The Future of Financial Advice reforms rest on the best interests obligation

Robbie Campo, Manager – Strategy, ISN, asks whether it is really possible for any financial institution to argue against the introduction of a best interests test for financial advisers. 

The best interests duty is considered by many to be the cornerstone of the Government’s Future of Financial Advice (FoFA) reforms introduced into Parliament last week. It is a long overdue measure that will assist the industry in transitioning to a credible and trustworthy profession.  But while there is a high degree of agreement that the Government has presented to Parliament a balanced yet effective best interests duty, banks and large insurers are largely unhappy.

The Financial Services Council (FSC), which represents banks and insurance companies, contends that the duty is unworkable. As banks and insurance companies are major employers of financial advisers (around 85 per cent of financial planners are employed by product providers) and have traditionally used planners as their primary distribution channel, it is no surprise that they are objecting.

The best interests obligation, which will require a client’s interests to be given priority over all other interests, will impact on the sales function that banks and retail funds have traditionally assigned to planners. Yet if the best interests obligation and other FoFA reforms fail to free financial planners from being sales agents, then we will have failed one of the key policy objectives of this reform process.

The FSC, on behalf of major banks and insurers which run retail super funds, has raised concerns that the best interests duty is unworkable because it is not completely defined by a step-by-step process. However, an effective best interests test cannot be condensed to a finite number of steps. It requires astute and professional judgement based on an adviser’s knowledge and experience, rather than just imposing a ‘tick-a-box’ approach.

Initially, stakeholders were divided as to how the obligation should be defined. Some stakeholders, including the Financial Planning Association, sought a principles-based approach, while others argued for a tight set of regulations. In the end, the Government struck a compromise between the two and provided a significant level of prescription by identifying a number of ‘reasonable steps’ an adviser could follow to prove that they have acted in their client’s best interests. This approach, however, does not exclude the need for an adviser to exercise some professional judgement.

The FSC is also arguing that the Bill fails to provide the requisite certainty to enable planners to offer basic advice on a single or limited subject matter. Interestingly, industry super funds, who are currently the major providers of single issue financial advice, do not share this concern.

The Bill and the Explanatory Memorandum make very clear that a planner can scope advice to a single subject matter, provided this is done in the client’s interests. However, this has not gone far enough to appease the big banks and insurance companies. So what modifications to the duty do they seek?

The FSC’s submission to Treasury on the draft legislation argued that a client and adviser should be able to “agree” on the scope of the advice, to give the provider certainty regarding the extent of their liability. However, typical Australians are vastly less knowledgeable and experienced in financial matters than their planner and often do not provide clear instructions. Is it to be seriously contended that the capacity for ‘contracting out’ should be built into the best interests obligation, given the gap in financial knowledge that exists between most clients and their financial planner?

Properly identifying the scope of advice in the client’s interests is fundamental to any professional obligation – for instance, a doctor does not always just look at the immediate symptoms of which a patient complains. A doctor will often question a patient to consider whether further investigation/tests are warranted. However, a doctor would not contemplate getting a patient to ‘agree’ to the scope of the diagnosis or treatment. In any normal professional engagement, it is incumbent on the professional to direct or advise their client, not the other way around.

The Government has delivered a best interests duty that offers some compromise between the choice of a principles-based obligation or a qualified set of steps which enables a planner to demonstrate compliance with the duty. 

The Government has undertaken over a year’s intensive consultation in an effort to address all legitimate issues raised by industry stakeholders. The current form of the duty sets a professional standard for financial advice, which is why it is supported by a number of key stakeholders including Choice and the Financial Planning Association.

Any further compromise would simply return financial advice to sales.

For further information on the FoFA reforms, contact Robbie Campo on rcampo@industrysuper.com

Intra-fund advice on the rise in industry super funds

A recent survey by ISN shows that intra-fund advice services offered by industry super funds are in higher demand than ever before. Robbie Campo, Manager – Strategy, ISN, sheds some light on this important member service.

The demand for intra-fund advice services by industry super funds has been growing steadily, according to new figures.

A survey of seven industry super funds conducted by Industry Super Network in September revealed that a total of 64,184 pieces of advice was delivered to consumers in the 2010/11 financial year – representing an increase of 17 per cent on the previous year.

In recent months, intra-fund advice has been in especially high demand – most likely due to ongoing market volatility. In August 2011, when markets crashed because of the Greek debt crisis, four of the major industry super funds experienced an average increase in calls of 26 per cent compared to the previous year.

Robbie Campo, Manager – Strategy, ISN, said that the delivery of intra-fund advice by super funds is clearly meeting consumers’ needs, many of whom are simply looking for basic advice on their super to maximise their retirement savings.

“The delivery of intra-fund advice by super funds is filling an important gap in the marketplace by providing consumers with basic advice on their super. It is also helping to make financial advice available to all Australians, irrespective of their age, income or superannuation balance,” she said.

