Financial services: do we really have a profession?

It is often the commissions versus fees issue that overwhelms discussions about the appropriateness of the title ‘profession’ when applied to financial advice. This issue will eventually be resolved. My hope is that it can be achieved without too much legislative intervention.

However the solution is worked through, can financial planning or advising, without criticism, finally be referred to as a ‘profession’? In my view, there is still a major obstacle to overcome.

How many professions involve individuals who provide advice that is more often than not prepared by other individuals who have never seen a client, let alone given advice? I refer to the industry wide practice of producing software-generated and templated Statements of Advice (SOAs).

When I see a typical SOA, I see evidence of an industry in fear of litigation. I see an industry in doubt about the ability of its advisers to reduce their own advice to writing, to produce a document that speaks to the client. I also see an industry in which most licensed participants are not entirely comfortable in giving the advisers they authorise the freedom to express themselves in writing.

Which is why we have the lengthy, templated documents posing as written advice we have today.

These SOAs have little chance of complying with the provisions of the Corporations Act 2001 that require advice to be presented to the client in a clear, concise and effective way. How can an SOA effectively speak to a client when the greater portion of it is templated ‘legalese’, technical information and disclaimers?

I know there is a well entrenched but mistaken belief that providing lots of information to a client will somehow get the licensee and/or adviser ‘off the hook’ should a dispute arise down the track.

However, a good lawyer will relish the opportunity to take apart a complex document crammed full of contradictions, quasi warnings, duplication and complex technical data.

One can almost hear the question in the courtroom as the plaintiff’s barrister asks the adviser to explain their motivations behind the provision of a confusing advice document that even the adviser has trouble explaining.

For example, does a typical SOA really ‘speak’ to a plumber whose stated goals and objectives are to invest in a diversified portfolio of actively managed Australian and international assets that will produce enhanced returns above an agreed benchmark across several business cycles?

One can imagine our plumber client might have a different recollection of events or for that matter what his definition of a benchmark is — particularly when asked by his barrister in court if this was indeed his financial objective at the time.

I am equally sure that most tradesmen would not have the same financial literacy as, say, an executive of a financial institution. Why then would the SOAs for each of them look the same (other then the client’s name, personal details and amounts invested)? Should an adviser make any decision about the client’s knowledge of financial matters? The answer surely must be an emphatic yes. Making reasonable enquiries into a client’s relevant personal circumstances is a statutory requirement under section 945A of the Corporations Act 2001.

When a largely templated ‘scope of advice’ section of an SOA states that the client wants to consolidate his current superannuation funds into one easy to manage, flexible and cost-effective investment platform (and then specifies the name of that platform), it’s not difficult for any file reviewer to conclude that the only needs being met here are the adviser’s.

Little wonder then that advisers are accused of ‘product flogging’ when they have already, apparently, decided on both strategy and product at the outset.

Clients do not usually follow any recommendations made unless they trust the adviser. This trust is developed through personal contact, nearly always in meetings. Once trust is achieved, the client is likely to agree to act readily, especially since the adviser has explained matters in the client’s own language — perhaps using rough diagrams on a whiteboard.

Imagine the state of confusion when the client is subsequently provided with some 50 or more pages of technical information bearing little relationship to what took place in the discussions. I know of several advisers who have to ‘re-sell’ the strategy all over again when presenting the SOA.

Remember, clients do not pay fees to advisers for the preparation of an SOA. They pay for the adviser’s individual skills, technical knowledge, expertise and experience — all of which are used in putting forward an appropriate strategy to meet the needs of the client.

It is the adviser’s skills in drawing out relevant information from the client while establishing a high level of trust that will result in an appropriate strategy. The eventual recommended product is merely the vehicle selected to activate the strategy, so it isn’t necessary to extol the virtues of the product either.

If we can agree that the client is in fact paying for the adviser’s expertise and experience in putting together a strategy, then it’s high time we provide the SOA ‘free of charge’. That way we can stop charging by its weight.

Frank Smith is a compliance consultant at Compact — Compliance and Corporate Training.