There is little doubt the necessity to act in the best interests of clients is a pivotal part of the professionalisation of advice.
As this article is being written, the US Fiduciary Rule, which requires advisers to put their clients’ interests before their own, has begun its roll out, after a six-year struggle by advocates.
The regulation was almost delayed another six months in March this year, when the Trump administration called for further analysis of its impact on investors.
The US’s struggles, in some ways, make Australia look like a pioneer of the client-first model – even though there is still work to be done. Back at home, best-interests duty has been a core part of the post-Future of Financial Advice landscape for the last four years.
It also continues to be subject to evolution and refinement, as the regulator, clients and planners navigate some of the unanswered questions around the practical application of the rule.
In March this year, the Australian Securities and Investments Commission (ASIC) updated its regulatory guidance for financial planners to clarify best-interests duty requirements, including what qualifies as advice reasonably deemed in the client’s best interests. The update explains advisers need to lay out clearly the scope of their advice and how exactly clients would be better off with it than they would be if they never sought it out (with the exclusion of unexpected market falls, which are outside the adviser’s control).
Of course, legal decisions may shed further light on what passes the test and what does not. Dante De Gori, chief executive of the Financial Planning Association of Australia (FPA) noted at the recent FPA National Roadshow that a number of court cases are in progress that will illuminate what precisely defines best interests. He says it is a question financial planners frequently ask.
“The true definition of best interests was never going to be known until we had some court cases, and we are getting them now,” De Gori said at the roadshow. “Over the next 12 months, we will get outcomes
in some of those cases that I think will surprise some…I think it will require further training and understanding of processes around best interests.”
When it comes to how the best-interests duty will be applied and policed for digital advice providers – which are ballooning in popularity thanks to their ease of access and reasonable price points – one of the challenges that may emerge is perception. More specifically, how clients perceive general advice (for which best-interests duty does not apply) and personal advice, what they perceive to be scoped advice and how they act or follow up
if advice is confusing or an outcome does not match expectations.
ASIC’s advice regulation is platform agnostic, which means digital providers have to comply with the same rules as face-to-face advisers.
That includes acting in the client’s best interests, having an internal dispute resolution process and other compliance processes, and belonging to an external dispute resolution body.
“Digital advice does not…equate to a lessening of standards,” a spokeswoman for the regulator says. “Digital advice providers must actively monitor and test their algorithms to ensure that the advice provided to clients meets the best-interests [duty] and related obligations.”
The Financial Ombudsman Service, at the time of writing, has not received any disputes about digital advice. However, it has previously expressed concerns about the ability of clients to understand the type of digital advice offered and whether it’s personal or general in nature.
As digital offerings increase in both number and volume of advice, the onus will be on providers themselves, the regulator, the public and traditional planners to ensure best interests are at the heart of their services and that the industry eliminates miscommunications about the scope of services.
Keeping up with the robots
Dudley Kneller, a partner at Madgwicks Lawyers who specialises in technology and regulation, has been engaged by a number of technology providers who want to make sure their digital platform measures up to the regulator’s standard, both at a retail level and at an institutional level (funds).
He describes it as a “thorny” area.
“Robo-advice is allowing financial providers to narrow the gap and provide an offering for people who don’t necessarily want full face-to-face advice,” he says. However, he adds that lack of awareness about the regulatory requirements is common among the technology vendors he has met.
Some of the robo-advisers Kneller has encountered have the technological capability to provide full-scale personal advice, but have not done their due diligence on the regulatory side to make their concept fit for market.
“They’re at a crossroads in terms of technology,” he says. “Do they provide factual advice, which is not licensed… [or] personal advice?”
Personal advice obviously requires an Australian Financial Services licence and Statement of Advice.
When it comes to best interests, Kneller has concerns about digital advisers’ emotional intelligence and their ability to draw out the complexities of a situation the way a face-to-face adviser might be able to do; for example, if a client omits an important detail that requires further investigation from the adviser.
“It’s difficult for a computer to comply with the best-interests obligation…They’re only as good as the information programmed into them,” he says.
Neither Kneller nor Professional Planner is claiming full-scale digital advice providers do not meet legal or regulatory requirements, only that it is an area of tension for developers. He notes that it is still early days in terms on innovation in digital advice and he has not seen law suits around best-interests duties.
The challenge, from Kneller’s perspective, will be for the law to keep up with the pace of technology.
Staying ahead of the regulator
For digital advice provider Ignition Wealth, the critical part of meeting best-interests duty has
been exceeding the expectations of the regulator in terms of communication, reporting and compliance, its chief executive, Mark Fordree, says.
