia, we also need a comprehensive register of financial planners so that we complement advances in adviser training to improve standards in the industry. This literally means nobody without ASIC recognition via the register hangs a shingle and starts advising clients.

Potential investors should be able to check the bona fides of their financial planner – not via ASIC’s simple RG146 list which was considered sufficient in the past. Ideally, financial planners would be required to disclose not only qualifications and history but also their institutional affiliations and any past professional and criminal misdemeanours. Without this, I would question the efficacy of having a national exam at all.

Universities deliver fundamental education and many have steadfastly resisted coming up with training courses that feed into the current sales-based financial planning culture that infects much of the industry.

Under the spectre of deregulation of higher education fees and the present market spotlight on financial planner education standards, many universities offering financial planning qualifications have or will be approached by organisations wanting to make a quick buck.

Some are not even course providers themselves but want to act as brokers, trying to convince universities to downgrade standards or offer excessive exemptions and credit for years of experience alone or lower-level previous qualifications.

The present system of training financial planners is tainted and higher education providers should resist being used to rubber-stamp these failed systems (retrospectively) to give them credence. There is no point to be used merely as a branding mechanism where credibility is obtained by an affiliation with a respected university.

Jerry Parwada is an associate professor of finance and head of the school of banking and finance at UNSW Business School.

Jerry Parwada

Tomorrow will be a historic day in terms of financial advice, one that is likely to reinforce the perception of a crisis of trust and confidence in Australia’s financial planning industry.

It is when the government will implement the Future of Financial Advice (FOFA) regulations, which govern financial planners. These could force two rounds of changes, creating greater uncertainty in the market.

By rushing the FOFA changes, the government foregoes the potential benefits of having the current Financial System Inquiry take a holistic view to cleaning up the financial planning industry for the future benefit of all Australians.

Instead, the federal government should halt legislative changes impacting relations between financial planners and investors until the conclusion of the inquiry, scheduled for November 2014.

No less than 25 of the submissions to the inquiry are from associations, consumer groups and firms that have significant exposure to the financial planning business sector or its customers, the retail investors. This number does not include the many regulators, research centres, and policy think tanks that may well have expressed opinions on the financial planning industry.

Clearly, a significant component of submissions to the inquiry will cover FOFA-related issues. Expediting the government’s proposals means that any recommendations made by the inquiry that affect the financial planning industry will trigger another major change to the legislation and regulations governing the sector, creating greater uncertainty to a market that is particularly vulnerable to falling participation rates by the public.

Is it not better to take advantage of the timing of the inquiry to give the financial planning industry a thorough review? FOFA issues may appear politically isolated, but financial planners’ fiduciary duties to investors and the fairness of fee and commission arrangements in the industry are at the heart of the integrity and safety of the whole industry.

It’s really disappointing to see the government come out with a change to financial sector operations when they have said there would be a moratorium on that during the course of the Financial System Inquiry. It would have been good to see them defer this and put it into the mix.

Indeed, at this stage it would be a shame to reduce the impact of FOFA. For example, under the new moves, a large fund management group could refer people from personal to general advice within the same company. Second, the FOFA changes mean that complex products could have commissions on them; this could be seen as a step backwards, and is something the Financial System Inquiry has been looking at in depth.

In support of this move, Minister for Finance Mathias Cormann has said that incentive payments related to the provision of general advice are not conflicted remuneration – in other words, it is not expected to influence the choice of financial product.

However, the Financial System Inquiry is right now looking at ways in which the four main banks may be able to get around the banning of commissions by, for example, offering bonuses to bank tellers even if they don’t get a direct cut of the product they are effectively selling.

So, why not let the Financial System Inquiry conduct a thorough review of these issues, and actually come up with some moves that reduce red tape without impacting on the quality of advice to clients, and ensure they are better served?

All parties on either side of the FOFA debate would be hard pressed to refute the common perception that there is a crisis of trust and confidence in the Australian financial planning industry. Education and accreditation standards are being debated. Solutions to this crisis need better treatment than targeted interventions by the incumbent government.

Associate professor Jerry Parwada is head of the school of banking and finance at the Australian School of Business and an expert in funds management.

Jerry Parwada

While the big equity markets of Europe, the US and even Australia have struggled since the global financial crisis, investors have increasingly found that there are profits to be made in emerging and also the new frontier markets.

The story of Brazil is now well known, but new mutual funds and also hedge funds have been investing in countries as diverse as Romania, Kenya, Kazakhstan and Nigeria.

The economic forecasts for some of these markets are certainly bullish. By 2015 the BRICS group of Brazil, Russia, India and South Africa is expected to account for almost one quarter of global GDP, up from 8 percent in 2000.

