Advice affordability concerns a 'phantom fear'

February 12, 2021

It was two years ago last week that the government warmly embraced Commissioner Hayne’s 76 recommendations to boost standards and, once and for all, fix misconduct in the financial services industry.

Some five years earlier, though, two independent government inquiries into standards – a Parliamentary Joint Committee on Financial Services and the David Murray-led Financial System Inquiry – had come to that very same conclusion. Unsurprisingly, ASIC had been making the same noises for even longer.

Perhaps this is why the industry regulator had been accused of being a toothless tiger by Hayne, for being unable to bring the industry to account for its conduct. Hayne’s approach was different, though: the very public hearings of the Royal Commission were like watching a train wreck in slow motion – impossible to look away.

The obvious could no longer be ignored: standards had to be lifted and, what’s more, government had to be the one doing the lifting because industry couldn’t (or wouldn’t). And so, in 2019, before Covid was even a thing, implementation of Hayne’s standard-lifting recommendations began.

Industry, however, despite being the expert in the room, didn’t get to come up with its own standards. The task was handed to FASEA. Sure, industry knew what a standard is – the two largest associations each had their own set of them, both reading like a who’s-who of vague virtue. But when closely scrutinised under Hayne’s steely eye, industry enforcement looked more like a rubber-stamp circus.

Hayne’s cynicism about the industry could hardly be faulted, by the way. It was surely no coincidence that the industry-authored standards had been revised and republished right at a time when the subject became subject to much closer scrutiny, hence the Financial System Inquiry. One standard, called ‘Code of Professional Practice’, originally published in 2009, was given a makeover and re-released just before Joe Hockey launched the FSI. Another, called ‘Six Principles of Professionalism’, had previously been languishing as a draft version for two years before being dusted off and re-released while the FSI was in the middle of its proceedings.

Nonetheless FASEA had already begun its work to professionalise an industry. Seldom, though, does the stick of statute magically install a new culture.

Traditionally, recognised professions emerge when a community of like-minded practitioners come together to set aspirational standards in the interests of the public. That’s not what this looked like though; an unwilling industry was instead being handed down a set of new commandments – the bare minimums now required by law – that it must meet, or else. The situation more closely resembled herding cats than celebrating the birth of a profession.

Then what happened? Thousands of financial planners exited the industry, and many more are expected yet to leave.

And now, with the government not yet even half-way through implementing Hayne’s recommendations, the industry narrative has shifted from ‘standards’ to ‘affordability’.

Is this real or is it spin?

No doubt in response to industry bleating the perils of this adviser exodus, ASIC released a consultation paper, ‘Promoting Access to Affordable Advice for Consumers’. Allegedly financial planner numbers are causing “widespread concern” that consumers may find it difficult to access “good-quality affordable personal advice”.

Does this pass the pub test, though? Let’s back up a moment.

New industry standards that underpin good quality advice are released;
Those who don’t want to meet them leave the industry;
Consumers now can’t access good quality advice. From whom? The ones who left the industry rather than meet the good quality advice standards?

Has the availability of good quality advice really changed that much? Or has the tide gone out and now we can see who was swimming naked?

Here we are, only half way through raising the bar, and we’re jumping at the first shadow and talking about lowering it. This is a phantom fear. The truth is that access to good quality advice is the same as it was prior to the exodus. Getting good quality advice has always been the aspiration, and it was the reason for the Royal Commission.

As a matter of fact, the issue of affordability didn’t come up in the Royal Commission. Over 2100 pages in those reports and the word appears only once – out of the mouth of none other than AMP’s CEO. That’s because affordability is not about lifting standards, it’s about asking which standards can be let go.

However the word ‘conflict’ appears over 500 times.

A conversation now about affordability, before the new standards have been bedded down, is putting the cart before the horse. Get this wrong and we’ve got another scandal just around the corner, you can bet on it.

advice affodability, asic, code of ethics, consultation 332, Daniel Brammal, FASEA, Financial Systems Inquiry, FSI, Hayne royal commission, PIFA, Profession of Independent Financial Advisers, standards

7 responses to “Advice affordability concerns a ‘phantom fear’”

Philip Anderson

February 15, 2021

If Hayne did such a good job, then how does your comment (‘As a matter of fact, the issue of affordability didn’t come up in the Royal Commission. Over 2100 pages in those reports and the word appears only once’) reconcile with paragraph k of the Hayne Royal Commission Letters Patent (terms of reference).
“have regard to the implications of any changes to laws that you propose to recommend … for access to and the cost of financial services”
If a financial adviser ignored one of the key objectives of a client, then they would be in breach of their obligations.
Hayne did not look at this issue of access or affordability. He did not look at good advice or all the good work that the majority of financial advisers have been doing year in year out. He really only looked at a limited number of examples of misconduct.
If you think that cost and access is not an issue, then you are not looking at what is happening in the real world and not listening to the many financial advisers who are doing everything they can to deliver quality affordable advice to their clients.

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Rebecca (Becky) Soans

February 15, 2021

For me Daniel’s argument falls over on his blanket assertion that “Those who don’t want to meet them (ie. the standards) leave the industry.” Many sole/small business advisers who have left were already providing a high standard of advice without a stick being wielded over them and without being forced to spend time and money on increased compliance and on a degree or second degree. They have left because they cannot make money charging affordable fees to non-HNW clients. The disgraceful ASIC $2,426 fee-for-no service just adds to this problem. I see professional financial advisers becoming unaffordable for the 90% and low-cost “advice” going back to being the domain of the product-providers where all the problems started: thanks Hayne and ASIC!

