The future of financial advice needs educated advisers

Consumers generally trust their financial adviser, even when the level of advice is poor. Shutterstock

Finance Minister Mathias Cormann’s decision to back away from plans to repeal sections of the Future of Financial Advice (FOFA) reforms is not surprising. Recent comments suggest this may indeed be a complete turnaround in the government’s position, more likely now that Assistant Treasurer Arthur Sinodinos is no longer at the helm.

It’s been a long fought battle to achieve a new standard in financial planning, but more, not less reform is required to ensure financial advisers evolve beyond commission-driven salespeople.

Under the guise of reducing compliance costs, the proposed reforms to FOFA include removing the “opt-in” requirement, where clients of financial advisers must indicate annually that they wish to continue the service. Also up for removal is the need for an annual fee disclosure for clients engaging before 1st July 2013, and a watering down of the “best interest” duty and provisions directed at removing conflicted remuneration, that is the payment of commissions, on general advice.

While these reforms may well reduce compliance costs, they also wind back some of the important consumer protection benefits of FOFA, which has been a real win for investors.

Potential conflicts of interest are ever present in the financial planning industry where the average consumer struggles with the complexity of financial advice, and advisers can recommend options that maximise their own revenue stream. The consequent information asymmetry between clients and advisers warrants regulatory intervention, as cases such as the failure of Storm Financial have clearly demonstrated.

From salespeople to educated advisors

It would appear the pushback on restricting commissions for financial advice is coming from vertically integrated financial conglomerates such as banks, that wish their staff to be “incentivised” to sell a wider range of products to wealth management clients. They would also argue that additional costs of compliance may price financial advice out of the reach of those who need it most.

While the motivation of these organisations is understandable, removing the current restrictions on commissions under FOFA would be a retrograde step, both for consumers and the advice industry as a whole. While admittedly there are a few issues to be tidied up in the legislation, such as a better definition of personal and general advice, a little more time is really required to bed the current processes down.

If further reform is needed in the financial advice industry, surely it needs to be focused on lifting the bar on the minimum educational standard for licensees.

At present one can satisfy ASIC’s minimum educational requirements for a financial services licence by completing a course listed on its website – stated to be “at or beyond the standard required for a Diploma”, that is one year of full-time study or the equivalent to 1/3 of a three year bachelor’s degree.

While this standard is widely acknowledged by finance professionals as being woefully inadequate in itself, in practice some courses that are listed as satisfying this criteria can be completed in just a few weeks of study. It is hard to see how the complex matter of financial advice might be adequately addressed in such a short time frame, no matter how intensive the course.

A gaping knowledge gap

The particular difficulty of information asymmetry in financial advice was well demonstrated by ASIC’s shadow shopping study of financial advice in 2012. In this study, ASIC examined 64 financial plans for retirement age individuals. Only 3% of the financial plans examined were found to provide good quality financial advice, while at the same time 86% of participants felt they had received good quality advice and 81% said they trusted the advice they received from their adviser “a lot”.

Hence the dilemma - consumers are often the worst at making an objective assessment of the quality of financial advice they receive.

At a time when we are seeing a rising wave of potential retirees seeking advice to maximise their well-being in retirement, there has never been a greater need for transparent, affordable and scaleable financial advice. Not just for the wealthy, but even more importantly for those with more limited financial means.

The FOFA reforms have been a huge step forward for the financial advice industry to adopt a more professional and ethical standing, focused on providing quality financial advice, as opposed to selling financial products for commission. For many financial planners, however, the FOFA legislation has simply been a codification of existing good practice. The concept of fee for service and advice in the client’s best interest is well established in better practices.

The FOFA legislation has lifted the professionalism of the financial advice industry. The way forward is not to undo what has been achieved here, but rather to move to the next stage of reform in the industry by reviewing the minimum qualification for advisers.