Financial planners can take some steps to avoid non-compliance findings while increasing the standard of financial advice provided to customers.
March 27, 2012 saw the release of ASIC's shadow shopping research into the provision of financial advice. Report 279 Shadow shopping study of financial advice involved 64 examples of personal financial advice given to real consumers.
This report came less than a week after the House of Representatives passed the revised Future of Financial Advice (FoFA) reforms. These reforms aim to improve the quality of financial advice, align the interests of the adviser with those of the client to reduce conflicts of interest and build confidence in the financial planning industry.
In summary, it would be fair to say ASIC was underwhelmed by the results of its shadow shopping exercise, particularly in the area of the quality of advice provided to its consumer participants. ASIC was concerned with:
- an apparent lack of investigation of the client's personal circumstances;
- failure to ensure strategies recommended by advisers married up with the objectives and personal circumstances of the client; and
- perceived conflicts arising as a result of the commission pay structure for advisers and quality of the advice generally (for example, lack of appropriate scoping, lack of detail surrounding product switching and failure to provide cash flow projections).
Impact of FoFA reforms on ASIC
One of the recommendations arising from the findings was that financial services licensees should integrate the findings from the shadow shopping report into their FoFA implementation projects. Some of the key amendments proposed under the FoFA reforms are the bans on trailing and upfront commissions and volume based payments (funds under advice). The impact of commissions, resulting in what ASIC perceives could be a conflict of interest, was also raised in the ASIC shadow shopping report.
ASIC makes the observation in its shadow shopper report that a key barrier to good advice is that consumers have difficulty in evaluating the quality of advice and that advice costs are not always appreciated.
While the arguments about conflict of interest are strong, a potential impact of these changes raised by industry is a possible lessening of capacity to access these services. It is possible many clients who approach financial advisers will not have the financial capacity to pay an upfront fee. In many respects these are the people that are likely to need assistance in managing their financial affairs to ensure they have enough money for the future and the ability to provide for their family in the event of sickness, injury, or premature death.
Some industry participants have indicated their clients would opt for being charged a percentage of funds invested under advice rather than writing a cheque for payment of an upfront fee. With costs of living continuing to increase, there appears to be a real risk that many people will choose to forgo financial advice. This will not only raise potential long-term financial implications for the individuals themselves and the industry (through the possible exiting from the industry by many advisers) but may also come at a great cost to our society.
There is no doubt that there are significant challenges for the industry ahead and within that challenge is the need to balance a genuine need for profitability to ensure retention of advisers in the industry against adequate protection for consumers. Steps taken by industry to implement both the FoFA Reforms and any ASIC initiatives arising out of the shadow shopping exercise will be the key to balancing these competing issues.
Next steps from ASIC
In the report ASIC detailed further steps that it will be taking as a result of the findings. ASIC will:
- provide workshops covering the more detailed findings of the report;
- work with industry associations to ensure that quality advice frameworks are incorporated into professional development programs;
- reinforce the importance of implementing an assessment and professional development framework;
- carry out further shadow shopping research on financial advice with a possible focus on new benchmarks in accordance with the forthcoming FoFA reforms;
- explore the possibility of having an independent service which evaluates advisers and advice groups for consumers; and
- issue an example of scaled financial advice that covers retirement topics in ASIC's forthcoming regulatory guide on scaled advice.
What to do now?
For financial planning businesses to achieve compliance we suggest that Australian Financial Services Licence (AFSL) licensees consider the following:
- Financial advisers should develop and complete their own benchmarking shadow shopping exercise, providing a benchmark of current practice based upon their own current assessment of good advice.
- From this exercise advisers should determine the drivers and challenges that led to these results. These could be cultural, historical or sectoral drivers which influence the patterns of advice offered. These can be used to work out how to fix and improve the areas which are giving any adverse results and learning from areas of excellence.
- AFSL holders should actively participate with ASIC in their next steps noted above.
- Finally, financial planners should co-ordinate the implementation of the learnings with their FoFA implementation projects. This way there can be a more streamlined transition of the new reforms and the internal shadow shopping reports, rather than having to complete to transitory projects in quick succession after the ASIC results become known.
By following these steps financial planners will be better equipped to avoid non-compliance findings while increasing the standard of financial advice provided to customers.
Thanks to Mark Teys for his help in writing this article.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.