DBFO is well-intentioned, but misses the point

The road to hell is paved with good intentions. Sadly, it seems increasingly likely that this ancient proverb might be appropriate to describe the outcome of the government’s efforts to implement the principles in the Quality of Advice Review. What started out as a well-intentioned process to simplify the delivery of financial advice by reducing red tape, thereby increasing public accessibility to lower cost advice, is not looking quite so positive as when it started some three years ago.

And even if some of the major reforms in Tranche 2 of the Delivering Better Financial Outcomes legislation are eventually implemented, such as simplifying biblically proportioned (and often unread) Statements of Advice, the “word on the street” is that the cost of advice won’t be reducing any time soon (or at all).

If that does turn out to be the case (and I suspect it will), what’s the point of the legislation? Is it simply to make life easier and more profitable for the industry or is it truly to improve the quality of advice offered to consumers? Of course, there’s nothing wrong with improving the professional lives of financial advisers by simplifying the unnecessarily complex rules and regulations under which they operate.

However, the originally advertised key objective of the Quality of Advice Review was to improve the lives of consumers by making higher quality, lower cost advice available to many more people in the community. Right now, achievement of that outcome looks rather doubtful.

The reality is such an outcome was unlikely from the get-go. That’s because the Quality of Advice Review was never really about the quality of advice. It was about the quantity of it. The simple proposition was that by reducing the cost of advice, the public would buy more of it.

Whether that’s in the best interests of the public is another matter. The point has been missed all along (or perhaps ignored), that the cost of advice is not the main problem. It’s the quality of advice and the ethics of the people who deliver it. In my experience delivering financial education, most consumers will pay reasonable fees, even high fees, if they trust the person delivering the service to act in their best interests.

This doesn’t mean that we should not be seeking to rid the industry of intricate SOAs and other complexities. On the contrary, we should do that, along with improving the flexibility of service delivery models to meet the needs and circumstances of the public, rather than preferring a “one size fits all” approach, driven by compliance concerns or the desire to accumulate “funds under advice”.

These reforms are worthy objectives and may have the impact of increasing the quantity of advice being delivered, at least on the margins. But what they won’t do is improve the industry’s reputation and the quality of the advice it delivers. That can only be achieved by genuine and “good faith” adherence to the form and substance of a set of ethical standards which create and support behaviour which is offered in the best interests of the public.

In fact, it is the quality of advice and the public trust it creates that will be the principal guarantor of the wider delivery of financial advice, not its cost. The very name of the Quality of Advice review was unfortunate because it may have mislead casual observers about the review’s purpose. Certainly, it contains some excellent recommendations, many of which are reflected in the DBFO legislation, but they have very little to do with quality and a lot to do with quantity. So even if all of the DBFO provisions are enacted, trust in financial advisers won’t be improved.

The industry can engage in rhetoric and marketing campaigns as much as it likes, such as the recently promoted Value of Advice Index which claims that nine out of 10 clients believe that the benefits of financial advice outweigh its costs. I’m sure they do believe that, although I doubt the technical ability of the average client to sensibly make that assessment. In fact, the happiness of clients is as much a testament to the ability of advisers to gain and retain clients as it is to the quality of advice. Most clients simply want to trust their financial adviser and hope for the best, as happens in other professions where client/adviser trust is at the core.

Indeed, during my professional life, I’ve often thought about what an enormous responsibility it is to offer advice to clients, many of whom are rather too trusting and as a result are sometimes open to be influenced to take actions that aren’t always in their best interests. Therefore, it behoves the financial advice industry to support ethical and professional standards that avoid incentives that may lead to poor behaviour and broken trust. The DFBO legislation, as worthy as it might be in making the lives of financial advisers easier, has a minimal role in creating an environment of professional trust. Neither does most of the voluminous box-ticking bureaucracy in the Corporations Act, which we loosely call the “compliance regime”.

It all comes down to ethics. The stuff your parents taught you. In the context of financial advice, the industry’s ethical standards are succinctly articulated in the mandatory Code of Ethics which consists of just twelve principles set out on one page.

If the industry would genuinely and sincerely adhere to those standards, including the imperative to avoid conflicts of interest (not just disclose them), the remaining complex rules and regulations (the “compliance regime”) could confidently be consigned to the dustbin of history. The advice industry would become a true profession, the lives of its participants would be considerably simpler and more satisfying and the public would be able to confidently trust the profession to deliver reasonably prices services in their best interests. Sometimes, we miss the wood for the trees.