Three regulatory must-haves for an advice investment service

The fundamental premise of financial advice has never been methodically tested, but if strategic investment advice goes under the regulatory microscope advisers will need to provide evidence of three critical elements.

To date, the focus of regulatory and consumer action has been on the quality and appropriateness of advice rather than value for service.

As I discussed in my previous article, Strategic advice in line to be next regulatory target, imminent harsher market conditions mean it’s more likely advisers will be put under the microscope about the veracity of their investment approach.

With the comfortable retirement of millions of Australians at stake, this won’t be a routine exercise.

Advisers may be called on by the Australian Securities and Investments Commission to produce hard evidence of their ability to provide high quality investment services to retail clients.

This will likely include appropriate qualifications and experience, documented processes, efficient systems, and formal risk management and governance controls.

A practice may not have proof of such things readily available.

The most effective way to satisfy these critical responsibilities is to formally engage the required expertise: be that an internal resource, external asset consultant or support from an experienced licensee.

What will regulators expect to see?

If and when the appointed time comes, there are three must-haves for advice businesses.

1. Customised advice and solutions

The biggest problem with Storm Financial was that every client got the same solution. They all got the investment equivalent of Panadol, regardless of their needs, circumstances and objectives not to mention point-in-time asset valuations and market conditions.

Similarly, the main criticism of the vertically-integrated model is that it revolves around product rather than the customer. Both these roads lead to an in-house product sales construct (whether by design or inadvertently).

Despite it being more than a decade on, the memory of Storm Financial is still fresh in the regulator’s mind so it will be compelled to look for evidence of thoughtful, bespoke advice in each and every client situation.

They want to see advisers acting as fiduciaries because that leaves no room for predetermined outcomes.

There is also no appetite for arbitrary fees. In the past, it may have been okay for practices to have a medley of active and inactive clients with some, for example, paying $6,000 and others paying $1,000 but everyone more or less receiving the same homogenous solution.

Commercially, and also from a regulatory perspective, there must now be greater alignment between a practice’s value proposition and the fees charged.

It is an adviser’s fundamental duty to understand a client’s unique needs, circumstances and goals. Then, based on that information, customise solutions to maximise the probability of them achieving their agreed goals.

2. An efficient execution model

While advisers should be guided by a consistent investment philosophy and steadfast principles, personal advice starts with the individual. Advisers need to be able to articulate their philosophy, systems and processes, evidence their veracity and demonstrate how it meets best interest.

Advisers need a model that can accommodate a client’s personal preferences even if they conflict with their own.

For example, investors may want to bring existing funds, assets and insurances with them. If they use a particular administration platform or don’t want to use a platform at all, flexibility in solutions would be required to satisfy their needs.

Advisers need a model that can facilitate efficient access to a broad range of direct and managed options; capture timely investment opportunities; adjust portfolios as required; dump and replace underperforming managers; and continuously track, measure and report performance.

They need to be able to do this across multiple clients without any administrative delays as they progress through the advice process.

3. Requisite scale or the potential to achieve requisite scale

Value and price are inextricably linked.

Theoretically, the higher the fee, the greater the value add.

Importantly, the underlying cost for advisers to service clients is rising, due largely to mounting compliance requirements and the end of passive income streams.

Practice profitability is under increasing pressure. Many advisers have been forced to increase fees.

However, in a post-Hayne world, pulling that lever requires advisers to justify their fees and demonstrate a commensurate increase in value.

A business with scale is in a stronger position to manage costs, meet their compliance obligations and keep fees steady than a small practice.

As such, the regulator will want to see profitable, scalable businesses or at least businesses on the right trajectory. After all, quality bespoke advice and effective systems are irrelevant if businesses are not around to fulfil their obligations to clients, staff and other stakeholders.

No fear

Over 12 years have passed since the Global Financial Crisis (GFC).

If the financial advice industry had been further down the regulatory track when the GFC hit, it may have faced the value test earlier. However, at the time, there seemed to be many other issues identified such as fee for no service.

Now it is only a matter of time before the industry must face the music or at least hear a distant note or two.

Fortunately for advisers, there is affordable support available from plenty of capable providers to secure these critical elements without the need to reinvent the wheel or kick the can down the road.