Simon Hoyle reports that as the focus in financial planning shifts from tick-the-box, legal compliance, the industry is rediscovering how to recognise and deliver genuine quality services.
The quality of financial planning in Australia has improved significantly over the past two decades. Comparing how the industry operates today, its standards and the calibre of its practitioners with those of 20 years ago is like comparing chalk and cheese. But what’s much harder to say is how much it has improved.
While regulators remain focused on compliance – making sure dealer groups and authorised representatives “tick all the boxes” – less attention has been paid to measuring and benchmarking the quality of advice. Recent police raids on the homes and offices of financial planners involved in the promotion of managed investment schemes has done little to convince the public that quality has improved, however.
While compliance is a necessary precondition to providing quality advice, on its own it’s not enough. Nor is it enough that advice be only technically sound. Even if a financial planning firm meets all of its legal compliance obligations and provides technically-sound advice, that advice may still be inappropriate for a particular client.
So a definition of “quality” has to include issues of technical competence, compliance and appropriateness – and other things, besides. Key stakeholders in the industry – planners, dealer group heads, product manufacturers, professional associations – seem to agree broadly on what constitutes high-quality advice.
- Quality advice is built on an individual planner’s experience and education.
- It depends on a solid relationship of trust and understanding between planner and client.
- It’s supported by the appropriate resources within the practice or by the dealer group.
- Front line planners are not distracted by relatively routine functions that can be efficiently outsourced.
- In-house expertise is supported by external expertise, where necessary (for example, lawyers to assist with preparation of wills).
- Processes and practice structures are designed to allow maximum face-to-face time with clients.
- The planning practice has a strong culture of compliance, but is not beholden to the compliance process.
- Advice is focused on a client’s needs and is appropriate to the client’s goals.
- The advice represents good value for money.
- Where the advice incorporates investment advice,that advice is given independently of product influence.
- The advice is understood and accepted by the client – both in terms of its intended effect, and its cost.
- The advice and the plan are regularly monitored and reviewed.
- It works! It demonstrably moves a client towards their stated financial goals over time.
But even so, a firm industry-wide accepted definition remains elusive. In 1964, US Supreme Court Associate, Justice Potter Stewart, bemoaned the difficulty in defining “obscenity” and what, at that time,constituted hardcore pornography.
“I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so,”Stewart said.
“But I know it when I see it…”
The same difficulties apply to defining “quality advice” – we know it when we see it, but a formal definition remains elusive.Perhaps it will never intelligibly be defined. But Paul Barrett, general manager of distribution for Colonial First State (CFS), says it’s time to try.
Dealer groups, individual planning firms and individual planners might know what quality advice looks, smells and feels like, but a definition has to be produced that allows the consumers of financial planning advice to know what to look for – so they know it when they see it, too, or, perhaps just as importantly, they recognise advice that is substandard.
“Quality advice is advice that presents clients with a legitimate opportunity to achieve their goals,” Barrett says.
“That’s a very hard thing to come out and benchmark and define.
“In the past we have focused on the quality of documentation, the quality of processes, the quality of Statements of Advice [SoAs], and whilst it’s vital that advisers do the right thing in terms of these things, their number one obligation is to deliver quality advice. We have yet to build…a mechanism to go out and measure that.”
Barrett says one can tell intuitively if advice is good or not. “You can pick up a piece of advice and you can look at it and fairly objectively assess whether the advice being provided is going to give the client a chance to achieve their goals,” he says.
“But you have got to have a system that looks beyond whether Financial Services Guides [FSGs] are being given out.
“I have seen some SoAs that have been absolutely perfect when it comes to how they measure up on disclosure objectives, et cetera, but the underlying advice has been of poor quality.
Conversely, I have seen SoAs that have been quite poor, but the underlying advice has been excellent.
“What we’ve got to achieve is a balance between the two [things] – advice that’s legally robust,but at the same time maximises a client’s chance of achieving their goals.
“We can’t put it in the ‘too-hard’ basket. We have got to try to define it.”
That’s what CFS and its affiliated planning networks are now attempting to do, Barrett says.
“Does the advice improve the position of the clients from where they are today?” he says.
“Does the advice provide a strategy that lines up with the client’s needs and goals? Is the advice easily understood, and is it able to be executed?
“These are some of the components that will go into the definition.”
In 2003, the Australian Securities and Investments Commission (ASIC) and the then Australian Consumers’ Association(ACA) released a report on the quality of financial advice in Australia.
It sent 53 volunteers to three financial planning firms each, to seek a comprehensive financial plan. Notwithstanding criticisms of the ASIC/ACA methodology that followed, the survey found that 10per cent of plans were “very poor”, 17 per cent were “poor”, and 24 per cent were “borderline”. Only 2 per cent of plans were rated “very good”, and 19 percent “good”. When ASIC repeated its exercise in 2006, the results were not directly comparable; and in any case, the 2006 survey focused on issues most dear to ASIC’s regulatory heart – namely, compliance.
ASIC will conduct another survey in the current financial year, and this time it is understood it will focus on the quality of advice, not just planners’ compliance with the law. However, as things stand, few planners considers to constitute quality financial planning advice.
Right now, the regulator is gathering data from a number of dealer groups around the country to work out what yardsticks it needs to use to assess the quality of advice being provided to Australian consumers.
Deborah Koromilas, ASIC’s assistant director of financial services compliance and senior executive leader of the financial advisers stakeholder team, was unavailable to talk to Professional Planner about the project, about why ASIC thinks it needs to focus on quality in addition to compliance, and how it proposes to define and go about testing quality of advice.
A spokesperson for ASIC said: “[Your]questions do touch on the project we are conducting, and while this is progressing, it is something we can’t speak publicly on right now.”
Jo-Anne Bloch, chief executive of the Financial Planning Association of Australia (FPA), says the association is currently working on a formal definition of “quality advice”. Some of the elements of such a definition necessarily address intangible issues – such as how confident a client feels after receiving advice – but some are tangible, and can and should be measured.
At the time of writing, the FPA was working on a submission to the Parliamentary Joint Committee on financial products and services, chaired by Bernie Ripoll MP, which would include a definition of quality advice.
Bloch says the focus of the financial planning community has understandably been on compliance in recent years, and in some respects that’s been a distraction from the task of defining and delivering quality advice to the greatest number of people possible – particularly the provision of cost effective limited advice.
“One of the reasons we have struggled with ‘quality of advice’ is because we have been so focused on Financial Services Reform[FSR] and we have tried to make advice a commodity,” Bloch says.
She says product considerations cannot be unbundled from quality advice, for simple and very obvious reasons. But remuneration can,and should, be separate from the product. “I think quality of advice is based on other issues,” Bloch says.
“If it’s the right product, implemented correctly,and meets strategic objectives, I don’t think product is an issue.
“But the fee should be unbundled.”
A focus on quality of advice puts the client front and centre, and then ensures that all a financial planning practice’s systems and processes are aligned to deliver the best result for the client.
It’s about ensuring a business is structured to give front line planners all the support and resources they need to do the job, and none of the unnecessary distractions.