What are the critical moments in one's life where it's generally understood that financial advice would be most useful?
Common answers to this question include when you get your first job, begin saving for a house, have your first baby on the way or start thinking about what life could look like after you retire. But what about, say, when you're planning on investing in a risky property investment scheme whose collapse would lead to you and around 100 other retirees collectively losing more than $18.5 million in savings?
If that sounds a little specific, that's because it's referring to Sterling First - a major topic of discussion in a recent Senate committee inquiry into the Financial Accountability Regime Bill 2021, Financial Services Compensation Scheme of Last Resort Levy Bill 2021 and related bills, which we previously covered here. During that inquiry, the committee's chair, Senator Paul Scarr, referred to the Sterling First collapse as a "tragedy" that might have been averted (or at least mitigated) if "more of those investors had sought financial advice from an independent provider of financial advisory services, to actually give them warts-and-all advice with respect to the risks associated with that scheme."
AFA CEO Phil Anderson, whom Scarr was speaking to at the time, agreed, adding that "some of the impacted clients ... put an excessive proportion of their funds into the one scheme," which is "something that you would not expect as an outcome if someone had got advice."
Scarr then referred to former ASIC chair Tony D'Aloisio's suggestion that because "you're never going to be able to make a managed investment scheme readily comprehensible to a retail investor and, because the schemes are so complicated, one policy response might be to actually mandate that independent financial advice has to be provided by the promoters of the scheme, and the cost of that advice is distributed across all participants in the scheme."
Anderson noted that mandating access to financial advice was a "big call," even though the AFA, as an advice association, "would strongly support people getting access to advice, particularly if they're investing in something that is higher risk."
"The design that you describe in terms of the cost of that advice being shared across other investors is a pretty significant consideration," Anderson continued. "We would argue that if clients of financial advisors are already paying for that advice, they shouldn't be paying for advice for other investors in the same scheme. But mechanisms need to be looked at to help encourage Australians to understand the risks that they're taking and to consider other forms of protection."
Anderson is right that such a policy response to Sterling First would represent a significant departure from the way Australians have typically accessed financial advice - and paid for it. One also wonders where the basic principle of caveat emptor fits into this idea, even if the specifics of the Sterling case call into question whether investors could possibly have made an adequately-informed decision in the matter.
However, there's no denying that managed investment schemes are inherently complex - and given that recent HILDA data suggests nearly half of Australian adults could be considered "financially illiterate," it's easy to understand the potential benefits of having an advice layer in between investor and scheme.
The idea isn't without precedent, either - late last year, we discussed research from Iress and Griffith University which revealed a 50% increase in poorly-timed superannuation switching decisions throughout the COVID-19 pandemic. That research recommended using technology to "positively intervene in decision-making of members potentially at risk" along with a "dramatic improvement" in access to quality financial advice, as there's a clear correlation between advice and better financial decision-making during crises like these.
If there's a case to be made for "customer intervention" in super, why not for monies invested outside of APRA's regulatory remit? Perhaps such a system wouldn't work exactly as proposed by Tony D'Aloisio (and echoed by Senator Scarr), but what about a digital advice layer that can effectively reduce the complexities around investment risk down to digestible information for customers?
Given how enthusiastic both sides of the aisle have been about the value of financial advice recently, this is a perfect opportunity to consider the role advice plays in steering Australians through a crisis.
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