“Good advice” and the spectre of vertical integration

This article has been taken from the NMP education library which has now moved to Advisely

If you’ll excuse the unintentional rhyme, that sentence more or less encapsulates one of the most pertinent concerns about the overhauled regulatory model for financial advice laid out in Michelle Levy’s Quality of Advice proposals paper. The gist is that the best interests duty (and safe harbour steps for complying with it) should be replaced with an overarching obligation to provide “good advice”. 

What this means in practice is that any personal financial advice, regardless of provider, should “be reasonably likely to benefit the client, having regard to the information that is available to the provider at the time the advice is provided.” Levy justified this by arguing that the current model, which hinges partly on the best interests duty, is the “wrong way around” and that her proposed model would regulate the “content of the advice” rather than the “conduct of the adviser”. 

This model (and all it entails) would represent a dramatic shift in the way advice is regulated in Australia and would likely result in a substantial increase in the number of providers available to consumers. But as we’ve seen in the past, not all “advice providers” are created equal and there would only be a subset of businesses to whom additional obligations, such as those relating to education and professional standards, would apply.

One rule for thee

That subset, defined as “relevant providers”, can be summarised as individuals providing ongoing advice to clients and directly remunerated on that basis (either via fee or commission). In other words, most likely the vast majority of advisers still practising in the years following the Royal Commission. 

In a “good advice” world, then, there would be a variety of ways for consumers to get financial advice at a significantly lower price point – collectively-charged via a super fund, for example, or from a salaried bank employee – than if they’d engaged the services of a professional adviser. And those professional advisers would have essentially the same obligations (and associated compliance considerations) as today – as Levy noted in her paper, the Code of Ethics, contentious as it is, serves as an effective substitute for the best interests duty. 

Should SOAs be scrapped? 

Mind you, one thing relevant providers wouldn’t have to do anymore – unless requested by a client – is issue an SOA. But as JBS Financial Strategists CEO Jenny Brown notes, even this relaxing of the rules isn’t necessarily a net positive for the industry. 

“I’m all in favour of cutting SOAs down,” she says. “When I talk to clients – good, satisfied fee-paying clients – they tell me they want an exec summary, projections for this year as compared to last year so they know how they’re progressing and they want to know what they’re paying. What they want, basically, is a detailed strategy paper, which is what the SOA should be. If we could just eliminate 80-90 page SOAs and provide a quality 10-page strategy paper, happy days.

“But I think eliminating them entirely, or just making them optional, is a dangerous idea for two reasons. First, while the onus should always be on the adviser to have excellent files and records, the methodology for how you keep those records could vary wildly across businesses. And related to that, it raises questions about how you record the advice you’ve given from a PI perspective. Has anyone canvassed the PI insurers about this? I fear PI will increase if this goes ahead.” 

Persistent costs

Brown adds that while optional SOAs could potentially reduce per-client overhead (and might even allow JBS to increase its client roster), it wouldn’t result in the massive savings some of the literature around SOAs might imply: “We’re going to charge as a qualified adviser, and that’s going to cost what it needs to cost to continue running our business and make a profit. We can’t do advice for $1000. Even if you remove the SOA, there’s still training, PI insurance, compliance – it just doesn’t add up.”

Those additional costs, of course, wouldn’t be as much of a factor for those who fall outside of the “relevant provider” category. But as Brown notes, consumers also wouldn’t be guaranteed they were getting help from a qualified, experienced practitioner – and may not even recognise the difference. 

“A lot of consumers don’t really know,” Brown says. “So yes, people are going to see $1,000 versus $4,000 and think, ‘Well, I’m going to go with the $1,000 option.’ Makes sense, right? But are they going to get quality advice? 

“My concern is how well-trained these other providers are. We’re pretty agnostic to where clients put their super as long as they’re getting the right asset mix – in fact, we’ve often recommended they go to an industry fund – but from fund to fund, how do we know what kind of advice they’re going to get?” 

A conflict by any other name

Echoing Brown’s concerns, Integra Financial Services co-founder Deborah Kent wonders if the “good advice” model might create a “two-tiered system” which could “lead back to those days where we have a lot of product selling.” 

“Let’s say you’re employed by a super fund,” Kent says. “One of your members rings up for advice on their super. Are they going to get good advice? Possibly. But are you going to tell them that super fund might not be right for the client anymore? Probably not.”

Kent doesn’t think members getting advice from their super funds is necessarily a bad idea, but she worries – and not without reason, given the past five years – that consumers won’t know the difference between the “good advice” provided in a situation like the above and the advice they’d get from a relevant provider. 

Do consumers know?

“I think the Quality of Advice review is assuming that consumers understand that difference,” she says, “but history has shown us that when clients have a problem, it’s usually when something goes wrong and they say, ‘I didn’t understand the cost. I didn’t understand the advice being provided. I didn’t understand the product I was invested in.’

“Assuming they’ll understand is a mistake. We’ve spent years trying to explain the question of ‘what an adviser does’ to the general public. We’re still not all the way there.”

While Kent appreciates Levy’s advocacy of a more principles-based regulatory framework – in fact, she thinks the QAR interim paper is some of the “best analysis of the shortcomings of the prescriptive regulatory system” – she’s hoping for more of a happy medium. 

“How do we make advice affordable?” she asks. “Is the answer giving it back to the institutions? I don’t believe it is. We are so close to being a profession, and it’s been a long and hard road, but we’re nearly there. I worry that some of this could push us back.” 

Playing by the same rules

Like Brown and Kent, Story Wealth Management CEO Anne Graham is concerned about the “unintended consequences” of the good advice model. 

“The idea makes sense on its face,” she says, “and I’m supportive of a principles-based approach that recognises financial planners and advisers as professionals. And if the objective of the review is to make advice more accessible and affordable to consumers then allowing super funds and the like to provide advice is one way of achieving that goal.”

“However,” she adds, “we should all be held to the same standard, and that’s what concerns me. If a consumer approaches their super fund for advice they aren’t likely to have the same experience that they’d have going to an unaligned adviser. As long as the client is aware of this, that’s the main thing.” 

On the other hand, Graham believes a softening of the rules regarding the advice delivery model – including optional SOAs and FDSs, as laid out in Levy’s paper – could make for a better client experience. 

“The research and other elements required to provide advice still needs to be done regardless,” she explains, “but being able to provide the advice in a way that is practical and client-centric would make a big difference to us and our clients.”

Ultimately, Graham says she “doesn’t want to see a return to the bad old days” but acknowledges that the “current system isn’t working, either.” 

“We need to land somewhere in the middle,” she says. “A bit like Goldilocks. Hopefully common sense will prevail.”