The Quality of Advice Review

There’s good and bad in the?Quality of Advice Review?(QAR) released by Treasury last week.

The good is the proposed framework for the delivery of affordable financial products.

For Australians less interested in advice and more focused on making simple purchases, the QAR might serve as the needed turning point for helping buyers and sellers of financial products.

This is where the Review excels.

There are, however, some “bads”.

GREED

The first of the “bads” is greed.

Former Commissioner Kenneth Hayne used “greed” to summarise the findings of this 2018/9 Royal Commission in the Misconduct in the Banking, Superannuation and Financial Services Industry. Still, it didn’t rate a mention in QAR.

While much of the behaviour Hayne identified was probably illegal, it is confusing why the QAR did not provide specific structural recommendations to confront the inevitable greed factor, which will grow quicker than the nation’s superannuation stockpiles.

Despite decades of commitments, promises, slogans and chest-beating by both large and small product distributors about how efficiently, honestly and fairly they deliver financial services, most of the headlines in the 2018/9 Royal Commission were examples of the power of greed.

The industry’s?Financial Services Council supports?the QAR’s adoption, hoping the recommendations can remove the regulatory frameworks they claim have caused financial harm for millions of Australians. Ironically, the regulations were implemented to prevent the financial harm inflicted on millions of Australians by some of the FSC’s member firms.

For Australians trying to make better financial decisions, the QAR’s proposed new standard of ‘good advice’ is promoted as ‘better’ because it is built with a content-focus rather than process-focus (page 93).

The QAR believes this is key to the systemic imbalance afflicting financial services, which has been studied in many of the last nine enquiries into financial services over the previous 12 years.

There is a fine line between being driven by growth and being driven by greed.

But when combined with client confusion, that fine line is so easily crossed.

CONFUSION

The second of the “bads” is client confusion.

QAR’s ‘good advice’ will ensure it continues.

Cigarettes not only had to have explicit warnings on the packages, but the merchandise also had to be physically hidden from view before new purchasing habits began to improve the lives of reforming smokers.

The difference between a financial product purchase and a financial advice purchase are the consequences.

Product purchasers are less concerned about them than advice purchasers.

This distinction about consequences is confusing.

QAR’s recommendations are a cracker for those Australians seeking to make financial product purchases who are either confident or not concerned about any significant consequences of their purchase.

The promise of ‘good advice’ with fewer forms, fewer questions, less paperwork, and less fees makes sense, provided they are willing to take responsibility for their purchase’s consequences.

But for Australians less confident about their financial decisions, the consequences matter a lot.

The less confident purchasers have been confused for years.

Most believe they were purchasing ‘good advice’ when they were buying ‘as-good-as-our-product-list-allows-us-to-offer’ advice and charged a fee determined not on the quality of advice and management of consequences but on the amount of product purchased.

The QAR comments there is “merit” (page 121) in fixed fee arrangements over asset-based fees, but notes there would be too much additional complexity to address the fundamental issue that financial advisers can sell financial products and financial product issuers can give advice (page 54).

The Accounting Professional and Ethical Standards Board (APESB) attempted to address this over ten years ago without success.

They proposed an accounting standard (APES230) that would have disallowed accountants offering financial advice to receive any remuneration from financial products, i.e. they could recommend but not benefit. Their objective – separate advice remuneration from product remuneration.

Unfortunately, APES230 was watered down by product providers claiming it would ruin practising advisory firms.

The confusion and labelling of financial advice to manage consequences and product advice to buy a product is not resolved by QAR.

Whose best interests are being served?

BEST INTERESTS

The third “bad” of QAR is the perpetuation of power in the hands of product providers.

The provider’s best interests are guaranteed under QAR’s recommendations, while the client’s best interests remain a hope.

The demand for advice is guaranteed as superannuation funds grow towards $7T by the end of this decade. It is unfair for a Review of this stature not to reweigh the power away from the product suppliers.

QAR’s ‘good advice’ is ideal for those Australians seeking to conduct financial transactions. The regulatory paperwork and compliance fear introduced to outlaw bad practices has made these transactions too difficult.

Any effort to make these product transactions more affordable is deserved.

However, QAR’s ‘good advice’ will continue the confusion, strengthen the product-supplier’s powerbase and attract more greedy behaviours hindering Australians concerned about the consequences of their financial decisions.

The more challenging decision, avoided by QAR, Hayne and prior enquiries, yet confronted by the APESB ten years ago (i.e. APES230), is the removal of all incentives from any product attached to advice.

This would allow the pricing of financial advice as it must be – purely upon the value of the advice.

What do you reckon?