Mapping a path to self-regulation

For many years the Australian Securitiesand InvestmentsCommission (ASIC) has been urging the financial services industry to take a greater self-regulatory role in complying with the professional standards set out under the Corporations Act.

In November last year at the Financial Planning Association’s (FPA) national conference, former ASIC chairman Jeffrey Lucy said: “Individual practitioners joined together as a profession through organisations such as the Financial Planning Association have special responsibilities to protect the reputation of their profession by collectively developing ‘best practice’ standards beyond the minimum standards set out in the law and ASIC’s policy and guidance.”

Lucy also said that Financial Services Reform (FSR) was introduced to “eradicate the ‘sales culture’ that was prevalent in the financial advice industry at that time and instead promote the maturing of an industry that was, and is, working towards a culture of professionalism and a deserved climate of trust. ASIC’s minimum expectation, therefore, is that you will comply with requirements of financial services regulation”.

However, those minimum standards or expectations are not always being met.

In ASIC’s “Shadow Shopping Survey on Superannuation Advice” released in April 2006, the regulator reported that of the 284 cases surveyed on the provision of superannuation advice, 16 per cent clearly did not have a reasonable basis in some respect and a further 3 per cent probably did not.

When it came to the provision of switching superannuation advice the results were poorer.

One-third of the 124 cases where a switching recommendation was made either clearly did not have a reasonable basis (28 per cent) or probably did not have a reasonable basis (5 per cent).

The financial advice industry was also attacked over the Westpoint collapse, where nearly 4,000 investors lost $300 million, with planners accused in the media of chasing exorbitant commissions attached to mezzanine funding schemes.

ASIC has previously said that the reason regulation was introduced across the financial services industry was to recognise the significant impact financial services, including the giving of financial advice, can have on individuals in the Australian community.

Significant is an understatement. In the year to December 2006, the superannuation industry’s assets increased by $163.1 billion.

It is only a matter of time before superannuation surpasses the family home as the largest asset held by most Australian families, largely driven by its legislative compulsion to increase by 9 per cent each year through the Superannuation Guarantee. And this is just superannuation — it does not include the other areas of personal advice for which a planner is responsible.

The value of providing a reasonable basis for financial advice recommendations should not be underestimated, especially for superannuation given its importance to the actual standard of living expected in retirement.

The importance of saving for retirement is magnified by Australia’s ageing population crisis.

The Australian Bureau of Statistics recently reported in its Year Book Australia 2007 that Australia’s estimated resident population aged 45 years and over has increased by 30 per cent since 1995 compared to 4.8 per cent for those aged 15 to 44.

The ageing of Australia’s population coupled with a falling taxpayer funding base has certainly assisted in the recent raft of changes to the superannuation regime, including tax-free benefits from age 60, which commence on July 1, 2007.

These changes promote self-funding in retirement for a much longer retirement period via a highly tax-effective superannuation system.

Financial planning software and FSR

These changes will place greater emphasis on the role of the financial planner, which can be assisted through the proactive development of practical solutions at the advice level.

In order to operate a successful financial planning business, advisers must first develop and then maintain their existing client base, attract new business, manage an office, manage client expectations, keep abreast of constantly changing legislation, understand and implement new technical strategies, and provide Statements of Advice that can be so burdensome they often require multiple ink cartridges just to print. And these are just some of the issues within the adviser’s control.

When it comes to providing a reasonable basis for strategic recommendations, particularly super switching, there is generally not enough time in the day (or the night for that matter) to effectively cover off ASIC’s suitability rule single-handedly.

Phone calls to ‘from funds’ for basic fee and feature information alone, especially to industry funds, can be a nightmarish, time-wasting exercise. Even where information is provided by ‘from fund’ representatives, it is extremely difficult for the planner to ascertain whether that information is true and correct without referring to product disclosure statements whose fees do not reflect the client’s current or actual circumstances.

Financial planning software should alleviate much of the compliance, time and strategic pressures faced by advisers.

However, these software solutions do not generally assist advisers in satisfying their FSR requirements. Financial advice software that guides planners through the advice process, and assists them in providing a reasonable basis for their product and strategic recommendations is the key to saving time and generating advice business while helping advisers satisfy the suitability rule under section 945A of the Corporations Act — an ASIC requirement when providing personal advice to clients.

Technology for technology’s sake

The recent acquisition of the IWL-owned VisiPlan by Iress Market Technologies has created a duopoly within the large multi-functional financial planning software market.

