Putting the cart before the horse

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

The AFA believe many requirements under current financial advice legislation, including annual renewal and the use of financial services guides, as “additional layers of bureaucracy [introduced] with little consideration of the impact on clients and whether they value these measures and whether they were willing to pay for them.”

Regarding annual renewal and client consent forms, the AFA noted that “clients now need to renew their arrangement with their adviser each year and also sign consent forms that are provided to each of the product providers that are involved.”

“For a couple, this could involve signing six or seven fee-related forms every year".

The AFA suggests that circumstances like this – where clients might need to sign upwards of seven forms each year – are examples of how the advice process has become less client-friendly due to reforms ostensibly designed to protect consumers. “The advice process and regulations should support the needs of clients,” the AFA said, “not make things more difficult for them.” 

How, then, could we move towards an advice process and regulatory framework that “supports the needs of clients”? 

Cutting down on confusion

According to Story Wealth Management CEO and senior financial planner Anne Graham, there’s plenty of room for changes. “If you think of the current framework,” she says, “there are pretty strict requirements for things like fee disclosure statements and service agreements. It’s new legislation and once people get used to it systems will improve, but these things do add time, complexity and a whole lot of paperwork.”

All this complexity and paperwork, she adds, “confuses clients.” 

“They don’t know what any of it means,” she says, “which isn’t a great experience. They think, ‘I’ve already signed up for advice. Why do I need to keep doing it?’ Ultimately, it comes down to the adviser and how they explain it to existing clients, but there are a lot of pain points and friction that come as a result of current legislative requirements.”

Anne argues that the same problem persists when onboarding new clients, too – perhaps more so, given consumer expectations. “The primary issue,” she says, “is how much time it takes to get the work done.  If you’re a client or a customer and you’ve made the decision to purchase or get advice on something, you pretty much want it there and then. You’ve gone through the ‘will I or won’t I’ phase, you’ve done your fact-find on whether you think the adviser is trustworthy and whether you’re going to get value for money. You’re ready. And then it takes two months or so to actually get advice.

“It would be a better experience, I think, to provide the advice in chunks; if you can explain the overall scope of the advice and then address other pieces along the journey, that might be a better experience that aligns more with client expectations. There’s so much to do in the background – your legal stuff, data collection, discovery, and at the end of it you issue a large document that really provides the advice.”

What’s in a SOA? 

As we’ve discussed many times, that large document – the SOA – often contains a lot of extraneous information. And clients know it, too. 

“Clients will often note all the stuff you have to put in the SOA to ‘cover your arse,'” Anne jokes. “Disclosure is very important, but it does matter when and how you do it, which is why I think we need a system that places some confidence in advisers regarding how they can present information in a client-centric fashion.”

While the size of the typical SOA is often cited as an example of how cumbersome the advice process has become, Anne sees it as a symptom of a larger problem. 

“Cutting down the size of the SOA would be useful,” she says, “but the bigger issue is how prescriptive the requirements are. A lot of the stuff we’re required to provide to clients could be kept in the file notes. If you’ve already done the work in terms of educating clients, discussing financial concepts and explaining your approach, the SOA is basically a doorstop – a written document no one reads unless you get sued.

“If you go to a medical specialist, they’ll see you for 15 minutes. Your health is in their hands; there’s a lot of background stuff, but that’s not part of the experience; you don’t need to be given a 40-page document at the end of the appointment.” 

A more principles-based regulatory approach to these requirements would align better with client expectations, Anne argues: “Best practice is research and data collection, scoping advice and developing strategy – how much of that goes into the SOA versus some other medium like video or a PowerPoint presentation could be informed by a principles-based approach, and this would enable the adviser to tailor their information to suit the client’s understanding.” 

Unnecessary complexity

Integra Financial Services co-founder Deborah Kent agrees that successive reforms have led the advice process to stray too far from its central purpose of increasing a client’s understanding of their finances and the strategies they employ to reach their goals. Speaking specifically about the SOA, she notes that in the past, “we’d be able to present a really nice document that had all the information in it, told them about their investments and informed them about any commissions that might be involved as well.” 

“It was simple,” she adds. “We’d put it in a nice bound cover and they valued it. They’d walk away with something special and they’d add their own notes in as we made updates over time. Now it’s such a big process and people really need to be talked through it.”

While acknowledging that advice has invariably become more complex as the world has changed – people are more interested in investing rather than putting their money in savings accounts, for example, and the super system has become bigger and more complicated over the past 30 years – Deborah thinks that many of the changes to the advice process are less about adjusting to the changing economic climate than responding to certain high-profile incidents like Storm Financial and the Royal Commission. 

She points to client consent forms as a glaring example: “When clients sign up, we tell them about their fees, what services we provide and we agree on how they’ll be charged. Under the new system, the client not only signs your agreement but also consent forms for every product provider involved. So now you’re seeing clients getting packages of about nine documents. We warn them in advance, ‘Just know you’re going to get a lot of documents to sign.’”

Paperwork overload

Deborah doesn’t believe this deluge of forms achieves much other than client confusion, saying that even long-term clients have called her up wondering why they’re suddenly getting so much paperwork. 

“It gets even more complex,” she continues, “because every product provider has a different way of doing it. If there was one consistent approach to consent forms it might be a simpler process, but everyone asks for different information. Some super funds want to see an SOA, too, which I don’t understand. Who is making the decision there as to whether the advice is good or not? The advice is between you and your client and overseen by the licensee.”

Ironically, despite many of the post-Royal Commission reform packages being explicitly aimed at “restoring trust in Australia’s financial system,” Deborah’s own experience suggests that requirements like the client consent forms have had the opposite effect. 

“I had a comment from a client,” she explains. “They said, ‘The more paperwork you give me, I wonder who’s being protected? Is it me or you?’ In this case they weren’t talking about my advice but the product provider. They wondered, ‘What are they trying to protect?'” 

Responses like this are why Deborah believes we should “rethink how we present advice so we can do it in a way that’s suitable for the client and not as complicated, and reduce the overload of paperwork.” However, she’s concerned about the Government’s ability to achieve that goal given the scope of the review.

“The things that appear to be flagged,” she says, “are the LIF review, looking at general versus personal advice, how financial coaches and influencers fit in, how we simplify advice, standards 3 and 7 of the Code of Ethics, wholesale versus retail investors … Is there too much? Is it going to be a problem getting so much done?”

She hopes not, because she strongly believes the system needs to be changed to benefit clients. “We’re in the business of helping people,” she says, “and of getting them to that better place. We’re about the outcome for them. It’s so important the review gets the right people around the table who can ask, ‘What is it the client really wants?'”