Scaled financial advice - can it deliver on its promise?

Scaled financial advice is a promising offering receiving a big push from the Government and industry regulators. However, lingering uncertainties are preventing the service from truly taking off, writes Tim Stewart.

A major part of the Government’s Future of Financial Advice (FOFA) reforms is the introduction of the concept of ‘scaled advice’ – that is, relatively simple advice on a single issue that can be delivered at a lower cost than comprehensive financial advice.

In making the argument for the provision of scaled advice, the Government cited an Australian Securities and Investments Commission (ASIC) paper released in December 2010 titled Access to Financial Advice in Australia.

The ASIC paper found that between 60 per cent and 80 per cent of Australians have never sought advice, in part because they feel financial advice is out of their reach or not appropriate for their circumstances.

“Demand side research suggests that more than half of consumers across all age groups want simple advice (piece-by-piece) or a do-it-yourself option,” according to the ASIC paper.

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AMP director of advice Scott Machin says his company identified the consumer demand for piece-by-piece financial advice before the ASIC report was released.

“We did some research in 2009 in conjunction with our planners and our clients, and one of the things we identified was that we needed an alternative to our comprehensive advice offer,” says Machin.

AMP wants to ensure its financial planners can establish relationships with new clients without consumers being scared off by the price of a full financial plan, says Machin.

Mercer financial advice leader Jo-Anne Bloch points out that while consumers are demanding simple advice, financial planners are continuing to base the business models around full, comprehensive advice.

“So what this has led to is a ‘one-size-fits-all’ approach which has led to an asymmetry between what people want and what the industry’s actually delivering,” says Bloch.

One of the big stumbling blocks is financial planner attitudes about what constitutes good financial advice.

For years, advisers have been told – by ASIC, industry bodies and licensees alike – that financial advice must take into account all aspects of a client’s circumstances, along with the circumstances of other family members.

“It has been drummed into planners that quality advice is comprehensive advice,” says Machin.

“And the longer you’ve been in the industry, the more likely you are to have those holistic relationships with your clients,” he says.

Many of those in the older generation of financial planners may have initiated their current client relationships with a simple piece of financial advice, says Machin.

That suggests it might be easier to convince the up-and-coming generation of younger financial planners about the benefits of scaled advice, he adds.

Bloch says that the current attitude of financial planners is that comprehensive advice is much safer – both in terms of acting in the client’s best interests as well as protecting the financial adviser from litigation down the line.

Furthermore, clients may wish to limit the scope of the financial advice, but financial planners are reluctant to do so until they understand the client’s full circumstances.

“Many financial advisers would say that … until you understand the financial circumstances of the client you may not be able to give them the right advice,” Bloch says.

So the idea of delivering advice to consumers on a limited basis makes financial planners wary. They need some reassurance from the Government and ASIC that they will be able to deliver limited financial advice without being exposed to legal action by a disgruntled client somewhere down the track.

Financial Planning Association (FPA) general manager for policy and government relations Dante De Gori says the main intention behind the Government’s proposals is to clarify the rules for dealer groups.

“Compliance groups apply a very conservative approach to advice and hence stop many of their financial planners from providing limited advice,” De Gori says.

The solution could potentially come in two parts. The first one would be around who sets the scope of the financial advice, according to ANZ general manager of advice and distribution Paul Barrett. 

“If you could get clarity that the adviser and client can agree on the scope of the advice with the relevant warnings issued, that would make things easier”, says Barrett.

“Second, is how the best interests test applies. Will the best interests test be scalable? Will best interests apply in all cases to limited advice if all of the client needs are not in scope?” he asks.

The issue of how the ‘best interests’ obligation will interact with scaled advice has also been raised by Financial Services Council (FSC) chief executive John Brogden. 

Pointing to a FSC submission to the Parliamentary Joint Committee on FOFA, Brogden gives the example of a client who has had a $10,000 windfall and wants to put the money in their superannuation.

Brogden asks: if the financial adviser determines that the client would be better off using the money to pay off their credit card, but the client insists they want to put in their superannuation, will the adviser be in breach of fiduciary duty if they carry out their client’s request?

“These are relatively straightforward pieces of financial advice. They don’t need the full advice spectrum. But if you apply the full best interests spectrum, then no financial adviser will provide scaled advice because they’ll be worried about losing their licence,” Brogden says.

The implementation of a workable, scalable advice structure is “an absolutely essential outcome of FOFA”, Brogden adds.

Financial advice as a transaction?

Machin describes AMP’s scaled advice offering as being “much more a transactional style, a very quick piece of advice”. For example, it might be a bite-sized piece of financial advice for someone who has just taken out a mortgage, Machin says.

He uses the analogy of going to see the doctor. The doctor will take your pulse and ask you about your general health, and then ask “why are you here today?”.

