Experienced professionals who have been doing their job for any meaningful period of time will have developed general rules of thumb that help them efficiently perform their role.
For example, GPs know that in most circumstances the best remedy for the common cold is plenty of rest and fluid.
An accountant will tell you to keep receipts for everything, however, if your record keeping is lax, there are shortcuts they can take to estimate deductions.
Similarly, financial advisers have rules of thumb too. For example, people with a mortgage and dependents probably need life insurance, young people can accept greater investment risk and retirees prioritise income and capital preservation over capital appreciation.
The human tendency to form rules of thumb is centuries-old and has a scientific name: heuristics. In ancient times, much like today, heuristics helped people navigate complex conditions and make decisions quickly such as the safest route home.
For decades, rules of thumb helped financial advisers to assess a client’s needs and determine a satisfactory course of action.
Advisers also formed views on the types of products that suited most people in most circumstances, based on their experience. They didn’t go to market and conduct due diligence for every client.
These mental short-cuts kept the cost to serve down and made professional advice affordable for the average Australian.
But today, rules of thumb can’t be used as a starting point for advice. In order to fulfil their best interest duty and related obligations, the law requires advisers to be completely open-minded. Nothing can be definitively ruled out, effectively discounting years of experience.
Under the best interest rules, advisers must research and consider a client’s existing financial strategy including any insurances and investments, in the context of their personal circumstances.
They must then research and consider alternative strategies, stress test the efficacy of each strategy against multiple scenarios, make a recommendation, document the basis of that recommendation and demonstrate why it is likely to deliver the optimal client outcome.
In short, they must justify the advice they give and the advice they don’t give. The catch-all in safe harbour creates this challenge.
This added complexity is driving up the cost of advice. It is adversely impacting the productivity and profitability of businesses, sapping the joy out of being an adviser and ensuring fewer and fewer Australians can afford the advice they need.
Sadly, that is the real cost of proving best interest; a much higher requirement than simply meeting best interest.
Professional judgement
Who’s to blame?
In financial services, the answer to that question – whatever the context – is usually, ‘the problem began with Storm Financial’.
As I pointed out in my previous column Three regulatory must-haves for an advice investment service, Storm turned advice into a product. Every client got the investment equivalent of Panadol, regardless of their personal circumstances.
But what Storm did was not completely dissimilar to what was happening across the broader industry, only it was dialled up to the extreme.
Inside many advisory firms, advice almost always leads to a preferred product or vehicle. The best interest duty admirably aims to ensure clients receive advice that meets their unique circumstances and objectives but, under the current rules, advisers are being forced to consider every possible advice permutation.
Given advisers are not schizophrenic, they’re spending a lot of time ruling out options over and over again in order to come to the same conclusion they would have had they been able to exercise their professional judgement.
Admittedly, many of the deficiencies in advice documents are not about the recommendation or the work done to justify that recommendation but what hasn’t been done. The problem is not so much what a file says but what it doesn’t say. This is bought to the fore if there’s a client compliant.
There is no question that advice must be in a client’s best interest but there are significant repercussions if we cannot get the balance right.
Consider what’s already happening in the life insurance space. Anecdotally, advisers are turning people away because it is not economically viable to service them, given the legal obligations.
Once upon a time, advisers could safely direct their clients down some well-trodden paths to arrive at a suitable destination.
For example, a young couple with children and a mortgage will probably need enough life cover to clear their debt and support dependents until at least age 18, as a starting point.
For a single professional, their most pressing need will likely be income protection insurance to maintain their lifestyle and cover any medical expenses, in the event of accident, illness or injury.
Nowadays, advisers must investigate every possible path and the sturdiness of each path, under different conditions, at the client’s expense.
Unfortunately, this means most people are excluded from the advice journey, which surely is in no-one’s best interest.
