Where will the gentrification of financial advice leave most Australians?

31st August 2018

To say the advice industry is in the midst of a period of significant change would be an enormous understatement. When this stage of reform reaches a conclusion though, who will be able to afford financial advice? This month’s Industry Insights takes a step back to look at what the advice industry will look like in the wake of all this change and who will benefit from the reforms.

Reform, but to what end?

The changes swirling around financial planning all seem to be leading towards a set of circumstances and rules that will make providing financial advice, and thus purchasing financial advice, more expensive. The amendments to the Corporations Act on which FASEA are currently consulting and the themes from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry all point towards more regulations, more regulatory overseers and a one-size-fits-all role for planners.

Of itself, greater regulation is not a bad thing if it achieves better outcomes for consumers. It does, however, seem a far cry from the democratisation of advice that was championed during the Future of Financial Advice (FoFA) consultations. Intra-fund advice, scaled advice and limited licensing for those advising on SMSFs are all at risk of losing their viability.

Intra-fund intrigue

Outside of a situation where the boundaries between intra-fund advice and full personal advice became blurred, intra-fund advice has largely escaped the ire of the Royal Commission. Where intra-fund advice does face significant hurdles is in the application of the FASEA-interpreted education and training standards.

Under the changes to the Corporations Act that passed parliament in February of this year there is currently no dispensation for those providing intra-fund advice. This means that, in order to provide advice to a client that is specific to their current super fund, an adviser will need to:

  • Have a degree qualification,
  • Pass a 3 to 4-hour exam,
  • Do 50 hours of CPD a year, and
  • New advisers will need to spend a year being mentored and supervised before they can provide advice independently.

In light of these requirements, it is fair to wonder:

  1. Why would an adviser opt for an intra-fund advice role given the significant investment they had to make in order to be able to provide advice? And,
  2. Which super funds be willing to wear the cost of employing advisers, particularly a new adviser who will be effectively unable to do their job for a year?

MySuper funds are required to ensure intra-fund advice is available to all members on equal terms, so intra-fund advice will continue on some scale. That said, the greater cost of providing such advice will be fed into an increased annual cost of being a member of a super fund that provides intra-fund advice. This increased cost was definitely not one of the desired outcomes when the MySuper system was created.

Scaled semantics

One of the aims of the FoFA reforms was to allow more Australian to access advice through the process of scoping and scaling advice. The reality is that planners’ ability to scale advice has been hindered by the wording of the Best Interests Duty from day one.

Since 2013, a succession of governments have attempted to amend first the Corporations Act, then the Corporations Regulations, in order to make scaled advice practically possible. In the main these amendments focused on the final, catch-all clause of the Best Interests Duty’s safe harbour provision. Unfortunately, none of these reform attempts has proven successful, and the ability for an adviser to provide their client with genuinely scaled advice continues to be restricted by the requirement to:

Take any other step that… would be regarded as being in the best interests of the client, given the client’s relevant circumstances.

The education and training requirements on which FASEA are currently consulting will not make the provision of scaled advice, or the ability for an adviser to specialise, any easier. Under the current rules that are governed by ASIC’s Regulatory Guide 146, advisers need only be trained and maintain knowledge in the specific areas they advise on, such as insurance, superannuation and managed funds. None of FASEA’s guidance to date has indicated that a similar, specialities-based training program will be in place.

The result of the end of specialisation is that every financial planner will need to know about every area of advice – or at least those covered by their degree-level qualification and adviser exam. It seems increasingly likely that a large number of planners, particularly those who specialise in insurance advice, will see the additional requirements as more than they are willing to undertake in order to continue providing advice in their narrower speciality.

A recent ASIC report outlined the value of advice to consumers looking to purchase life insurance. ASIC’s report showed that the outcomes for consumers when purchasing life insurance directly (rather than with the help of a planner) included high policy lapse rates, poor product choices, and poor claim results.

This report gives an indictation as to how a reduction in the availability of single-issue, scaled advice could adversely affect consumers. Advice should not only be available to those who can afford a comprehensive review of their financial affairs at a significant cost.

Limited licensing licked

As the details of the FoFA reforms were being refined, it became clear that the accountants’ exemption was not going to survive. Its removal would leave accountants no avenue through which they could advise clients on their Self Managed Super Funds (SMSFs) bar becoming fully licensed planners.

A compromise was found in the creation of limited Australian Financial Services (AFS) licensing. This allows licensees and their authorised representatives to advise on aspects of establishing and running SMSFs, as well as other strategic areas provided they do not recommend specific products.

Now, those providing advice under a limited licence face the same issues as those providing intra-fund advice – all the FASEA-administered changes will apply to them. This means that accountants using limited licences who wish to continue advising clients on their SMSFs will need to undertake a significant amount of further education and training, on top of their normal accounting requirements.

Much like intra-fund advisers and specialists, limited licence financial planners are likely to drop significantly in number as they decide the new requirements simply aren’t worth the additional time and cost. This will leave many clients without any guidance when it comes to their SMSF beyond their annual (or possibly three-yearly) audit. A result that is concerning in the ever-changing super environment.

There has been a movement to reinstate the accountants’ exemption, or a similar rule, to ensure SMSFs are receiving the support they need. Whether this movement gains traction with the government remains to be seen.

General advice by any other name

General advice has been widely used, particularly by large organisations, as a way to provide information to customers on products that may be relevant to their situation. It is supposed to not consider the client’s objectives, financial situation or needs. The difficulty is that possessing a client’s personal information does not, of itself, preclude a provider from giving a client general advice.

How to define the thin line between general and personal advice is a significant challenge, even for ASIC. In recent Royal Commission hearings, a senior officer of ASIC was quizzed about ASIC’s view of a process used by banks to provide general advice to customers. The counsel assisting asked the ASIC officer:

Was it the case, though, that ASICs view as to whether it was possible to have one of these questionnaires and then a general advice warning and then a recommendation of a superannuation product is something that has changed over time (sic)?

While the ASIC officer made no outright admission that this was the case, it was acknowledged that at least one bank had told ASIC it was using this process a number of years before ASIC decided the process could not be relied upon to provide general advice. If ASIC battles to reach a clear opinion on how general advice is defined in practice, it seems riskier and riskier to rely on the concessions permitted under the general advice rules.

In its recent report on competition in the Australian financial system, the Productivity Commission recommended that general advice be renamed to avoid it being confused with personal advice by consumers. The implication is that general advice is not advice at all and brings into question how general advice actually differs from providing purely factual information.

If, as ASIC now asserts, gathering a client’s information before giving them information on a product runs too great a risk of being personal advice, there scarcely seems a place for general advice, or whatever it ends up being called. Its demise would see another affordable, or free, source of information for consumers on financial matters diminished or lost.

Advice for the many

The revelations from the Royal Commission have made it clear that reform is necessary to ensure the successful transition of financial planning to a profession in the eyes of consumers. The danger is that such reform will restrict advice to those who can afford to pay thousands of dollars in comprehensive advice fees.

“Which super fund should I use?”

“How much insurance do I need?”

“How can I save more for retirement?”

These are questions that confront the majority of Australians. Without the ability to easily scale advice, or even provide general advice, there will be no way to provide succinct answers without doing an expensive deep-dive into the individual’s full financial situation. Reforms currently being implemented may result in there being no one to provide these answers, even if there were clearer regulatory paths.

Regulatory oversight needs to be balanced. It is important to both protect consumers and ensure that they have access to the right support when making important financial decisions. The current climate has seen a sharp focus on increasing regulation, with good reason, but it is important not to lose sight of the importance of making advice accessible to a wide range of Australians.

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