The Future of Financial Advice
- On 21/10/2020
In January, we opined that product disclosure remained poor in financial services¹.
Everyone knows that most laypeople cannot understand a Product Disclosure Statement (PDS) let alone be able to compare it to other products available. Sadly, the steps taken to provide useful comprehensive information have led to incomprehensive documents which would detract from consumer understanding if they could ever be bothered to read these lengthy turgid pieces. A triumph of compliance over comprehension…
This problem is but one of many in the convoluted world of financial advice.
There is no doubt that significant reform was needed at the turn of the century. The Financial Services Reform Act 2001 (FSR Act) was introduced to shift the industry away from a sales culture where remuneration incentives were based almost entirely on selling products towards a professional industry where advisers would help their clients plan properly for their financial future.
Unfortunately, the transition has been a traumatic one as was shown in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Much of the industry did not embrace the shift – many institutions held onto high fees rather than move consumers to contemporary products, and far too many financial advisers continued to focus on product sales rather than delivery of sound strategic advice.
The reaction to this has been an increased legislative burden on the industry, which has added greatly to the cost of delivering financial advice. Rice Warner recently released a report commissioned by the Financial Services Council looking at the status of financial advice in Australia². Despite the unquestionable need for more advice to be delivered, the industry is going backwards.
Our research and analysis show that the goals of improving financial advice and making it more accessible to Australians have failed despite twenty years of change driven by legislation. The situation today is dire (and worsening):
- The number of financial advisers is falling leaving a severe shortage of practitioners.
- The cost of delivering financial advice is rising and is much higher than most Australians can afford.
- Many superannuation funds have withdrawn from offering comprehensive financial advice on the grounds that they cannot do so without a financial subsidy from the fund.
- The rules for delivering some forms of simple advice remain unclear – note the different opinions held by superannuation funds as to the validity of intra-fund
- Many unlicensed advisers describing themselves as Money Coaches provide valuable advice on budgeting, debt management and other strategies around saving. If a financial adviser provided these services, the documentation would be more voluminous and complex even for similar advice.
- Current legislation does not differentiate between complex advice where consumers are taking financial risks or simple advice which is largely risk-free and cannot lead to major financial harm.
We consider the current regulatory regime provides several barriers to consumers who need to or want to take advice. These are at many levels, but some key ones are:
- Value – the service is partially intangible, and the value is difficult for consumers to quantify.
- Cost – Financial Advice as currently regulated is costly to deliver and consumers believe it to be too expensive in relation to what they perceive as its value.
- Delivery – The advice service is heavily focused on compliance rather than the client’s strategy.
We all understand why the legislation has been imposed – consumers need protection where they buy a service with an asymmetrical level of knowledge. However, they engage with other experts without having the same difficulties. In most cases, they can go to a doctor or car mechanic expecting their problem to be fixed. So, why will they not seek out an adviser when they have financial needs?
Obviously, the poor brand image of the industry is partly to blame, but it is more than this. We have developed a heavily bureaucratic world and driven most Australians away from receiving valuable advice.
Rice Warner believes we need to reset and change the legislation to reflect the risks borne by consumers and the likelihood of harm resulting from any advice they receive. The separate review and elimination of under-performing superannuation products by APRA, together with ASIC’s Design & Distribution Obligations will reduce the risks of taking up a poor product. This can be reflected in new rules for delivering financial advice.
Some of the steps to consider in making this change:
- Group together all education, guidance and the existing General Advice and call them all General Information. This could include all strategic advice around budgeting and debt reduction which can easily be delivered by accountants and others with some supporting financial tools.
- Separate Personal Advice into Simple and Complex based on the degree of risk borne by the consumer. Most single-issue advice including all intra-fund advice provided by superannuation funds would fit into the Simple category.
- Simple advice would not need to have a Best Interest Duty as currently defined. For example, if someone wants to take out a modest amount of extra life insurance or put more contributions into their superannuation fund, the amount of risk they take is low and as it is unlikely to be against their interests, so the documentation should reflect this.
We also need a catalyst to encourage people to start using financial advice. Once the structure has been cleaned up and simplified, it makes sense to allow a modest tax-deduction to rebuild this valuable community service.