Financial services minister Stephen Jones has spent the summer digesting the Quality of Advice final report.
The Michelle Levy-authored report, which is expected to be publicly released imminently, will usher in a new economic era for financial advice.
While proposed changes need to be considered through the parliamentary process, if the draft report is an accurate indicator, there are some recommendations that are sensible to progress more quickly. It’s time to move forward on measures that improve access to advice.
If and when the overly tight compliance shackles come off, advisers must decide how they will respond.
The government, regulators and media will be watching to see if the industry can self-regulate.
There is no question that the current regulatory framework is unnecessarily burdensome, which has driven up the cost of compliance and, in turn, advice.
But it has also gotten the industry to the cusp of professionalism. It has removed cross subsidisation, lifted education standards, and forced businesses to get organised, implement systems and processes, and strive for requisite scale.
Businesses that have survived the last five years are in good shape.
Notwithstanding a short-term dip in profitability due to the end of grandfathered rebates and commissions, they are strongly positioned for the future.
Maintaining that position will mean holding on to some practices, long after they have stopped being law.
Consider Treasury’s recommendation to scrap statements of advice (SOAs).
SOAs, in their current form, can go every day of the week. They are lengthy, complex and costly to produce. Few clients read them.
However, clear, concise and effective client communication is critically important, as is record keeping.
The original principles and objectives behind the introduction of SOAs remain true: clients should be informed about the basis of advice including potential benefits, risks and consequences, in order to make informed decisions. Information on remuneration, costs and conflicts of interest should be clearly disclosed and explained.
Unfortunately, in implementing the SOA requirement, form superseded substance.
Advisers should tread carefully before abandoning SOAs and other practices.
Legislation or not, it is still good business sense to document advice and explain the reasoning that led to that advice. Advice documents don’t need to be long and complex. In fact, they shouldn’t be.
Ultimately, few people are prepared to engage a professional on a handshake alone. Equally, no one wants an 80 page SOA.
In an increasingly self-regulated world, where the rules aren’t so black and white, advisers must use their professional judgement and discretion to find the right balance. Licensees and other business partners can help them understand and navigate their legal and ethical obligations.
The price of professionalism
With deregulation on the horizon, the industry should reflect on the sound principles that underpin the existing rules and the events that lead to the current regime.
Advisers have paid a hefty price to get to where they are on the journey to professionalism.
Along this journey, many have built businesses of significantly higher capital value.
While the methodology for valuing advice businesses is determined by the market and beyond an individual’s control, within that valuation there is a range. Businesses that are well structured and organised, with the right systems, processes and governance framework in place, typically attract a price at the high end of that range.
Building a great business requires a client-first commitment and mindset that says; what’s the right thing to do?
Those that see tasks like documentation and record keeping as a burden are likely to take the path of least resistance. They risk curbing the value of their business, if not destroying it.
Whatever the outcomes from the advice review, good businesses won’t radically change their operational processes.
The review promises to transform the industry by making good advice more affordable and accessible but it does not signal a world without rules.
Levy’s proposals should address the duplication caused by the layering of regulation. It should empower advisers to use their professional judgement but it should not undo the massive improvements to advice processes.
Common sense business practices must remain.
Arguably the transformation many advisers desire has already occurred. They have gone from self-employed practitioner to bona fide, corporatised small business owner. As a result, they stand to prosper in the new economic era for financial advice.
