Financial planner compliance ranking needs to be predictive rather than retrospective, according to the head of financial advice and accountancy dealer group GPS Wealth.
Grahame Evans, director of GPS Wealth, compares compliance ranking to the role of insurance underwriting, in that it should indicate areas where risk could arise.
One of his key criticisms of traditional auditing systems is that they measure adviser behaviour after the fact. “Audit results are lag indicators. This is an attempt try and give us more of a lead indicator,” Evans says.
In-house compliance ranking
Giving Professional Planner an insight into the GPS Wealth ‘Advisor Risk Rating Process’, he explains GPS Wealth rolled this out across its network of practices around 18 months ago.
This comprises some 68 practicing advisers at present, with another 10 that are currently being introduced into the business.
It classifies specific identified risks according to nine categories. Points are allocated against each of these, with the number of points scored identifying an adviser as high, medium or low risk.
“It’s actually managing our risk, not only of the statements of advice (SOAs) having poor advice, but other risks associated with poor advice, whatever that may be defined as,” Evans says.
“The purpose of it is to try and risk rate our advisers so that we know where we need to spend time on training, education and management in those situations.”
Location, testing and complaints
The nine categories relate to a number of variables including where advisers work, the type of referral partners, any issues identified in previous audits and the type of advice software used.
The three top-ranked categories are geographical challenges, prior auditing problems and whether two or more complaints have been made in the last year. They attract four, seven and six points respectively
According to Evans, the location of the practice is measured because GPS Wealth deems that the ability to monitor and supervise advisers decreases the further they are from a GPS office. “For instance, we have no advisers in Adelaide, but four in Perth, where this comes into play,” he says.
Referring to its monitoring of previous audits, he explains “you could have someone who’s had issues in four out of the last six.” In these instances, he says “we don’t rate the adviser, we rate their files”.
It also assesses the number of client complaints an receives, with two or more suggesting the advice being provided may be of poor quality.
Software choice is included because of the emphasis placed on record keeping, “For example, if someone isn’t using XPLAN or Coin, they could hit the seven point mark,” Evans says.
Accountants and compliance
GPS Wealth specifically checks whether advisers are working with accountants, which it regards as an informal line of compliance.
“Generally, they won’t let an adviser do anything with their client that may be to the client’s detriment.
“They have a good sense for what’s right and not right, they can sniff out a problem, a conflict, where a client’s best interest hasn’t been given a priority. So we feel they’re a good measure for helping people with compliance,” Evans says.
Action taken
The score an adviser receives sets in motion potential actions on the part of GPS management.
A score of seven indicates compliance is not being met, with more ‘pre-vetting’ of the adviser required. A score of between three and seven points results in an increase in the number of random audits undertaken of the advisers client files, increasing to six from the standard number of three.
Advisers working for GPS Wealth are classified as low risk if they score three points or less, with no additional action taken.
Evans says this has been in place at GPS since he joined, having developed it while a director of Centrepoint Wealth.
“We were trying to be more predictive, not reactive, with advisers, to either bad audit scores or client complaints.
“We spent a lot of time talking to professional indemnity insurers about this issue. It’s a big issue for them as well, how do you become more predictive with advisers,” he says.
The process
Evans says is not difficult to implement, with most of the information available from GPS Wealth records.
The process is largely managed by the business’s head of compliance. “We also use some external overflow, but at the moment, with the number of advisers we’ve got, the changes are not dramatic,” Evans says.
“We have a spreadsheet with all our advisers and all the measures, then we rate them on that basis. I look at my board reports, from head of compliance, which will have the risk rating attached to it.”
Evans says the ease of the system is also aided by most of the categories being quite “static”. Once the system is set up, he sees the monitoring of adviser audit results or claims processes as the main categories requiring ongoing updates.
