It is well known that neither of the two Australian Securities and Investments Commission (ASIC) Shadow Shopping exercises provided any real value to the business of professional financial planning, other than a highly contentious“enforceable undertaking”, and a media frenzy of accusations and finger pointing.
The only real outcome was a wave of fear spreading through the industry, including ASIC, for that matter. This was a fear that emerged again in September 2008, when the chairman of ASIC, Tony D’Aloisio, announced the third Shadow Shopping exercise.
And let’s be clear, ASIC shivered too, because the first two reports were not good for ASIC, either. D’Aloisio described Shadow Shopping as “…an expensive and time consuming exercise…”. An exercise, it appears, ASIC is only undertaking because the Parliament has asked it to, following the last Parliamentary Joint Committee Inquiry into Superannuation in 2007 which recommended that these pointless exercises continue.
So what did the industry learn overall from either of the first two exercises? That limited personal advice was incredibly confusing and was not being clearly executed due to the (poor) definition of “scalability” and the lack of clarity between general and personal advice? That conflicts of interest exist in the industry? That there were unlicensed advisers providing advice?
The one important fact that went missing in the subsequent coverage was that the second Shadow Shopping exercise demonstrated significant improvements from the first, showing that 80 per cent of financial planners delivered quality advice, on a reasonable basis. That was something that got lost amidst the media’s desire to slam the industry that was still adapting to a massive legislative wave called Financial Services Reform, implemented only two years earlier reform that required very new and different standards of disclosure, competency and definitions in terms of advice and delivery of advice.
Third time lucky, perhaps. ASIC has started the process of defining “quality advice” and is conducting research with a number of Australian Financial Services Licensees to assist in defining the key tenets of quality advice. Most likely these will form the key issues that will frame the third Shadow Shopping exercise.
Quality advice appears to be the holy grail, and yet the sooner we grapple with what it is, what it feels like, and how a client can tell whether they are, or aren’t, getting quality advice, the better. At the moment it is entirely subjective and open to interpretation, other than legislative requirements that refer to “appropriate advice on a reasonable basis”.
It’s a hard ask to capture a definition that ultimately applies so differently depending on the client, and their circumstances and needs. The easy part is defining the ingredients needed to improve the ability to provide and receive quality advice. Throw in a good process with a regulatory underpin; a competent and qualified professional financial planner with the ability to define their client’s needs; and then deliver a plan accordingly, and you should get the right result. It’s the outcomes and the value that are really hard to determine; and this is in no small part due to the fact that the value may take some while to eventuate.
In 2008, Rice Warner Actuaries produced research for the FPA showing that $1.7 million in monetary value was unlocked in eight case studies of clients of financial planners as a result of getting advice. In addition, clients were better prepared for retirement, they had peace of mind, and they received a lot of education in addition to the advice. All very important, but intangible, benefits.
What we must do is integrate our knowledge of the value of advice with the broader issue of quality advice, and try to frame a model flexible enough to apply across a variety of circumstances. We also must consider that quality advice will be tested by ASIC, by the Financial Ombudsman Service (FOS) and the broader community, particularly where a perceived failure to provide quality advice occurs.
It is incumbent upon our industry to work together to define quality advice so that we have a framework to stand behind, that we are happy to be accountable for, and that we can be publicly judged by. It is incumbent on ASIC to test financial advice constructively, using indicators that are tangible and feasible and that are agreed to across the industry.
Then the next Shadow Shopping exercise could conceivably be a constructive assessment of where we stand, and what the challenges might be. But then again, the media has little to gain from constructive results for ASIC or the industry, so hang onto your hats and prepare for the worst, whatever the outcomes might be!