Sub-Saharan Africa has not featured strongly on many investment radars but over the next five years seven of the region’s economies are expected to be among the top ten economies measured by growth.

This year the Zambian and Nigerian economies are both expected to grow by 6.8 percent, Mozambique by 7.5 percent, Ethiopia by 8.5 percent, and Ghana by 13.7 percent.

These are encouraging forecasts, but if the emerging and frontier markets are to remain a beacon of light for global markets some structural issues need to be addressed if the phenomena is to be sustainable.

The boom in many of these markets is being accompanied by strong inflationary pressures which, if left unchecked, will undermine the markets and create havoc in the individual domestic economies.

Already, we are seeing very high food price inflation in many of these countries, driven in part by the substitution of staple food for the production of biofuels. The moment food production is substituted for fuel production food will rise in price and inflation is the result.

These are the kinds of investments which deliver returns to investors while creating difficulties for the local population. These are transient money flows which may be damaging to the very growth potential that make the emerging markets so attractive.

If the inflows are too unbalanced, the phenomena will become more speculative than sustainable and beyond that will also foment political instability. More prudent Governments might deliberately slow down growth to curtail inflationary pressures.

The hedge funds, mutual funds and private equity groups investing in these markets and also local industries such as biofuels are stateless entities driven entirely by profits and are difficult to regulate in terms of how they invest. If a nation tries to protect itself from speculative investment through regulation, the funds will simply go elsewhere.

There is, however, a solution and it is in the hands of multi-lateral agencies such as the World Bank and its finance arm, the International Finance Corporation, and regional development banks such as the Asian Development Bank and the African Development Bank. These agencies have the ability to balance the growth story with intelligent investing and counter-balance the more speculative inflows from the likes of the hedge funds.

Portfolio and inflows of Foreign Direct Investment are much better directed to projects that genuinely improve productivity. This is the only kind of money flow which is permanent in any way.

Zimbabwe, for example, has a crying need for import substitution after the political turmoil of the last decade has decimated its agricultural sector. Zimbabwe, once the farm of southern Africa, is now importing food from neighbouring countries.

The IFC could increase its partnerships with local organizations in such an economy and successfully contribute to the production of food. Partly due to the flow of hard currency remittances from expatriates, many of these countries are dollarized in one way or another so food can be sold at competitive prices, removing the need for massive subsidisation.

Such initiatives would not only help feed the local population, but they would also lessen the pressure for inflation which is the biggest economic danger.

The boom in emerging and frontier markets will only be a positive for the countries themselves if it is balanced and sustainable. And if it is sustainable it will be a positive for the global economy over a long period and prove to be more than an investment fad.

Associate Professor Jerry Parwada is Head of the School of Banking & Finance at the Australian School of Business.

Jerry Parwada

There has been a mass of negative information over the past few days, and investors can’t just ignore it.

Even though Australian shares have staged a strong rally, it follows Wall Street’s sixth biggest points drop on record. Investors have dumped riskier assets on fears the US is headed back into recession and after the US was stripped of its triple-A credit rating.

Market players are looking for any signs as to the conditions they are going to face in the markets in the short term, and maybe the medium term as well. Uncertainty is stalking the market, even though there isn’t a logical reason for the markets to melt down, as the US debt downgrade had been widely anticipated. However there is a lot of uncertainty about what is going to happen in Europe, and although there are reports that the European Central Bank bought Italian and Spanish government bonds yesterday to try and stem the crisis, there is real fear. While Italy is too big to fail, it is also too big to bail out, and unless there is more belt tightening in Europe, we could see defaults there.

Overnight the Moody’s ratings agency has presented a more hopeful perspective than S&P on last week’s debt-reduction deal, which will cut more than US$2 trillion (S$2.44 trillion) from US government spending over the next decade. Moody’s says that the United States remains on a fiscal footing that is as solid as other AAA-rated countries.

The US debt downgrade will have little practical impact as the US remains the world’s biggest economy and Europe provides no alternative to US bonds as a safe haven. A rating is a measure of probability of a lender getting their money back. In this case it is an estimate that a government is going to ignore its borrowings, but there is little question of that with the US. People will still lend to the US. China will continue to buy US debts. The markets have tanked, but it is just a knee-jerk reaction to the need for information. And all the information is negative, so it has a negative effect on market sentiment.

The Australian dollar has dipped below parity, losing nearly 10 per cent against the US greenback in just two weeks. Meanwhile Chinese data shows consumer prices rose at the fastest pace in more than three years, stoking concern China will not be able to respond to weak global growth by dropping interest rates.

With all this going on, it might mean that a country such as Australia will not be immune to this unfolding crisis after all, particularly in markets for liquid assets such as equities.

Associate Professor Jerry Parwada is Head of the School of Banking & Finance at the Australian School of Business.