While the value of financial advice is becoming recognised by consumers, the real developmental issue for the industry is the need for a regulatory system that not only accommodates but encourages episodic advice according to AMP’s Matt Lawler.
With the adoption of Letters of Advice (LoA), Lawler believes, in place of costly Statements of Advice (SoA), episodic advice would become more than just a niche corner of the advice proposition; it would become the foundation of a whole-of-life advice relationship that begins with engagement, gestates with episodic advice and flourishes into holistic advice when the clients’ needs can sustain it.
Speaking on the first of three Professional Planner roundtables focused on exploring the industry’s exposition of the value of advice, Lawler said consumers often don’t want an “all or nothing proposition” and would prefer to build trust with an adviser over time.
“Episodic advice allows advisers to establish trust with their clients,” he said. “After being given bits of advice at crucial times in their lives, the ground is laid for a more holistic advice service when the client has accumulated larger amounts of money. They will be more inclined to entrust an adviser having established the relationship.”
While holistic advice works for some consumers at the point where they meet an adviser for the first time, including high-net-worth individuals and those with complex needs, the predilection many have for receiving episodic advice – at least until the pre-retirement phase – can’t be ignored.
Despite the importance of episodic advice to consumers and as a gateway to holistic advice, however, Lawler says the current regulatory framework isn’t suitably scaled to support episodic advice delivery.
“We need to make episodic advice more accessible to people, and this concept of a Letter of Advice as opposed to a full SoA allows you to actually give that episodic advice without big costs or inputs attached to it from the advice practices point of view,” he explained. “And then we nurture these clients into a point where they are prepared to build that deeper relationship.”
Also on the roundtable, Elixir Consulting founder Sue Viskovic agreed that a “much larger cohort of clients are receiving episodic advice” in 2022.
“A lot of the firms that we’re working with are looking at their client base and figuring out how much they need to charge to be profitable, and there’s always a tail-end of clients for whom it’s not going to be value-adding to pay the minimum fee and they don’t actually need an ongoing service,” she said.
“So a lot of firms are turning to those clients and saying ‘we’re here when you need us, but we don’t believe that you actually need us on an annual basis’.”
Letters over statements
The concept of an LoA was popularised by the Financial Services Council in its Whitepaper on Financial Advice, which proposed abolishing Records of Advice and supplanting SoAs with a shorter, simpler document that provides “only the information the consumer needs to decide whether to implement the advice”.
Using LoAs to spur an increase in the use of episodic advice and meet the demands of consumers – especially those under the pre-retirement age threshold – is a development some advisers might object to, Lawler acknowledges. The required changes to business models wouldn’t suit all practices, with many rusted onto the ongoing fee model.
Not everyone needs to prioritise episodic advice, Lawler countered. But if a large cohort of consumers value it as their advice delivery method, there must be a regulatory change to accomodate the provision of that episodic advice. “It does also allow new advisors especially, or younger advisers, to build a business off the back of those newer clients.”
According to Mybluesky principal Michelle Veitch, the recent regulatory change to annual advice agreements has blurred the lines between ongoing and episodic advice, which means the way advisers communicate their value needs to change.
“We still have our language all messed,” Veitch said. “We’ve got an annual advice agreement, so it’s not an ongoing thing. For instance, if your bill is $3,000 and you just happen to buy that over 12 months… is it episodic or is it ongoing? We need to be careful about that.”
AMP’s managing director of licensee offer Nick Hilton concurred, noting the move to annual advice agreements is a “big step towards a pure episodic advice model”.
LoAs would reduce the cost to provide episodic advice, JBS Financial Strategists founder and CEO Jenny Brown said, which would make it a viable service proposition for many more advice businesses.
“The issue that we have faced continuously is the cost to providing the one off advice,” Brown added.
‘Bags of wealth’
Stakeholders on the roundtable expanded on some of the remaining issues that stand in the way of making the value of financial advice clear to consumers. One of the foundational problems, according to Fox and Hare co-founder Glen Hare, remains the perception that people need “bags of wealth” to qualify for financial advice.
“95 per cent of people that reach out to us have never seen a financial adviser before,” Hare said. “A lot of what we do is really trying to break down that preconceived notion that you need to be old and rich to see an adviser.”
Instead of promoting the value advice holds to consumers as a broad concept, he said, that value should be articulated as something that’s “specifically relevant to the individual”.
A similar theme pointed out by Neil Macdonald, CEO of AMP’s The Adviser Association, was that consumers are often still under the impression that financial advice is all about product.
“The challenge is that the regulatory environment talks about product, [but] I don’t know any financial advisers these days that talk about product,” Macdonald said. “We’ve not put that message across at all well, to consumers, and until we address those core things from a marketing perspective we’re never going to change it.”
Veitch agreed that the current SoA-driven regulatory system keeps the focus on product, while a switch to LoAs would allow strategy to flourish.
“99 per cent of the SoA is product driven information,” Veitch said. “In what world can I deliver strategy? That world needs to exist. Clients who can go and source their own products online, I should be able to deliver a strategy [with] separation from product, because not every time there is a product at the end of it.”
Tax and togetherness
Roundtable participants agreed that the lack of tax deductibility of upfront advice will continue to stop consumers from reaching a full understanding of the true value of advice.
“It’s really frustrating,” Veitch said. “We could do so many more one-off pieces of advice if it was tax-deductible.”
The advice value proposition would also be better served with cohesive leadership from the industry’s representative groups, Lawler added.
“There is an opportunity for us to get together as a profession to create one voice and be more articulate in how we describe the changes we need to better support consumers,” he said.
“The Quality of Advice Review is a once-in-a-cycle opportunity, but we can’t be fragmented through the many different industry bodies in how we describe the type and nature of changes that need to take place.”