The good, the bad and the ugly

The QAR (Quality of Advice Review) is proposing that “good” financial advice be “good enough”, rather than following the current “best interests” rule. If the advice is reasonably likely to benefit the client, based on their circumstances at the time the advice is given, then it will pass the test.

Following the banking royal commission, the banks exited personal financial planning, leaving a ton of money on the table for remediation. ASIC has overseen at least $5.6 billion in remediation, much of it attributed to the banks. That is a lot of bad behaviour. Commissioner Hayne observed “The banks have gone to the edge of what is permitted and too often beyond that limit, in pursuit of profit”

Will the proposals attract the banks back to financial planning? Will they again put profit before clients?

The Institute of Managed Account Professionals (IMAP) thinks that several of the recommendations made by the QAR could result in another royal commission in a decade or so. IMAP chair, Toby Potter argues, “The process of defining (good advice) is likely to result in heavy institutional lobbying of ASIC for something substantially less than the current best interest duty,” He argued further that while the proposals leave individual advisers subject to a Code of Ethics, they remove these constraints from organisations that “don’t even have to meet a ‘good advice’ standard”. Banks must be salivating.

Current financial advice isn’t that good. It is a long, inefficient and expensive process. Research conducted by KPMG and commissioned by the Financial Services Council found the average cost of providing comprehensive financial planning advice is $5,335 a client, while the average cost charged was $3,660. In most cases, the person creating the plan (called a para-planner) hasn’t ever met the client and operates on instructions from the adviser. The adviser usually hasn’t done any in-depth analysis of the client’s situation because it’s the para-planner who operates the planning software. Often, the para-planner relies on a few boxes ticked in the “goals” section. I wonder if ASIC will ever look at this?

The advice generated isn’t very absorbing either. An unintelligible, computer-generated, 50-page document, burdened with compliance requirements.

Rather than “dumbing down” an already flawed process, the solution should be a modern, efficient system, making it easier and cheaper for both clients and advisers, without weakening the service.