My Adviser managing director Philippa Sheehan explains why the recent ASIC paper on scaled advice is a huge leap in the right direction, but needs more clarification.
The financial services world is currently undergoing a transformation. The industry is reinventing itself in the face of a number of forces, including government reforms like FoFA, as well as continued volatility and uncertainty in global markets. Many investors and superannuants are feeling disillusioned about the future of their investments and confused about what the FoFA reforms will mean for them.
Against this backdrop of change, the recommendations of the recent Australian Securities & Investments Commission’s (ASIC) Consultation Paper 183 Giving information, general advice and scaled advice around scaled advice (i.e. advice which is limited in scope) have done a great job of clearing up many of the grey areas. One of the stated objectives of the FoFA reforms is to improve access to good quality advice by facilitating scaled advice, and the consultation paper goes a long way towards providing comfort to investors as they seek professional financial advice, whether scaled or comprehensive.
The recommendations are particularly welcome, given that the guidelines concerning scaled advice have been somewhat nebulous in the past. In fact, prior to releasing the consultation paper, ASIC shadow shopped retirement advice to retail investors, and the results were alarming. Although nearly 60% of the advice given was characterised as ‘adequate’, a whopping 40% was described as ‘poor’ and only 3% considered ‘good’. In the cases of ‘poor’ advice, clients’ personal circumstances had often not been adequately taken into consideration, and the situation was exacerbated by the fact that some clients believed the advice to be comprehensive, when it clearly wasn’t. These aren’t the kind of statistics we, as an industry, should be aiming for. Investors seeking financial advice should reasonably be able to expect that the advice will leave them in a better position, regardless of whether the advice is scaled or not.
Having said that, I have always maintained that the consultation paper has been instrumental in clarifying the majority of the big issues. It spells out that scaled does not mean lesser advice and that the rules which apply to comprehensive advice apply equally to scaled advice. The only difference from a financial adviser’s point of view is that the level of inquiry needs to reflect the complexity of the advice being given. Advisers are also expected to spell out in detail the type of advice they are providing, and even more importantly, the type of advice they are not providing.
Financial advisers are also given very specific recommendations about how to give scaled advice so that it complies with Chapter 7 of the Corporations Act, including the best interests duty and related obligations, and it highlights instances in which it may be difficult to provide scaled advice while still meeting legal obligations. For example, in some cases, where clients’ personal circumstances are complex and involved, advisers need to use their best judgement when deciding whether scaled advice is appropriate or even possible.
All of these things are really great steps forward.
But what the consultation paper should also address is the issue of at which point scaled advice becomes comprehensive advice. If a client comes to me for tax advice in insolation, which I give, and then the same client returns for superannuation advice, which I also give, should this client be deemed as having received comprehensive advice? Do I, as an adviser, eliminate previous discussions I have had when I start a new discussion with a client on a different topic? How many times do clients need to get scaled advice and over how many topics before it becomes full advice?
The big problem is not that providing scaled advice is problematic in itself, particularly now that how to do it has been so well delineated, it is that providing scaled advice in isolation can potentially lead to outcomes for clients which may not ultimately be in their best interests. This is a particularly relevant discussion point given ASIC’s Consultation Paper 182 Future of Financial Advice: Best interests duty and related obligations – Update to RG 175. Separate advice on separate occasions may never end up linked as they need to be, so that rather than ending up in a better position, some clients may end up in a less advantageous one.
For example, in the case of insurance, if an adviser recommends a certain level of insurance without realising that the client already has insurance attached to their superannuation fund, the client may end up paying for extra insurance that they don‘t need. Alternatively, in some cases, all insurance may be rendered void if it is held both as part of a superannuation fund and outside superannuation. In this case the client may end up with no insurance at all, even though they are paying for it twice.
All of this then leads inevitably to the question of liability. If the client is not happy, and I think it is clear that without more clarification there is scope for plenty of unhappiness, who is to blame, the client for not painting the whole picture, or the adviser for not looking at it?
Clearly, more clarification is needed. This is particularly true because the very fact that the ASIC paper spells out so clearly how to go about giving scaled advice, but does not address the issue of when scaled advice becomes comprehensive advice, could be seen as exacerbating the problem. It opens the door for giving scaled advice in every scenario. And it is evident that even strategies which are excellent in isolation can be rendered disastrous when combined with other strategies without regard to the big picture.
My own view is that the magic number should be two. What I mean by this is that if scaled advice is provided on two different topic areas, then full advice provisioning must be applied. The adviser should have an obligation to link the two sets of topics and objectives to be sure that the advice given provides the best possible outcome for the client taking into account all relevant circumstances.
Ultimately, let me finish by reiterating that ASIC has done a great job of clearing up nearly all of the grey areas surrounding scaled advice and their paper has been welcomed in the industry. My only concern is that it would be a shame not to take the final step and provide clarification around when scaled advice becomes full advice. This would go a long way towards providing comfort for both clients and advisers, as well as to achieving at least one of the stated objective of FoFA, namely to improve access to good quality advice, both scaled and comprehensive, for all Australians.
Do you agree with Sheehan? Join the debate by commenting below.
Mortgage brokers muscling into financial advice: should you be worried?
Bank launches zero fee super fund, targets advisers