The three largest financial planning software players are now owned by two companies: Xplan and VisiPlan owned by IRESS Market Technologies, and CoinSoftware owned by Macquarie Bank.

With such few software providers with significant market share, it is vital that the focus of new software developments be on the needs of the planner and their individual clients, rather than the use of technology to conquer new, service-based markets.

This temptation is largely responsible for the debate that has raged over many years regarding the ability of financial planning software providers to make a successful foray into the platform world.

It has been suggested that multi-functional software providers could replace the role of platforms in providing consolidated reporting and straight-through processing among their other services.

If this were to occur, Joe Blow financial adviser’s software could provide straight-through processing, a multitude of data feeds at his disposal, and the ability to model the effect of his client purchasing a portfolio of shares through a bare trust owned by his family trust whose corporate trustee is his company’s company. But this is of little use to him when he is stripped of his Australian Financial Services Licence (AFSL) by ASIC because he did not equip himself with the right tools to effectively investigate the ‘from fund’ or properly disclose the significant consequences of a superannuation fund switch.

Technology for technology’s sake is also largely responsible for the market’s shift toward Internet-based software.

This is despite new software that takes advantage of the best of both worlds: the accessibility and reliability of the desktop, with the efficiency and currency of automatic data and software updates via the Internet.

There is also the issue of size. Large financial planning software providers will tell you that advisers are looking for software that from a functionality perspective can model every different type of financial planning scenario. They argue that this streamlines the financial planning process, allowing advisers to spend more time in front of their clients.

While planners do want functionality, this should not be at the expense of simplicity and usability. Financial advice software should be developed with the view to finding the balance between functionality, simplicity and usability. Unfortunately, in an attempt to be everything to everyone, generalist multi-functional financial planning tools have become so cumbersome that planners heavily underutilise them.

The large software providers themselves concede that multi-functional financial planning software is not used to its potential by planners.

In an AMP CapitalInvestors Fundamentals article on technology trends in April 2006, Darren Pettiona, head of distribution for Coin Software, said that while “software solutions are comprehensive, most advisers are really only using around 20 per cent to 30 per cent of their total capability”.

Some financial planning software tools can be more difficult and time consuming to navigate for technical strategy than financial adviser-developed and maintained Excel spreadsheets.

As a result, financial planning software has largely become the domain of paraplanners, who are generally more IT savvy than their financial adviser employers.

Another key consideration that is not usually addressed by current financial planning software providers is an emphasis on assisting the adviser at the advice level. This is where there is distinct differentiation between specialist software that has recently entered the market and more general, multifunction tools.

Financial advice software should automate financial planning strategies during the accumulation, transition, and pension phases of the client’s life map. This relies on the proactive optimisation of the many significant strategic opportunities that exist within new and existing investment, insurance, superannuation, social security and taxation legislation.

Outputs should also be designed to assist financial advisers in satisfying their legal requirements under the Corporations Act as well as ASIC’s policy and guidelines, in particular demonstrating a reasonable basis in justifying product and strategic advice recommendations.

Software providers can lead the way

Financial planning software providers should play a major role in self-regulating the financial advice industry.

Currently, this is largely the domain of fund managers, platform providers and dealer groups.

With financial planning software providers taking on greater functional commitment, they should be in the perfect position to take on more active roles within the advice industry.

This includes extracurricular activities such as representing the FPA, Investment and Financial Services Association and

Association of SuperannuationFunds of Australia committees, or lobbying the Attorney General’s Department for the introduction of broad-based policy incentives, such as the reduction or removal of superannuation contributions tax, introduction of greater incentives for young Australians to contribute or providing guidance on the most efficient fee structures within the industry.

Software providers should also take a lead role in providing solutions for the financial advice industry, or consulting with ASIC regarding proposals for policy that will help AFSL holders understand the way in which ASIC will administer its conduct and disclosure provisions.

Assisting planners satisfy the three elements of the suitability rule is paramount in helping alleviate the additional regulatory burdens.

In preparing and providing personal advice to retail clients, financial advisers must satisfy all three elements of the suitability rule.

These include making reasonable enquiries into the client’s relevant personal circumstances, the process of investigating and considering the options available to the client and the requirement to ensure personal advice is appropriate.

Solutions that guide planners along the right path, assisting in self-regulation and reducing the risk of future enforceable undertakings, goes a long way to helping ensure the financial advice industry goes above and beyond the minimum professional standards under the financial services reform regulations.