Scoped advice equals better value financial advice

Scott Machin explains how scoped advice is bringing financial advice within the reach of all Australians.

According to the Australian Securities and Investments Commission’s (ASIC) December 2010 Access to Financial Advice in Australia report, many consumers are ill-equipped to make sound financial decisions and would benefit from better access to financial advice.

Yet fewer than 40 per cent of the Australian adult population have ever used a financial planner.

Improving access to financial advice is no easy feat. The financial planning environment continues to change and become more complex as regulation and the expectations of self funded retirement increase.

Client needs are also changing.The Government has recognised the need to improve access to financial advice through its Future of Financial Advice reforms, which are currently in the consultation phase.

We want a better standard of living in retirement than our grandparents, yet the majority of Australians, who tend to be dubious about the need for advice, fail to realise that sound financial advice today can help them achieve a better tomorrow.

The Access to Financial Advice in Australia report highlights: the cost of advice, scale of advice provided and consumer perceptions that advice is out of their reach as some of the key factors affecting access to financial advice.

As an industry we need to continue to do more work in explaining the value of advice. Our focus over the last decade or so has been on the provision of comprehensive advice to clients. Naturally, we prefer to provide this model of advice, however it can be considered expensive and in some cases unwarranted in terms of scale.

We need to adapt and find ways to help Australians become less nervous about seeking advice. Offering bite-sized pieces of advice can help customers feel less daunted and make advice more easily attainable and warranted.

The need for more affordable, targeted advice is particularly important to new entrants into the industry — both planners and customers.

New planners can sometimes struggle to justify to clients the value of preparing a comprehensive financial plan.

Even experienced planners can be challenged with this cost dynamic. So there needs to be more flexibility in how different client needs are met and some clients advice focused on just one need at a time may be more relevant and more affordable.

This alternative financial planning business model is about focusing on scoped advice.

That is, rather than trying to solve every need at once, and potentially ending up with an overwhelmed client for whom the easy option is to do nothing, planners can concentrate on the client’s most pressing need. This model is a simple, effective solution offering better perceived value to clients.

Here’s how it works. During their working life most Australians have four basic advice needs:

• How do I maximise my super balance at retirement?
• How do I pay off my mortgage as quickly as possible?
• How do I ensure I adequately provide for my dependants if I die or can no longer work?
• How do I manage my budget to provide for the above and my other commitments?

At any point in time, one of these advice areas will be more important to the client than another.

Planners can use scoped advice to satisfy a new client’s initial needs, build trust and highlight the value they can provide. It also allows both new and experienced planners to build these relationships, one piece of advice at a time.

By way of analogy, the scoped advice model is what most of us go through every time we visit a doctor. Doctors will ask about a patient’s general health and then quickly get down to what is their most pressing need.

A financial planner using the scoped advice model uses a similar process with their client, without compromising professionalism, provided they follow a few general principles.

Scoped advice must still include an effective consultation with the client. It starts at the information gathering stage.

Planners need to refine an initial discussion with the client, agree on the advice area to be focused on and then only gather information relevant to the agreed scope.

Experience shows this reduces the information gathering stage and leads to shorter advice documents which are the preference of some clients, as highlighted in the ASIC report. This can ultimately bring the cost of advice within the realm of what some clients are prepared to pay.

However, there are two major steps planners need to get right if they wish to use this approach.

First, they need to make sure the initial discussion with the client is two-way and provides the client with the opportunity to discuss their current position before their most pressing need is agreed on.

Just as a doctor needs to consider how a patient’s overall health affects the pressing issue, so too must a financial planner consider any pertinent factors from the initial discussion.

Second, the planner must make clear what their advice does and doesn’t cover. At this stage, planners have the opportunity to highlight what is outside the scope of advice in a way that provides a framework for future discussions.

With the increased focus on professionalism within the financial planning industry, planners may be concerned about the place of scoped advice and how this compares to comprehensive advice.

However, just as a doctor maintains their professionalism when providing advice on a patient’s most pressing issue, so too does a financial planner when providing advice on a scoped issue only.

As more planners use scoped advice, the regulator and industry ombudsman will need to factor the changes this brings into their regulatory settings and determinations respectively.

Scoped advice has the potential to bring more advice to more Australians. In circumstances where it is appropriate and suitable for the client’s needs, it is a model that could be embraced by both new and experienced financial planners.

As an industry, it’s time we better promote this alternative model and offer clients more choice around how they spend money on advice.

Scott Machin is advice and services director of advice at AMP Financial Planning.