The caning meted out to the financial advice industry in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry might have been avoided if advice were treated all along as the product that advisers sell.
ClearView managing director Simon Swanson says bad advice practices are a symptom of an unhealthy culture that treats advice as a means to an end, permits conflicts of interest to distort advice, and puts other considerations ahead of the best interests of clients.
Under the circumstances, it is not surprising that the current structure for authorising individuals to give advice is under scrutiny, and the role and value of the licensee is being questioned.
But Swanson says the culture of advice will change only if the structure of the advice industry changes.
“If you get the culture right, you deal with the conflicts,” he says.
Swanson acknowledges it takes more than words to create a healthy culture, and licensees need to support advisers with systems and processes to help them to focus on advice and put the client’s interest first.
Six steps for staying relevant
1. Help advisers articulate their value proposition and confidently ask to be paid a fee
2. Adopt and integrate technology at both the licensee and practice level to drive efficiency, and automation to manage risks and boost productivity
3. Support and guide advisers to meet new education and training requirements
4. Work with practices to develop effective succession plans and help principals exit by facilitating transactions
5. Train and develop advisers’ soft skills to boost client engagement
6. Separate product from advice and invoice clients directly, to wean advisers off charging through a platform
Swanson says a licensee must create a structure and an environment to support advisers to sell advice as the product, rather than the advice being subsidised by other things they do.
“We’ve had an advice-only SOA for a couple of years now, and we have advisers who will give only advice – whether it’s on family trusts, etc – for up to $20,000,” he says.
“They can earn more for giving advice than they can by selling the product.”
Swanson says if advice is rooted in a culture of always doing the right thing by the customer, first and foremost, and if advisers are supported by licensees in that objective, then many of the issues the industry has faced and those that were exposed in the royal commission, might never have arisen.
“If we could just focus on financial advice as the product, we’d be in a lot better position,” he says.
“Culture is the most important thing. And that stems from viewing advice as the product. What a radical concept.
“If you think about all the companies, from the MLCs to the AMPs to everyone else, we’ve all effectively got the same structures. So what’s the difference? It’s the culture. And what drives the culture? It’s the principles you have under that on how you operate.
“But the industry has always been distribution, not advice as a product. And that’s been the problem.”
A better structure to support advice as the product involves removing from the Australian Securities and Investments Commission (ASIC) the task of licensing advisers; and removing from licensees the task of authorising individuals to give personal financial advice.
The challenge for licensees
This change presents challenges for existing licensees whose value proposition is based on low-cost licensing deals, but Swanson says it presents opportunities for organisations prepared to back advisers as professional services providers, and to back advice as the product.
“What we’ll offer is around practice development – how to run your business more effectively – and we would still continue to offer compliance processes and we’d offer technology support,” he says.
“It may well be in 10 years’ time that the dealer group gets mutualised, if that’s the right way of describing it, and becomes owned by the practices. That’s certainly an option.”
Swanson says the new regime will require every adviser to be individually authorised to provide advice by an entity that has no links to investment products or services, and that the decision to accredit or authorise or in some other way certify an individual as fit to give advice must be made independently of the adviser’s employer or dealer group.
“That should be separate from, let’s call it, the dealer group of today,” he says.
“I’m not sure of the timing of that. It’s going to take a couple of years to get to it, but I am surprised at how many people are comfortable with that concept, in politics, and regulators.”
Evolution of the business
Swanson says the existing dealer group will evolve to be “effectively like a law firm, and advisers will be like partners in the law firm”.
“That’s not to put lawyers up on a pedestal, but that’s how I see it operating,” he says. The move would mitigate some of the risk of being a licensee, but there are already equally effective ways to de-risk a licensee business under its current structure.
“I prefer to play a long-term game, and if we get our technology right [now] it means I’ve de-risked it that way,” he says. That will involve harnessing emerging robo-advice and other fintech developments to support and complement human advisers.
“If we had that happening today I’d actually feel quite de-risked,” Swanson says.
“But I don’t think I’d want to de-risk it structurally. There’s just as much risk in a life insurance company or a superannuation fund as, effectively, in financial advice, if you’ve got it running properly. The problem is, [the industry has] never run it properly.”