“I think most people have never walked out of experiences like that and thought it wasn’t the same level of quality as anything else. I think financial planners are the same,” he says.

But for Boutique Financial Planning Principals’ Group (BFPPG) president Claude Santucci, the way the Government has framed the debate suggests it doesn’t understand what financial advice is about.

“All the evidence points to [the Government] believing that financial planning is a transaction-based activity,” Santucci says.

“The Government has tried to give the impression that financial planners have been out to sell a whole financial plan with a huge [Statement of Advice] and charge accordingly, when all that was required was a simple piece of advice,” Santucci adds.

He agrees that there is a place for scaled advice, and points out that many members of the BFPPG currently offer it to their clients.

He adds that there was once a concept called ‘simple advice’, where you could give basic advice but you couldn’t wave off your own responsibilities to find out enough about the client so that advice was in context.

“Scaled advice where you can just answer the question, recommend the product and get a fee is a dangerous way to go,” Santucci says.

Intra-fund advice

Sitting at the most basic end of the scaled advice spectrum is intra-fund advice.

This is financial advice delivered to superannuation fund members which is limited to a single issue relating to their money within the fund, according to Association of Superannuation Funds of Australia chief executive Pauline Vamos.

“There was an expectation from members in a compulsory system that if I have money in your fund, then you can answer some fairly simple questions about my money in your fund,” Vamos says.

As it currently stands, superannuation funds have access to class order relief from some of the conditions in s945A of the Corporations Act in relation to ‘knowing your client’. However, ASIC has proposed that this relief be revoked because very few superannuation funds have taken it up.

The Government has announced that it intends to amend s945A to make it clear that Australian Financial Services licensees can provide scaled advice and still comply with s945A.

The Government is also planning to pass legislation which will enshrine the provision of intra-fund advice in law.

However, Vamos is quick to point out that this legislation will only relate to the way intra-fund advice can be paid for, rather than creating different rules for the way superannuation funds can deliver advice.

“No matter who you are – whether you’re an industry fund or [a retail adviser] – you have to obtain the relevant information to provide that advice.

"There are no conversations at all about giving any exemptions to superanuation funds or anybody. The fundamental principle is: you need to collect the relevant information to give that advice,” Vamos says.

Intra-fund advisers will still be subject to the ‘best interests’ duty under FOFA, and there will be no reduction in any of their obligations as financial advisers, Vamos says.

However, the one area where intra-fund advice will differ from scaled advice is fees.

Most superannuation funds currently bundle up their fees for intra-fund advice in the administration fee. Financial planners object to this because they believe it will mean that some superannuation members are paying for a service they don’t use.

For Association of Financial Advisers (AFA) chief executive Richard Klipin, this creates an unlevel playing field because financial planners are subject to a raft of fee disclosure obligations that do not apply to superannuation funds.

“At the moment, there are millions of Australians paying for financial advice and not getting it, because there’s a bundled fee that pays for all manner of things – your fund’s logo on the front of someone’s football jumper, advisers, admin, technology, and so on,” Klipin says.

But for Bloch, it is entirely reasonable for the intra-fund advice fee to be bundled up in the administration fee. Members expect their superannuation fund to provide them with information about their money in the fund, and they won’t be willing to pay a separate fee for it, Bloch says.

“To me, scaled advice is no different to helping members with claims management or benefit payments or administration. It’s very much an administrative expense,” Bloch says.

She is sceptical about claims that members will be paying for services they don’t use, since she believes that nearly every member will phone up their fund to ask questions about their money at some point in their life.

Bloch also suggests the financial advice component within the member administration fee could be disclosed, if doing so would placate concerns about an unlevel playing field.

“I wouldn’t be adverse to giving some estimate [to members] that said ‘if your fee’s $1, about 1 per cent is attributable to advice’. I don’t have a problem with that, I just don’t see the point of it,” Bloch says.

But that isn’t enough for the FSC’s Brogden. He objects to the fact that the stringent disclosure requirements within FOFA are not being applied to superannuation funds.

“It’s an act of gross hypocrisy to turn around and say ‘inside superannuation funds there’s no need for disclosure, no need for opt-in, but outside you’ve got to disclose everything and people can opt out at any stage’,” says Brogden.

“It’s putting in place two systems, and it’s undermining all of the principles that have been laid down with respect to financial advice,” he adds.

Klipin’s biggest concern is that intra-fund advice could end up being a direct sales offer masquerading as advice.

“When we start to grow the marketplace, if consumers’ experience with advice is ‘oh, well advice is like sales’ or ‘all I get is a particular piece of advice on a single-issue’, then really the world of advice becomes a fairly limited option for them,” Klipin says.

While he is completely supportive of the Government’s stated goal to make financial advice available to more Australians, Klipin is concerned that in doing so the public’s perception of advice will be damaged.

