Despite the general air of pessimism, after reviewing 13,500 files we consider the advice industry’s journey to professionalism much further along than most.
Looming professionalism isn’t simply the result of the institutional licensees retreat from advice or the decreasing influence of product manufacturers, but the inevitable result of a gradual, and then sudden, shift in adviser capability. The reality is that despite increased regulatory and stakeholder expectations advisers have adapted, and evolved, to prosper.
I’m not just offering anecdotal observations to mollify adviser complaints about compliance and complexity; our data shows that, despite increasing compliance obligations, the quality of advice in 2021 is materially better than it was in 2020.
I appreciate that assessing advice quality is triggering for many advisers, but it’s not purely a subjective assessment; advice quality is the inevtable consequence of advice processes that meet, and exceed, legal requirements. A more consistent and considered focus on intent, process and outcomes (ie., compliance) inevitably leads to reduced risk and better results. By mirroring ASIC’s prioritisation of engagement and understanding over disclosure, this approach also simplifies the advice process.
To be fair, the best advisers are often supported by licensees that innovate and avoid the kind of conservatism that’s so attractive to their competitors. Despite cost and relationships being the traditional means of differentiating licensees, the reality for advisers is that their licensee’s approach to compliance has the most profound impact on the quality of their advice.
What gets measured gets managed (they say), so it shouldn’t surprise that licensees that consider the audit as a control mechanism get the outcomes and culture that reflects their limitations. On the other hand, those licensees that approach compliance as a means to educate, empower and equip advisers to do better see immediate and lasting benefits.
These licensees are not only better at managing their legal and regulatory risks, but improve their clients’ (and their advisers’) experience while guaranteeing the sustainability of the advice businesses they support. They’re also more consistently profitable.
Here’s our view of the Top 10 advice issues in 2020. We’ve tried to simplify the data to highlight the key themes, but the larger the sector the greater the number of issues identified.
What might surprise after looking at this breakdown is not that advice process issues represent over 20 per cent of identified compliance issues, but that the qualitative failures identified in 2020 simply don’t accord with an industry that claims to prioritise relationships and understanding over process.
Contraventions of the FASEA Code of Ethics was the most frequent compliance issue in 2020. Reassuringly, despite the aspirational requirements of the FASEA, these ethical contraventions didn’t correlate with significant compliance failures such as failures to act in best interests, to provide appropriate advice or prioritise clients’ interests. In this respect, at least, advisers in 2020 soundly demonstrated a level of professional conduct. Further improvement may be both necessary and inevitable, but these results were particularly impressive given how little effort some advice businesses did to operationalise the FASEA Code.
So, was 2021 any different?
Several things here have changed.
First, although the FASEA Code remains troublesome for some advisers, it’s worth remembering that, for many formerly institutionalised advisers, their 2021 review was the first time the Code had even been considered in their review process. Despite this, we identified less Code contraventions in 2021 than 2020.
Second, although best interest duty failures were one of the top ten issues in 2020, these conduct and process failures didn’t make the Top 10 in 2021. In fact, the 2021 reviews clearly reinforced our contention that while most advisers routinely act in their clients’ best interests, they often poorly document (or validate) their process.
Third, the majority of the remaining issues for 2021 are ‘near misses’ rather than complete failures. The data suggests that most advisers are neither reckless, negligent nor ignorant of their obligations and duties, they simply require tools and training to better manage the increased complexity with which they are faced. This is where good licensees, and more effective compliance support, add significant value.
Hemingway wrote that one goes bankrupt in two ways – “gradually, then suddenly” – and this may also be how an advice profession emerges. Based on our data, we’re optimistic about the future of advice because we’re confident that advisers, and the better licensees, are actively building the profession Australians need. Instead of waiting for regulators and product manufacturers to show the way, advisers are choosing to lead.