The theme of this article is great, but it falls for the trap of perpetuating the myth of ‘best interest’. As anyone who understands the English language understands this, can not be known a priori, only ever a posteriori. It is a nonsense to insist that advice about the future be given be the ‘best’ for circumstances that cannot be known. The intention of course is to prevent advice that is clearly to the client’s detriment, given reasonably anticipated circumstances – and this intention is admirable. Some regulator somehow became confused with circus fortune tellers who can determine ‘ best interest’ when the future is unknown.
Neil is correct. The Best Interest Duty ( BID ) obligations have thrown the baby out with the bath water.
If best Interest is to enforce unworkable, unviable Regulation that every Licensee and Lawyer seem to have a different opinion and interpretation on and whom, then decide that to protect their Interests, they should follow the “SAFE” path of a maze of complexity, or from an Advisers perspective, the “maze of doom,” then the BID is a huge success.
No Licensee or Adviser firm will be sued, mainly because 90% of the population can no longer afford to get advice.
Limited advice can easily be incorporated into a BID structure, though a radical approach will need to be implemented, which is, shock and horror, allowing the client to choose the level of advice and then allowing the Adviser to get on with it based on their experience and obviously what is in their clients overall best interest.
One example of the madness that is the current regime, is if a client has a Super policy with NIL Income Protection in place, then we are expected to do a comparison on a Cancellable contract that we tell our clients is definitely not in their best interest to hold, as they have nil long term safety nets or representation, though we still need to and are forced to compare on a like for like basis.
This is like trying to compare a car to a boat, in that because they are both a form of transport, then we need to fully analyse and compare all the differences.
BID is about making sure that if a client can no longer work, then there is a safety net to enable them to have a proper Non-cancellable, long term Income replacement contract, with their adviser being on hand to help with their claim and ongoing needs.
What we have now is a future of up to 90% of Australians having no-one in their corner going forward, due to the current regime that does not recognise experience, commercial reality and Business risk that allows clients and Advisers to work together.
Thank you, Neil, for succinctly highlighting the most significant issue in financial advice today.
We spend countless hours doing research and analysis that no client needs, wants or values to justify the recommendations we could have made simply based on experience.
The result is that the only people who can afford financial advice are those least in need of it.
Something needs to change……..and fast, or, as a country, we will pay a very high price!
What the Ethics bridging course reminds us (or teachers us) is that we have biases, we use rationalisations and, heuristics is not always our friend.
Professional judgement needs to be stood up in the advice (industry) if it is ever to become a profession however, to be effective, it relies on trust. Therefore, advisers need to prove that they can exercise appropriate professional judgement and this means they have to be laser eyed about what they are personally taking into the advice engagement.
The industry will hopefully get there, but the time for talking is over and the demonstration is now required for that to eventuate.
Neil is correct. The Best Interest Duty ( BID ) obligations have thrown the baby out with the bath water.
If best Interest is to enforce unworkable, unviable Regulation that every Licensee and Lawyer seem to have a different opinion on and whom then decide that to protect their Interests, they should follow the “SAFE” path of a maze of complexity, or from an Advisers perspective, the “maze of doom,” then the BID is a huge success.
No Licensee or Adviser firm will be sued, mainly because 90% of the population can no longer afford to get advice.
Limited advice can easily be incorporated into a BID structure, though a radical approach will need to be implemented, which is, shock and horror, allowing the client to choose the level of advice and then allowing the Adviser to get on with it based on their experience and obviously what is in their clients overall best interest.
One example of the madness that is the current regime, is if a client has a Super policy with NIL Income Protection in place, then we are expected to do a comparison on a Cancellable contract that we tell our clients is definately not in their best interest to hold, as they have nil long term safety nets or represention, though we still need to compare on a like for like basis.
This is trying to compare a car to a boat, in that because they are both a form of transport, then we need to fully analyse and compare all the differences.
BID is about making sure that if a client can no longer work, then there is a safety net to enable them to have a proper Non-cancellable, long term Income replacement contract, with their adviser being on hand to help with their claim and ongoing needs.
What we have now is a future of up to 90% of Australians having no-one in their corner going forward due to the current regime that does not recognise experience, commercial reality and Business risk that allows clients and Advisers to work together.
Spot on Neil.