“It’s not like the brand of financial advice is seen broadly across the Australian community with great regard. We’re in a battle to protect the reputation of financial planning to demonstrate to the Australian community that it’s a trusted service that delivers value,” Klipin says.

If the Government wants to enact legislation that effectively turns financial advice into a sales process without any of the consumer safeguards, then it’s hardly surprising that the financial planning industry is up in arms against it, says Klipin.

A bridge too far?

Currently, there are four topics that intra-fund advisers can advise on: superannuation contributions; investment choices within super; insurance within super; and accessing super under financial hardship provisions.

ASIC has proposed in Consultation Paper 164 that five new topics be included within intra-fund advice: intra-fund provisions; transition to retirement (TTR) strategies; nomination of beneficiaries; interactions between superannuation and Centrelink benefits; and a single-issue about retirement.

Whether or not TTR and Centrelink strategies should be included in intra-fund advice is a contentious point in the financial services industry.

Machin says he has “major concerns”, with industry funds talking about delivering TTR-style financial advice.

“To be able to deliver that kind of advice and to do it justice, you need to consider not only superannuation, but insurance needs, income, relationships and partner income. I struggle to see how you can do that in an intra-fund advice process,” Machin says.

Bloch agrees with Machin, and says that Mercer will not offer TTR financial advice in a scaled advice context – even if the ASIC guidance includes it in the list of approved topics.

Rest chief executive Damian Hill says it would be ideal if everyone got comprehensive advice about a potential TTR setup, but “that is not a reality”.

“The fact of the matter is that a lot of people aren’t taking advantage of the TTR rules through lack of knowledge, and the default system’s not really putting them in that position,” says Hill.

Hill argues that the basics of TTR can be explained to members over the phone via intra-fund advice, but if the level of complexity “ramps up” they can be referred to REST’s comprehensive advice service.

Focusing on delivery

For the majority of financial planners, the concept of simple or ‘scoped’ advice is nothing new. In fact, many of them have been offering it for at least a decade, since the Financial Services Reform Act of 2001.

So what has changed since then? For Barrett, the big game-changer is the method of delivery. The telephone, for example, is playing a much bigger role.

“Particularly as the two-speed economy starts allocating people into the West, the need for video-conferencing facilities and phone-based financial advice in those areas is increasing,” Barrett says.

Barrett thinks the big opportunity could be for suburban financial planners who can utilise the Internet and the phone to reach clients who are geographically spread, with a wide range of needs.

One thing ANZ has found in its internal discussions is that simple advice needn’t always be phone-based, and complex financial advice needn’t always be face-to-face, says Barrett.

“You can provide complex advice over the phone, and you can provide simple advice face-to-face. It becomes more of a client need issue,” he says.

For example, time-poor clients with complex needs may feel phone-based financial advice is more appropriate for them, Barrett says.

Klipin says that another possible model in the scaled advice environment could be practices that limit the scope of their financial advice to a single-issue, such as insurance, superannuation or mortgages.

“You might even find that there will be businesses that will offer both holistic advice in the same shop that they offer scaled advice,” says Klipin. “That’s the way they’ll manage their lower-value or younger-style clients who may have less complex needs.”

There is also a wide range of advice models within superannuation funds, according to Vamos.

“Some [funds] have qualified financial planners within their call centres, and they either operate under an AFSL that the superannuation fund has or they’re operating under a third-party licence,” she says.

Bloch says that some superannuation funds have their own in-house financial planning service, while other funds may do their intra-fund advice in-house and outsource their comprehensive financial advice. 

Getting costs down

The Government’s stated aim is to increase the number of Australians who receive financial advice, but for that to be achieved the cost of advice needs to go down.

De Gori is concerned that the Government’s proposals will not achieve the aim of reducing the complexity and availability of financial advice.

“I am not sure that the Government and ASIC have actually done anything to help reduce the fears for both financial planners and the industry in general. FOFA may indeed result in more over-compliance,” De Gori says.

Brogden says that at the moment, consumers can either get comprehensive financial advice from a financial planner for around $2,500 or limited intra-fund advice on their superannuation – and there is nothing in-between.

Unless a workable scaled advice structure comes out of the FOFA reforms, the $2,500 figure will drift up to $3,000, he adds.

“If we don’t provide a mid-market solution, the outcome will be that fewer Australians get advice about their financial affairs, not more,” Brogden says.

Barrett points out that when it comes to retail financial advice, the fact remains that the true cost of advice is far higher than what people are willing to pay for it.

Historically, financial planners have gotten around this by subsidising the cost of advice with ongoing fees – but with commissions gone that is no longer possible, says Barrett. The only option remaining is to reduce the cost of advice, he says.

“If we can reduce the complexity around providing this advice, we can effectively reduce the cost of providing the advice, which means there will be more people paying for it and getting it,” Barrett says.

The big question is whether or not the Government can get the regulatory settings right, he says.