There’s good and bad in the Quality of Advice Review (QAR) released by Treasury last week.
The good is the proposed framework for the delivery of affordable financial products.
For Australians less interested in advice and more focused on making simple purchases, the QAR might serve as the needed turning point for helping buyers and sellers of financial products.
This is where the Review excels.
There are, however, some “bads”.
GREED
The first of the “bads” is greed.
Former Commissioner Kenneth Hayne used “greed” to summarise the findings of this 2018/9 Royal Commission in the Misconduct in the Banking, Superannuation and Financial Services Industry. Still, it didn’t rate a mention in QAR.
While much of the behaviour Hayne identified was probably illegal, it is confusing why the QAR did not provide specific structural recommendations to confront the inevitable greed factor, which will grow quicker than the nation’s superannuation stockpiles.
Despite decades of commitments, promises, slogans and chest-beating by both large and small product distributors about how efficiently, honestly and fairly they deliver financial services, most of the headlines in the 2018/9 Royal Commission were examples of the power of greed.
The industry’s Financial Services Council supports the QAR’s adoption, hoping the recommendations can remove the regulatory frameworks they claim have caused financial harm for millions of Australians. Ironically, the regulations were implemented to prevent the financial harm inflicted on millions of Australians by some of the FSC’s member firms.
For Australians trying to make better financial decisions, the QAR’s proposed new standard of ‘good advice’ is promoted as ‘better’ because it is built with a content-focus rather than process-focus (page 93).
The QAR believes this is key to the systemic imbalance afflicting financial services, which has been studied in many of the last nine enquiries into financial services over the previous 12 years.
There is a fine line between being driven by growth and being driven by greed.
But when combined with client confusion, that fine line is so easily crossed.
CONFUSION
The second of the “bads” is client confusion.
QAR’s ‘good advice’ will ensure it continues.
Cigarettes not only had to have explicit warnings on the packages, but the merchandise also had to be physically hidden from view before new purchasing habits began to improve the lives of reforming smokers.
The difference between a financial product purchase and a financial advice purchase are the consequences.
Product purchasers are less concerned about them than advice purchasers.
This distinction about consequences is confusing.
QAR’s recommendations are a cracker for those Australians seeking to make financial product purchases who are either confident or not concerned about any significant consequences of their purchase.
The promise of ‘good advice’ with fewer forms, fewer questions, less paperwork, and less fees makes sense, provided they are willing to take responsibility for their purchase’s consequences.
But for Australians less confident about their financial decisions, the consequences matter a lot.
The less confident purchasers have been confused for years.
Most believe they were purchasing ‘good advice’ when they were buying ‘as-good-as-our-product-list-allows-us-to-offer’ advice and charged a fee determined not on the quality of advice and management of consequences but on the amount of product purchased.
The QAR comments there is “merit” (page 121) in fixed fee arrangements over asset-based fees, but notes there would be too much additional complexity to address the fundamental issue that financial advisers can sell financial products and financial product issuers can give advice (page 54).
The Accounting Professional and Ethical Standards Board (APESB) attempted to address this over ten years ago without success.
They proposed an accounting standard (APES230) that would have disallowed accountants offering financial advice to receive any remuneration from financial products, i.e. they could recommend but not benefit. Their objective – separate advice remuneration from product remuneration.
Unfortunately, APES230 was watered down by product providers claiming it would ruin practising advisory firms.
The confusion and labelling of financial advice to manage consequences and product advice to buy a product is not resolved by QAR.
Whose best interests are being served?
BEST INTERESTS
The third “bad” of QAR is the perpetuation of power in the hands of product providers.
The provider’s best interests are guaranteed under QAR’s recommendations, while the client’s best interests remain a hope.
The demand for advice is guaranteed as superannuation funds grow towards $7T by the end of this decade. It is unfair for a Review of this stature not to reweigh the power away from the product suppliers.
QAR’s ‘good advice’ is ideal for those Australians seeking to conduct financial transactions. The regulatory paperwork and compliance fear introduced to outlaw bad practices has made these transactions too difficult.
Any effort to make these product transactions more affordable is deserved.
However, QAR’s ‘good advice’ will continue the confusion, strengthen the product-supplier’s powerbase and attract more greedy behaviours hindering Australians concerned about the consequences of their financial decisions.
The more challenging decision, avoided by QAR, Hayne and prior enquiries, yet confronted by the APESB ten years ago (i.e. APES230), is the removal of all incentives from any product attached to advice.
This would allow the pricing of financial advice as it must be – purely upon the value of the advice.
What do you reckon?
Photo credit: https://treasury.gov.au/publication/p2023-358632
ABOUT JIM STACKPOOL
For over 30 years, Jim has influenced, coached, and consulted advisory firms across Australia. His consulting firm, Certainty Advice Group, coaches, trains and builds advisory firms delivering comprehensive, unconflicted advice with fees priced purely on value. He is growing a strong and collaborative community of advisory firms aligned on Australia’s only Certification Mark advice standard for comprehensive, unconflicted advice – Certainty Advice. He has authored four books regarding financial advice, with his latest – What Price Value – released last year.
Jim
Well said. You’ve hit the nail on the head. How dispiriting to see another review’s outcomes potentially taking us backwards instead of forwards.
