The role of ongoing service agreements for financial advice is under question, according to a lawyer who specialises in financial services regulation.
According to Claire Wivell Plater, chair of The Fold Legal, Commissioner Kenneth Hayne’s final Royal Commission report may recommend a complete rethink of whether clients are largely better off without them.
Presenting at the Professional Planner Researcher Forum in Sydney today, Wivell Plater spoke on Hayne’s interim report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and predicted that the way advice firms contract out to clients will be under the spotlight.
Advice has a place, she said, but contracted ongoing advice sometimes doesn’t.
“For people going through life changes like inheritance, divorce or retirement, who have a need for that sort of advice and a need to have their hands held for a period, [ongoing advice] is absolutely sound practice,” Wivell Plater said. “But, arguably, many clients are better served by contributing to their low-cost super fund, and, if they have any spare cash, entering a savings plan or investing in an ETF.
“If that is the case, does that client need an ongoing service arrangement?” she asked. “Is it necessary and is it valuable?”
Weighing the cost of advice
She questioned whether a client that doesn’t have a need for specific and current advice gets more value out of advice than they would from straightforward investment strategies.
“Would they derive sufficient value from paying a 1 per cent fee to an adviser, which may or may not include a platform, when it could have been deployed to one or more of the strategies and significantly accelerated the compounding effect and impact on retirement Income?”
Conflicts exist, she explained, because advisers aren’t generally accustomed or compelled to compare the difference between the client’s investment in their advice services and the return they could achieve on their own.
“I’ve never met an adviser who recommends, let alone considers, the impact of the cost of advice – and the trade-off between the need for advice and the impact of that on the client’s ongoing wealth,” she said. “I have never seen it in a Statement of Advice.”
Risk of staying in the bubble
The issue of ongoing fee management, Wivell Plater said, should also come under the spotlight in Hayne’s final report. Hayne limited the scope of this issue to large financial institutions, she noted, but the relevance of ongoing fee management is something that relates to all advisers.
“Hayne made it clear that he believes advisers are prioritising revenue and fee generation over the delivery of advice and services paid for by their clients,” she said.
“When I talk about this to advisers they get white-hot with rage and say ‘we don’t do that, we act for [our] client’,” Wivell Plater said. “What I think advisers need to do is challenge that, to actually really step back and ask ‘is that what’s happening?’
“I think you have to. Otherwise you stay in the bubble you are in with all the risks of that bubble.”