Is there room for smaller planners in scaled advice?
Is scaled advice a game only the big guys can play? Malavika Santhebennur explores some of the things that might be stopping smaller financial planning practices from providing this service.
The issue of scaled advice has been a hot topic for financial planners and their clients, especially since the previous Labor government announced the Future of Financial Advice (FOFA) reforms in April 2010.
The government introduced the FOFA reforms to address concerns about access to and affordability of financial advice.
But the questions that remain are whether scaled advice is viable for only the big banks and financial planners or whether mid and smaller-sized planners can also get in on the game.
The Australian Securities and Investments Commission’s (ASIC’s) guidance sets out the requirements for advisers to meet their legal obligations when giving scaled advice.
Fulfilling the requirements mean advisers can meet their legal obligations and their best interest duty safe harbour requirements when providing scaled advice.
The safe harbour test and the criteria for fulfilling legal obligations are reasons why some mid-sized and smaller financial planning groups are reluctant to provide scaled advice to clients.
CEO of Premium Wealth Management Paul Harding-Davis sees potential in scaled advice in the form of intra-fund advice but he has issues with the safe harbour test.
He believes the test means advisers almost always have to do a comprehensive fact find.
“To know a client well and work though strategies is at least a two-hour job. If your hourly rate is $300, then you need to be able to charge $600 just to cover the costs of that part of the process, which is more than what is envisaged for many scaled advice offerings,” he told Money Management.
He said he had not seen anything in the legislation that would convince him that Premium’s advisers should not do a holistic fact-find.
But he said the main impediment for his company with scaled advice was not technical but commercial, due to lack of large scale technology.
CEO of State Super Financial Services (SSFS) Michael Monaghan agreed, saying scaled advice requires significant investment in technology and the underlying infrastructure to be able to provide it, especially on a large scale.
He said scaled advice or intra fund advice is still embryonic even among the bigger firms and believes it may take another four years before it becomes well established.
SSFS recently announced the expansion of its telephone-based service to public sector members in Western Australia and the Australian Capital Territory.
Monaghan said the service would give clients access to specialist advice on issues like defined benefit schemes rather than having to set up face-to-face meetings, which can be time consuming and difficult for clients in remote locations.
“There are many people who need reasonably straight-forward types of advice rather than the full comprehensive types of advice that we normally provide,” he told Money Management.
“We’ve introduced this as a way of helping those people who don’t as yet need full comprehensive advice to quickly get access to relevant advice, usually in relation to their superannuation scheme.”
Scaled advice is personal advice that is limited in scope, which addresses a limited range of issues or a particular area of the client’s requirements. Many financial planing firms were already providing scaled advice before the previous government brought the legislation into force.
AMP director of advice Scott Machin said almost all financial advice offered to clients is scoped to a certain degree.
“It’s very rare that we would see a planner talk to a client – and the client has seven or eight needs – and all of those needs are recommended to be addressed right at that point in time,” he said.
“Even when planners argue they gave comprehensive advice, they might have only given it on one particular topic.”
While scaled advice is less complex and more affordable for clients, it can have traps. Advising clients on limited isolated issues rather than taking a holistic approach could prove detrimental to the client.
In March 2012, ASIC released a report that said 39 per cent of advice examples it reviewed were poor while only 3 per cent were good quality advice.
“In several instances, particular topics were excluded from the scope of the advice, to the potential benefit or convenience of the adviser, and to the significant detriment of the client,” the report said.
Managing director of software firm Midwinter Financial Services, Julian Plummer, warned against the dangers of producing “boiler plate” solutions where advisers produce the same information and give it to everyone.
“They’ve got to make sure they customise the information, they’ve got to make sure it’s appropriate to the client, they’ve got to make sure the recommendations are reasonable and they’ve got to make sure they do the research and understand the client,” he told Money Management.
“It’s just not enough to go around and template up the SOA and send it en masse to clients.”
But Monaghan believes financial planners are skilled at dealing with employees in the public sector and are generally aware of the range of issues people need to consider.
“I suspect that in many cases people would need simple advice on many topics. If they get to know us in the process and they do need more comprehensive advice in the future, they may come back to us then and seek that more comprehensive advice,” he said.
Director of advice and client solutions at AMP Steven Helmich said despite the commercial challenges mid to small-sized firms face in providing scaled advice, such as not having the most efficient methods of providing the advice, it is still a good long-term investment.
“I would suggest the clients you get under scaled advice will become clients for holistic advice in the future,” he told Money Management.
“It’s a bit to me like they’re putting their tail in the water to see what the temperature is like. If they have a good advice experience in the scaled advice they’ll come back for more.
“I think more people are realising they want to engage with financial planners. And because of that there are more people who want scaled advice delivered like that. It’s more affordable and it solves an immediate issue for what the client thinks is important.”
Like ASIC, Helmich believes the duty of care lies with the planner. If advisers see something they think is critical, they must flag it to the client.
For example, if a client has come in about debt and budgeting but the adviser notices an issue with their insurance, they must inform the client, he said.
It is then up to the client to follow it up in a future advice meeting.
Plummer also believes scaled advice can lead to comprehensive advice, making it viable for mid and small sized firms. Midwinter offers software where advisers can choose certain topics rather than doing comprehensive advice all of time.
The software has a portal where clients can enter the fact-find information themselves. This reduces marginal costs as advisers can concentrate on producing advice rather than having to start from scratch.
Plummer said it takes about 20-25 minutes to generate the initial document for scaled advice, and another 15 minutes to personalise the statement of advice.
Advisers must use their judgement and training to decide whether they can still meet their legal obligations by limiting their scope of advice.
They should identify the client’s situation and ask relevant questions about the situation and not just depend on the information the client provides.
Advisers should also implement a ‘triage’ system or a filtering process where they can ask a series of questions to determine how scaled advice can be delivered while still meeting legal obligations.
They must communicate clearly to the client that they are offering scaled advice. They can explain the scope they intend to cover and make it clear that they will not be considering any other issue. They should also explain the reasons for limiting the scope of the advice.
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