“If you want to stay on the right side of the legislation, client’s best interests has to be the starting point. We don’t see the post-FoFA environment as the end of the journey.”
A major part of that for Ignition Money, Ignition Wealth’s digital advice platform, is triaging clients before they receive digital advice to determine whether scoped or holistic advice is appropriate for their situation.
From a compliance standpoint, client interaction is encrypted and recorded, with triggers emerging for the Ignition team if something doesn’t look appropriate. One of the red flags might be a high debt-to-asset ratio.
Clients with complex scenarios are referred to traditional advisers who work in partnership with Ignition Wealth.
Fordree stresses the outcomes are client-driven, based on goals and risk tolerance, and says the triggers would pick up misalignment that could put the client’s assets at risk.
“Let’s say we had a client in a moderate risk portfolio and we had another GFC, the system would automatically pick up that the client’s portfolio is out of alignment with their selected criteria or their goals,” he explains.
Fordree believes digital advice is a necessity to improve the low take-up of financial advice across Australia, but the client must be first.
“If you look at the whole advice market today, everyone is running away from giving personal advice,” he says. That’s not the answer, he argues, but digital advisers must have robust algorithms that account for many scenarios.
Bridging the SMSF/accountants gap
The accountants’ exemption for self-managed super funds expired a year ago, leaving only licensed accountants with the ability to advise on the appropriateness of SMSFs for their clients.
When the expiry date was first flagged, ASIC expected as many as 8500 accountants to seek limited Australian Financial Services licences.
The actual numbers fell short of that.
The low take-up of licences from accountants means cross-referral relationships are becoming more important for SMSF clients, who traditionally used accountants. Unlicensed accountants can still set up SMSFs, provided there is a referral from a licensed party.
Digital advice may play a role, but only if the provider is licensed.
ASIC has been looking into accountants who previously advised on SMSFs but did not become licensed, to see what they’re doing now with their SMSF clients, Professional Planner understands.
Regarding the best-interests rules for digital advice and accountants, ASIC’s spokeswoman says: “It is possible for personal advice to set-up an SMSF to be provided by way of a digital advice tool. Such a digital advice tool would need to be very carefully developed to ensure it complies with the best-interests duty and related obligations.
“If an accountant recommended that a client establish an SMSF by way of a digital advice tool, the accountant would be providing personal financial advice and would need to be properly licensed and would need to comply with all the legal obligations surrounding the provision of personal financial advice.”
For licensed digital advice platforms, there is an opportunity for a referral relationship, given the vast number of accountants and the potential for pre-established relationships with SMSF clients.
Ignition Wealth, as a licensed provider of advice, has experienced an increase in partnerships with accountants.
“We have just signed several agreements with unlicensed networks, including accountancy firms, to provide advice to their clients by referral,” Fordree says. “Accountants are a group we are certainly targeting. They have a high level of trust, but [are] broadly unlicensed.”
Ignition Wealth says many of the businesses that use its service do not have their own licence.
From Fordree’s point of view, the model of the future is a hybrid where professionals cross-refer to specialists to get the best client outcomes.
It’s a model that has been adopted by Elston Financial Solutions, a face-to-face advice business that has partnered with more than 60 accountancy firms on the provision of SMSF advice. Some of the firms had found licensing was not scalable.
“We’ve had a large number of [accounting] firms that have dipped their toes into the licensed advice space, and found it’s neither as simple nor as efficient as they expected or hoped it would be,” says Mark Smith, head of adviser services at Elston.
Other scenarios Smith and the team have encountered since July last year include accountants struggling to justify billable hours for the time it took to address their clients’ needs under new licensing arrangements.
“In every scenario, we’ve strived to be flexible and deliver a solution that not only provides a great outcome for the end client but also reinforces the accountant’s own value proposition as the client’s trusted adviser.”
When asked about the use of digital advice as a referral tool, Smith said his concerns lay in the point raised at the start of this article – client perceptions.
“We’re keeping a close eye on developments and although we do see technology as a great enabler, we also see challenges and risks for the industry, given responsibilities involved in establishing and running an SMSF and the propensity for some clients not to fully appreciate their responsibilities in these matters,” he says.
TOPICS: accountants, artificial intelligence, Australian Securities and Investments Commission, best interests duty, Dante De Gori, Dudley Kneller, Elston Financial Solutions, Financial Ombudsman Service, FPA, Ignition Wealth, Madgwicks Lawyers, Mark Fordree, Mark Smith, robo-advice, self-managed superannuation funds, smsf/accountant gap
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