Very soon fintech companies and other commercial operators will have greater latitude to provide sporadic scoped advice, if you believe early predictions about the outcome of Treasury’s Quality of Advice Review.

If the questions posed in the Quality of Advice Review Issues Paper are any indication, the government believes scoped advice may hold the key to solving the advice accessibility and affordability dilemma.

This has potentially dangerous consequences.

The former government’s Covid-19 early release of superannuation program and the advice industry’s strong reaction to it provides some insight into the challenges with scoped advice.

The biggest one being it can be myopic and therefore potentially out of context.

For example, something as seemingly simple and immaterial as allowing individuals suffering financial hardship due to Covid-19 to withdraw up to $20,000 from their superannuation could have unintended long-term consequences. It could affect when a person can afford to retire, buy a home and how much they can borrow.

Theoretically, there is nothing wrong with episodic scoped advice so long as people understand the impact of implementing that advice on their current and future financial situation.

Unfortunately, in the case of the early release scheme, it is unlikely the 3.5 million Australians who applied fully appreciated the potential downside of dipping into their retirement savings.

Context is crucial in financial planning.

Turning pipedreams into SMART goals and ultimately reality

Over the past 20 years, the ongoing separation of product and advice has led to more comprehensive, holistic advice.

The falling number of risk-only or investment-only specialists is evidence of that.

But despite the industry’s enormous progress, many advisers are still confused about the difference between the process of scoping advice and establishing client goals.

Looking back, the shift to holistic advice at the turn of the century led to a greater focus on client goals but many advisers still struggled to separate product from advice.

They used superficial goals like “I want to review my superannuation fund” as justification for switching clients from one fund to another; typically a related-party product.

To aid effective goal setting, advisers were taught that goals had two key characteristics; they had to be time-bound and dollar-costed. Ultimately, this was replaced with the SMART goals concept, a popular goal-setting technique and acronym for specific, measurable, agreed-upon, realistic and time-bound.

The problem is that goals can only become SMART goals with the help of an adviser.

The average person has no idea if their goal to pay off their home and retire by age 65 is realistic or achievable. This is a financial numeracy issue that sometimes gets confused as financial literacy.

Without an adviser to help them assess their situation, conduct a gap analysis and take a big-picture view of their earnings and savings capacity, goals are nothing more than pipedreams.

Goal setting is one of the most important aspects of the financial planning process.

It is expansive and provides context. Done well, it leads to better advice, better client outcomes and a stronger professional relationship.

However, in a bid to make advice more accessible and affordable (and less personal), some proponents of scoped advice seek to do away with or water down the fundamental process of goal setting.

Scoping advice is important

Establishing a person’s reasons for seeking advice has been part of the advice process for decades.

These days it’s referred to as the scope of advice, since the introduction of FASEA.

But asking a client why they want to see a financial adviser often leads to simplistic responses like “I want to start planning for retirement” or “I need help investing a windfall”.

As with goal setting, clients often need help understanding what advice they need. It can be useful to think of the first draft of the scope of advice as “what the client thinks they need” and the end state as “what the client knows they need”.

Even among the highly financial literate, very few have the ability to accurately identify their advice needs. Left to work it out on their own, clients usually set the scope too narrow.

Advocates of episodic advice should consider this.

Advisers ask a number of questions to scope advice but these questions are based on generalisations, such as:

  • Investment planning – Assistance with decision making on new or existing investment portfolios;
  • Personal insurances – Ensuring dependents are financially secure in the event of death or serious illness; and
  • Retirement planning – Optimising retirement strategies and structures to provide the most comfortable retirement lifestyle possible.

What is apparent from these general statements is that scoped advice is fundamentally different to client goals, although there should be goals that relate to scoped advice. Effective, compliant advice needs to follow a scope-to-goals approach in a structured, repeatable and defendable manner.

The industry needs to get this right quickly, and certainly before the potential proliferation of scoped advice models, or risk reverting to the olden days of product flogging.

One comment on “Scope with care: In advice, context is crucial”
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    Great article Paul, not many advisers truly understand the relationship between goals, SMART goals and scoping advice. You’ve brought together these concepts in a clear concise manner. Well done.

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