Jim
As usual, you’ve nailed the problem on the head. QAR was implemented by a coalition government and if you want to see what their priorities were, have a look at the political donations that come from the big banks and the institutions. Remember these are “investments” in politicians.
Second issue is the QAR was never ever truly designed with a primary focus on reducing the cost of advice. Ms Levy consulted heavily with ASIC, and ASIC have a Corporations act they don’t want to change, because it’s all about the sale of a product, not about advice.
You and I have exchanged views before on the peculiar situation with risk specialists. We are a different breed, with a different focus, and a different culture. Most of our work is behind-the-scenes, not always visible to a client, who faces having to spend money in a grudge purchase.
You’ve used the following phrase your review:
” The confusion and labelling of financial advice to manage consequences and product advice to buy a product is not resolved by QAR.”
I know it’s a cliché, but good risk advice requires the same discovery process undertaken by any other type of financial advice provider: add to that the cost of researching products (and yes there are significant differences if you drill down): negotiating underwriting outcomes and frankly just getting doctors to write reports. All of that takes time and time is money.
You see I argue that quality risk specialists do you provide strategical advice specific to the protection of one’s assets and lifestyles, AND then advive on the products deemed suitable to achieve the objective of the strategy.
And then you have the compliance load – 45 page risk only SOAs, driven by lawyers advising AFSLs, when everyone knows if a client lodges a complaint about your advice with AFCA , the serious consideration by AFCA will be what’s on the file, not the verbiage in the SOA.
And of course recently we have Standard 5 from FASEA – the communications standard, which really legally is a joke because the client can always say “he never told me that”, and AFCA will believe him. There is a huge, totally unreasonable, onus of proof on the adviser.
Our biggest difference with our investment colleagues is how we are remunerated, and for the last five years we’ve been suffering because the banks convinced the government that LIF was a fantastic idea and ASIC added that in their expectation risk only clients would be very pleased to pay fees in return through commissions not being paid to the adviser. That’s pipedream stuff!
As everyone now knows, research has proven what risk specialists have known for years: risk only clients are reluctant to pay advice fees regardless of value, in a risk only situation when they are aware that the client adviser will be receiving some commission. I can tell you that clients never really ask what the commission dollars are, they just know that you will be receiving some, and on that basis you haven’t demonstrated enough value to raise an additional fee.
QAR did nothing about this issue. In fact despite promises from the previous government mob, Ms Levy deliberately avoided the issue of whether or not LIF is of sufficient remuneration lived to sustain a viable and profitable life risk business. Too hard!
Where to from here ? Buggered if I know . The Labor government receives a a lot of political contributions from the industry funds and that swings a lot of lead. Jones can ignore this report entirely, or pick bits from it. But it’s a pretty sure thing that we will end up with the banks and their mates being able to divide some sort of “advice” lessening because Mr Jones would like to allow the ISN funds to provide advice to their members.
Any plans to reduce the size and complexity of SOAs will only occur if that can favour the industry funds and the banks if indeed take are required to provide SOAs. Any guarantee the quality of advice will be appropriate will disappear down the drain
I actually think ,and it will occur after I retire, that the life insurance industry in this country is heading for market failure. The industry needs a constant influx of fresh “new meat” i.e. younger clients continually entering the pool in order to pay premiums for the older clients who will be starting to claim very soon, if they can continue to pay the outrageously increasing premiums. Life new business, driven by the fiasco that is the Apra intervention in the income protection market and the rapidly departing number of life risk specialists wounded by FASEA, is already down 50% on the level 5 years ago. Where will it end?
I’ve long wondered about the short termism that infects ISN funds. It seems had it has never occurred to them that the group cover they by from the statutory number one funds of every registered life insurer in Australia is by definition, short-term insurance. The contracts are renegotiated roughly every three years and most of them have provision for the insurer to demand that the trustee and even more severity to the policies that they issued to members of a default basis.
Statutory number one funds can only provide the opportunity of short-term group cover if they have a healthy fund, where at least 70% of the risk in that fund is individually underwritten and priced accordingly. So if retail risk keeps dropping off as it is at the moment when will the Australian registered life insurers decide they can long no longer offer group default life and TPD cover.
Jim I also agree with Martin, however I’m confused. I see no incentives any where for the adviser if that adviser only charges fixed fees or are you directing that comment at the product provider?
I also see and hear that the Big Super funds are getting ready to give ‘limited’ advice on both private and age pensions with no considerations for the clients BROADER circumstances.
If that is the intention and the results from QAR then we are definitely heading backwards.
Thanks, Roland – It seems inevitable that the Big Super Funds et al. (i.e. banks) will be allowed to ‘advise’ to reduce the ‘cost’ and increase the ‘accessibility’ to product advice. The concern is client confusion as some buyers will not be aware of the consequences of buying ‘product advice’ compared to ‘non-product advice’. For these purchasers, the history exposed in multiple enquiries seems destined to repeat itself, showing the system lopsided towards the best interests of product providers rather than Australians seeking ‘non-product’ advice. Yes – I was aiming too at those advisers who base their ‘fixed fee’ on the amount of product, i.e. the higher the fum the higher their ‘fixed fee’ – simply because it is not based upon the value, but still on the product – trust isn’t sustainable when any aligned incentive is present.