Financial System Inquiry focuses on variability of quality as biggest advice issue

The greatest issue facing consumers of financial planning services is the variability in quality, according to the Financial System Inquiry (FSI) interim report, published today.

The report says many consumers have difficulty in telling the difference between good and bad advice; and that consumers generally are poor at assessing the risk inherent in some financial products.

While access to affordable advice is a key step in improving financial outcomes for consumers, the report adds that “lower-cost advice still needs to be of a reasonable quality to provide a benefit”.

The report covers the issue of financial advice principally in a chapter focused on consumer outcomes, and to a lesser extent in a chapter devoted to superannuation. It has called for further information on a range of issues and options, including:
• Making no changes to current arrangements;
• Raising minimum education and competency standards for personal advice – including specific requirements for self-managed super (SMSF) advice – and moving to a national examination for financial advisers providing personal advice;
• Introduce an enhanced public register of financial advisers (including employee advisers) which includes a record of each adviser’s credentials and current status in the industry, managed either by Government or industry;
• Enhancing ASIC’s power to include banning individuals from managing a financial services business; and
• Renaming “general advice” as something that more accurately describes what it really is, and mandating that the term “advice” can only be used in relation to personal advice.

Quality of advice

The report acknowledges that it is “challenging to increase the quality of advice and make it more affordable and accessible”.

However, “in the absence of quality financial advice, consumers may make inappropriate investment decisions, or fail to make appropriate financial planning decisions,” it says.

It says there is a lack of trust of financial planners, which recent regulatory reforms have sought to address. One source of mistrust is conflicts of interest – in terms of both business structures (as exist in vertically integrated businesses) and remuneration.

“Conflicts of interest have been a longstanding issue in financial advice,” the report says.

“There has been a tension between providing financial advice for the benefit of consumers and the product distribution role played by advisers. Shadow shopping studies carried out by ASIC found a strong relationship between advisers giving non-compliant advice and conflicts of interest in business models.

“ASIC’s submission argues that, in recent cases of substantial consumer loss, conflicts of interest held by financial advisers have often been a driver.

“The Inquiry considers the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice.”

Vertical integration:

The interim report acknowledges “a trend in the wealth management sector…towards more vertical integration”.

“Vertical integration is increasing, with the major banks and AMP at the forefront of this trend, combining advice, platforms and fund management into single

businesses,” it says.

“Other wealth managers, including Macquarie Group, IOOF and Perpetual, have replicated this strategy to varying degrees.”

It says that “although this can provide some benefits to members of superannuation funds, the degree of cross-selling of services may reduce competitive pressures and contribute to higher costs in the sector”.

It has called for further information on whether the trend towards greater vertical integration is “reducing competitive pressures and contributing to higher superannuation fees”, and whether the presumed efficiency of vertical integration actually flows through to consumers.

It says that “competition in the wealth management sector appears to be focused more on securing distribution channels and improving product features, rather than reducing fees”.

The report says the wealth management industry – which it defines as financial advice services and funds management, and says that superannuation is the largest segment – has consolidated considerably since the Wallis Inquiry in 199X

Specifically, the big have continued to get bigger, with the five largest platform providers now holding almost 80 per cent of “primary planner relationships”.

“Financial planners have consolidated or moved in-house to work directly for

wealth management institutions,” it says.

“Competition in the wealth management sector appears to be focused more on securing distribution channels and improving product features, rather than reducing fees.”