It's become a fairly common observation now that the advice industry is in trouble – adviser numbers are at all-time low, traditional portfolio strategies may no longer be viable and PI insurance costs are increasing beyond the realm of affordability for many advice businesses.
Even if there do seem to be voices in Canberra concerned about these issues – Senator Jane Hume recently described advice regulation as a “Gordian knot” at an FSC conference, and Shadow Assistant Treasurer Stephen Jones lamented the advisers being “crushed beneath confusing and contradictory reforms” – there’s currently no clear path forward for how to holistically address what’s ailing the industry.
A new report released by Rice Warner and commissioned by the FSC, though, makes a pretty straightforward suggestion: changing legislation to reflect the extent the risks borne by an advice customer and the likelihood of harm resulting from that advice.
Practically speaking, this would involve several steps. First, all education, guidance and what currently exists under the auspices of “general advice” should be classified as “general information”. Such information might include strategic advice about budgeting and debt reduction.
The next step would be splitting what’s now defined as “personal advice” into two categories: simple and complex. What falls into these categories should be determined by the “degree of risk borne by the consumer” – as such, a lot of the piecemeal advice offered on an intra-fund basis by super funds, such as the urgently-needed COVID-19 advice discussed in the latest season of After Hours, would fall into the “simple” category.
Finally (and crucially), there should be no best interest duty attached to advice that meets the “simple” definition. “For example,” Rice Warner explains, “if someone wants to take out a modest amount of extra life insurance or put more contributions into their superannuation fund, the amount of risk they take is low and as it is unlikely to be against their interests, so the documentation should reflect this.”
Rice Warner also believes that this kind of change complements the Government’s existing legislative agenda regarding super and product advice. Both the recently-flagged plan to benchmark super funds by net performance and ASIC’s Design and Distribution Obligations will “reduce the risks of taking up a poor product,” Rice Warner has argued, and this should be reflected in new rules for advisers.
As the report explains: “The delivery of advice is not structured around the risks borne by consumers, so simple advice has the same complex and lengthy processes as high-risk advice. This drives up the cost to consumers to unsupportable levels.
“If advice is delivered in a cost-effective manner, this will improve trust in the sector. There are many people, including disadvantaged groups, who currently do not obtain financial advice because they cannot afford it. Any process that will lower the cost of advice will benefit these people.”
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