Rice Warner Actuaries predict that by 2024, limited advice (which includes intra-fund advice) will constitute over 40 per cent of all pieces of advice. [1]

A number of large surveys of investors and superannuation members have also consistently found that limited advice, such as intra-fund advice, is preferred to comprehensive financial advice, and is in fact the most sought-after form of advice in Australia. [2]

“Research tells us that very few people who earn less than $100,000 will ever visit a financial planner. Yet many people in this category will increasingly tend to call their super fund with queries related to their super investment,” Robbie said.

“By providing intra-fund advice services to members, super funds are answering a key public policy challenge of ensuring that ordinary Australians are able to access the basic financial advice they need on their super.”

With the Superannuation Guarantee proposed to move to 12 per cent and market volatility expected to continue, Robbie believes that intra-fund advice will become even more important for Australian consumers in the future. She also believes that intra-fund advice should be a compulsory service offering of all MySuper funds, as recommended by the Cooper Review.

“Australians deserve access to basic financial advice that they can trust and that they can afford. The least Australians should be able to expect from our compulsory super system is help and advice on their savings from their super fund,” she concluded.

Survey findings

Two of the topics surveyed by ISN were the most popular subject matter for intra-fund advice and how intra-fund advice is delivered. The findings are outlined below.

Topics covered in intra-fund advice

While most advice offered by industry super funds is tailored general advice, there is an increasing provision of intra-fund advice. The most common topics for which intra-fund advice is sought are:  member investment choice, insurance options, making additional contributions and transition to retirement (TTR). TTR advice is becoming increasingly provided as intra-fund advice, for members with very straightforward financial and personal circumstances and advice needs at retirement.

Delivery of intra-fund advice

Most intra-fund advice is delivered over the telephone, with members being sent a Statement of Advice following the phone-based interview (if one is required). The advice is generally modularised, although some members will elect to receive advice on more than one topic. Email was a common channel for one super fund, while another had a primarily workplace-based model for delivering intra-fund advice, where advisers attend workplaces to hold scheduled appointments with members. Some super funds also offered members the opportunity to meet a financial planner in a more traditional face-to-face interview but this would certainly not be typical for intra-fund advice delivery.

 For more information on intra-fund advice or the survey findings, click here.

Briefing Note: Members Getting the Super Advice They Need

This Briefing Note provides an update on superannuation related financial advice services, which are provided by industry superannuation funds to their members.

This Briefing Note documents observable trends in the adoption of intra-fund advice, including results of a survey of seven large industry super funds, and identifies future likely developments in the area of simple financial advice.

Read the Briefing Note here.

Members Getting the Super Advice They Need

This Briefing Note provides an update on superannuation related financial advice services, which are provided by industry superannuation funds to their members.

This Briefing Note documents observable trends in the adoption of intra-fund advice, including results of a survey of seven large industry super funds, and identifies future likely developments in the area of simple financial advice.

Read the Briefing Note here.

ISN makes submission on Future of Financial Advice draft legislation

Earlier this month, the Federal Government announced the first tranche of its Future of Financial Advice (FoFA) draft legislation. In response, ISN has called for a set of stringent legal requirements to be applied to the financial planning industry.

In September, ISN made its official submission to the Federal Treasury on the Future of Financial Advice Bill 2011. In its submission, ISN has called for the strengthening of legal requirements to achieve the policy objective of increasing the professionalism of financial advice in Australia, increasing consumer confidence in advice and facilitating better access to advice.

ISN Manager of Strategy, Robbie Campo said that that the reforms were long overdue and that a robust set of legal requirements on financial planners was the most effective way to insure against future financial scandals eroding individual and aggregate national retirement savings.

“This tranche of legislation includes the best interests obligation, which is the cornerstone of FOFA,” she said. “It must create a clear and watertight obligation that protects Australian consumers from the self-serving and structurally corrupt business model which currently dominates the financial planning industry.”

Robbie called for the legislation to be formulated as a principles-based obligation that ensures that all personal financial advice prioritises the client’s interests over the interests of the adviser, licensee or other related party.

“A highly prescriptive or process-driven best interests obligation will be used by the financial planning industry to create loopholes and will impede the provision of affordable advice,” she said.

Robbie also commented that the reforms need to make clear that the best interests obligations apply to existing clients who are paying ongoing commissions and fees – to ensure that advisers do not avoid providing advice to their existing ‘passive’ client base, which research indicates is around two million Australians.

“The annual disclosure requirement for advice fees must apply to all clients, existing and new, and must require disclosure of all payments. It is inconceivable that the current regulatory gap, which means clients receive no ongoing disclosure of fees from financial planners, would not be rectified.”

Robbie said that ISN continues to oppose the deduction of any asset-based or ongoing fee for financial advice as it enables the industry to replicate all the ill-effects of commissions. However, if the renewal obligation is to be applied then the definition of ‘existing client’ must be limited to clients currently paying ongoing fees for personal financial advice.

ISN also fully supports the proposed increase in ASIC’s powers to ensure the regulator is better equipped to tackle ‘bad apples’ and to initiate more proactive surveillance of the financial planning industry.

For more information on ISN’s submission, contact Robbie Campo: rcampo@industrysuper.com