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Jeremy Wright

February 15, 2021

Daniel, your Professional fee, charged out at $330 per hour for the foundation of Financial Planning, ( Life Insurance advice and implementation ) with a refund of commission, done to the letter of the law and the plethora of Regulations you seem to be so enamoured with, is professionally provided, then your argument falls flat for the vast majority of Australians, who have been saying from day one that once the FACTS, not idealisms are presented, they can clearly see that the reduced premium, with thousands of dollars in professional fees to pay for all the work, does not equate to a more professional outcome, it actually equates to less money in their pocket, for what is, in their minds, a misunderstood and legalistic maze of complexity.
The world is full of high idealist theorists, though many of their arguments carry bigger holes than the Titanic after stopping to take on more ice.
Daniel, you might spend a lot of your professional life surrounded by people who live in and work in the bubble called Canberra.

Canberra is an anathema to the rest of Australia, who have to abide by unrealistic guidelines set by people who will always be paid by the Australian Tax payer, which creates an Institutionalised mindset and an eager army of Lawyers and Compliance “professionals” to spread their interpretations and keep the gravy train going.
It is an insult to all Australians to enable your argument to go unchecked.
You may have many high net worth clients who have the resources to pay your fees, though these people make up less than 10 percent of the population and to make a broad brush statement that advice affordability is a phantom, provides no delineation and rather, presents an argument that I dare say, is a main causation of the predicament Australia finds itself in now.

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David Smith

February 15, 2021

“A conversation about affordability…….is putting the cart before the horse.” Really?
Not if you are a consumer who wants and needs advice and can’t afford it. A lot of the unnecessary costs are not “standards.” They are misguided regulations that can be dispensed with, without lowering advice standards. Let’s be realistic and have that conversation.

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Graham Hutton

February 15, 2021

all good points, however the “Elephant in the room” is Life insurance. the idea that the paltry sums (commissions) go even close to the delivery of (stand alone) Life insurance advice is ridiculous. there needs to either be a “carve out” on the complexity of the stand alone advice model, or at the very least ceiling on complex advice based on premiums and commissions. alternatively a return to a more realistic commission model needs to receive urgent attention.

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Craig Meldrum

February 15, 2021

Advice affordability has been an issue for a lot longer than this. The FPA and FSC were arguing for deductibility of advice fees to ease the cost burden for consumers back before FOFA. The Hayne and Murray reports are not the panacea for professionalism. For instance, why did Hayne stop short in dismantling vertical integration when it was highlighted as a determinative factor in his findings against the banks’ and AMP’s respective models? Do you know David Murray was a key architect of those models when he headed up the Commonwealth Bank? The outcomes of the Hayne and Murray reports are certainly a part of the rubric but professional best practice, at its heart, requires an acceptance of ethical integrity which has nothing to do with the cost of delivery. What is more relevant is ASIC’s perception that post-FOFA/post-FASEA advice can be provided for a bargain basement price of only $300 – based on the Covid relief package which allowed for shortform advice (that was not on its own compliant with the FASEA standards) for the $10K super withdrawal and 50% reduction in account-based pensions.

There is no question that the industry (‘professional advisory’) will be smaller and more qualified. The concern is that the cost to provide professional advice will be out of the reach of ordinary mums and dads who will have no option but to turn to intrafund advice offerings for potentially more scoped and less holistic advice where the cost is subsidiarised by product and where advisers are funded by, and rewarded for, retaining and building funds under advice in vertically intergrated industry superfunds (that actually sounds like retail advice pre-FSRA/pre-FOFA – and so we’ve come full circle).

ASIC is imposing a ‘black-letter law’ approach in its work with the industry. The cost of advice would be reduced dramatically if licensees didn’t need the amount of compliance and legal resources to cater for the various lookback programs and enquiries. Look at the costs that an adviser has from their licensee fee to the ASIC funding levy, PI insurance, professional association memberships, further tertiary education, ongoing CPD, software, etc etc right down to the tea an coffee and tim tams for client meetings, and then the threat of a compensation scheme of last resort to cover those self-licensed and boutique firms who, bless ’em, don’t have adequate balance sheets to meet their obligations and go into voluntary liquidation rather than face the music so the good firms have to pick up the cost etc. It is not cheap to provide professional, compliant, quality advice.

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Kym Bailey

February 15, 2021

Very clear eyed David!
Back, in the day, accountants, tax professionals, provided advice on ETPS, redundancies, RBLs, SMSFs and a raft of other structural and tax related matters. These days there is a clear demarcation between accounting and financial planning but, in my view, they are two sides of the same coin for the above types of matters in whatever is their current iteration. Eg; RBL = TBC, ETP = ETP (non super) and so on. The TBC/TBA is a stand-out – FP need the info to provide advice but it is only available via the Tax Agent or via MyGov. Work that one out.
Where the similarity ends is easy to see – investment advice, insurance advice (for example) in the FP remit and the myriad of traditional accounting and tax work on the other.
It does seem that the answer (or at least one of the answers) to the conundrum may be to think about a simple license that covers only structural and tax matters. Although it is easy to say this, it is difficult to really get this right, but the current system will struggle to provide ‘simple, affordable advice’ so a rethink is needed.
Community perception about paying for advice is one hurdle. This is perhaps one of the reasons the alternative forms of remuneration became the stock of trade for FPs. Accountants do charge a fee for service so clients of that profession seem more inclined to pay under that model. However, and it is a big however, a client pays for ‘something’ such as a tax return etc, will they take the same view to receiving advice that may take years to manifest into the ‘dream’?
David is spot on in saying that until the profession grasps the nettle and drives change, it will remain where it is and ultimately, no-one wins as a result.

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