Provocateur: Swap complicated products for simple advice

RecentMoney Managementresearch suggests that there are some four million people who are currently clients of financial planners. If 90 per cent of these people have only been given limited advice (and there is good reason to believe that most clients have received limited advice, even if that is not what they asked for or needed), then a mere 400,000 Australians have full financial plans.

There are over six million family units (singles and couples) in Australia. This means that only a small percentage (7 per cent) of Australians have received comprehensive advice (and let’s not get into the quality of that advice at this time).

There is obviously a huge market for meaningful, practical financial advice that is going untapped. It is interesting to consider why this is so. A large number of people would not have significant resources and would not even know about financial planning. Even if they did, they would rightly think financial planning was not for them. The middle majority may also not know about financial planning and if they did would, again rightly, think it was too costly for them.

Who is a financial adviser?

Financial planning itself is not a practice that is limited to any one group in the community and certainly not to the one that wants to legally restrict the use of the term. Rather, in the first instance, everyone has a financial plan of some sort and everyone in some way is their own financial planner.

From the moment that a child starts saving with the intention of making a successful visit to the lolly shop, to the time an octogenarian puts aside money for her funeral, individuals are doing their own financial planning. At various points in their life they may choose to outsource all or part of the planning process by seeking advice. But this advice can come from any number of places, some professional, some formal and unfortunately, some informal and uninformed. How often have you heard someone on the train or in a queue giving frightening financial advice to a fellow traveller?

Many people who attend wealth creation seminars, watch TV gurus or read pulp financial fiction take away financial advice which can form part of their personal financial actions.

Who is setting the standards for advice?

One of the ironies of the present debate around financial planning standards is that the standards have been largely defined by theAustralian Securities and Investments Commission(ASIC) when it disclosed how it intends to administer the Financial Services Reform Act (FSRA). In particular, Policy Statement 175 goes a long way to determining the how and why of the financial planning process in the absence of any other meaningful articulation. The bottom line of PS 175 is that all advice that relates to a product outcome must be justified and must meet disclosure requirements. However, not all financial planning advice necessarily leads to product outcomes. It is left to dealer groups and individual planners to determine what level of responsibility they have for advice that does not have specific product outcomes.

What should financial planning be?

At its core, financial planning helps clients resolve the competing goals of how they spend their time, how they spend their money, how they wish to deal with insurable risk, and how much financial risk they take on in their financial dealings. It seems clear that if there is no product recommendation then this is not an activity subject to the FSRA. It will still be covered under the common law responsibilities of fiduciaries to their clients.

To return to the 90 odd per cent of Australians who do not have a comprehensive financial plan, the non-high net worth community can be divided into three groups: those who need financial coaching, those who need education and simple advice, and those who will continue to do their own planning for better or worse.

Many Australians can achieve financial stability and independence. They have the resources that, if properly allocated, can support their current lifestyles and will support their retirement needs. The problem is that they need help in how to allocate them. They need a financial coach to assist them identifying and understanding the trade-offs between work and leisure, spending and saving, risk aversion and long-term investment results.

For those who have not, and probably will not, develop the resources to achieve financial independence, there is limited benefit in discussions of investment management. What they need is education on the use, risk and benefits of superannuation top-up, savings and credit products, understanding mortgages and other loan products, how to minimise their risks, how to budget and how to access social security benefits. Investment advice would be limited to simple savings plans into risk controlled products.

The wrong formula

Current financial planning services and advice are inappropriately developed for high net worth clients, whose needs can be defined by the colourful acronym TWIPE. These additional services generally include:

* Tax minimisation;

* Wealth generation and preservation;

* Intergenerational wealth management;

* Portfolio optimisation; and

* Education on financial matters.

When we consider the educational foundation for financial planners, we see that the needs of these clients have set the knowledge base for all financial planners. However, even ‘blind Freddy’ can see that DFP1 to DFP8 is hardly necessary when the primary advice is ‘save some money and top up your superannuation and purchase appropriate insurance cover’. Derivatives and aggressive tax planning strategies are hardly applicable.

In an attempt to overcome the problems of inconsistent advice, we have mistakenly focused on enhancing personal competencies rather than the less draconian analysis of identifying the required skill sets to meet different target market needs and the industrialisation of the financial planning process itself.

One example of over complication that seems to be derived from servicing the rich and which has drifted down to clients with smaller amounts to invest is the recommendation for complex portfolios when simple diversified funds would be most appropriate. I often see in relatively modest portfolios of less than $50,000 as many as seven or even 10 products. How on earth can such complexity be justified? And how can a financial planner meet their requirement to monitor and review?

Who will provide advice to middle Australia?

At the lower end of the financial resources scale, one could see super funds, community groups, churches and charities being the prime providers of financial advice. Perhaps Centrelink will move to providing additional services, so that its clients not only achieve the benefits they are entitled to, but learn to manage and extend those benefits. Schools need to take up financial literacy, as well as verbal and mathematical skills.

For the middle range families, financial coaching does not seem to be covered under a FSR licence to the extent that a security (read product) is not recommended, although in some circumstances the line may be fine. Yet it is financial coaching that they really need. Cut up the credit cards, save $200 per month more, cut back on the weekend spending — all solid and needed advice, but not linked to products.

How will this advice be provided?

Certainly not through a financial planning process! From ‘FIZ’ officers within Centrelink to the professional financial coaches, the only way this advice can be provided is on the back of a streamlined process based on an intelligent and interactive planning system, probably web-based.

At the market-driven end, where there is a need, a commercial supplier is likely to appear. It is not difficult to imagine several good value providers of simple financial planning advice being established as soon as the supporting software is available. They will be at a cost competitive advantage and will be able to profitably service middle Australia.

When you think about it, even superannuation which is considered highly complex, is actually simple for most workers. The employer puts money in and when they retire, they can either take it out or purchase a retirement income stream. As more superannuation funds offer seamless rollovers into retirement income streams, even this process will become simpler. These people do not need product advice; they need budgeting and saving advice so they can stretch their retirement dollars, and they need advice about their ability to access social security benefits.

We have made it impossible (or extraordinarily expensive) for most Australians to obtain the financial advice they need to better manage their lives. The advice they generally require is: control your spending (especially credit cards), pay off your mortgage faster, salary-sacrifice what you can afford to your super fund, and invest in appropriate and affordable insurance cover.

For many people, the extent of ‘technical’ advice will be making investment adjustments so they can increase their social security benefits. None of this is rocket science. Does the provision of this advice require training in derivatives? Perhaps we need to think less about elitist training and more about how to deliver good advice to those who need it.

Advice does not have to be complicated to be of value. In fact, the more complex the advice, the more costly and the less material may be the final outcomes.

Paul Resnik is the head of Paul Resnik Consulting Group.