For me, two key issues emerged out of the recentAustralian Securities and Investments Commission(ASIC)/Australian Consumers’ Association (ACA) shadow shopping survey. One was brand and the other was communication. From this latter issue emerge questions about disclosure, client expectations and what is a comprehensive plan.
But first, some comments about my favourite legislation and industry reaction to date. I find it ironic that the government and the regulators triumph the financial services regulation (FSR) as the panacea to the issues raised by the survey, when FSR entrenches the nexus between products and advice.
In case there is anyone who doesn’t know, FSR is about regulating product advice, not financial planning. That is, unless you believe that financial planning should only be about giving advice on investment products. Unfortunately, there are many financial planners who, over the last five to 10 years, have positioned and presented themselves as investment gurus. No wonder their clients are disillusioned with them.
But these illusions of grandeur are understandable, given the bull market in equities and pervasive marketing by fund managers. The issue for these financial planners is: how do they now position themselves and retain creditability with their clients?
More importantly, how do the big dealers regain credibility? When dealers are grouped by owner, there are 11 owners who had at least four of their advisers shadow shopped (Money Management, March 13, 2003). And all of the 11 owners had their advisers spread over the spectrum of results. With this sort of result, how can any of these owners promote a brand?
A brand of any value has value because of the consistency of good experiences by the customer. For example, if a car manufacturer was producingcars of varying quality this would quickly be known and their sales would suffer.
Some dealers may think that our industry is different and that having their financial planners deliver a variable service (across the dealer) may not impact on their brand.
Firstly, I don’t believe our industry is different, except for one thing, our legislative environment — FSR in particular. Therefore, ASIC might perceive that a dealer, who has financial planners delivering advice of an inconsistent quality, is probably not supervising them adequately. Under FSR, the licensee (dealer) is totally, fully and entirely responsible for the conduct of their authorised representatives. This means that not only the brand is at risk, but the licence. (Thank goodness I’m not the director of a dealer group anymore.)
Does this mean that the compliance burden will now be so great on large dealer groups, that they will find it difficult to survive? It could be. It will be unless large dealer groups really assess how they supervise their financial planners. Is more compliance and more auditing the answer? I don’t think so — this is really more of the same.
The way financial planners are supervised has to be totally rethought. No, that is still after the event, the way financial planning is done, the process (or lack thereof) has to be totally rethought. (And there are some of us who think we know what that rethought should be!)
This segues into the other key issue that emerged out of the survey — communication. It appears to me that the shoppers did not know what to expect from the financial planners, nor did it appear that the financial planners knew what the shoppers wanted.
It is obvious to me that there was a real communication breakdown between the shopper and the financial planner — which would have been further compounded by the language we use.
How much time do financial planners spend trying to either understand what the client’s expectations of what they can and will do for them or try to agree with the client on what their expectations should be? If the financial planner positioned and presented themself as an investment guru, that is how they will be judged. If, on the other hand, the financial planner positions and presents themself as someone who can assist the client in putting a plan together, which will help the client achieve their goals with the minimum of risk, then that will be the expectation the client will have.
Anyway, what is a comprehensive financial plan? Is it a DFP 8-like plan?
Normally, a client will come to an adviser because an event has, or is about to, occur. It could be retirement, retrenchment, an inheritance, review of superannuation or salary packaging.
Do all of these events require comprehensive advice, therefore a comprehensive plan? Most likely not. Does the client want comprehensive advice? Are they asked or do we just ‘force’ it upon them?
Which brings me to disclosure. Can there be full disclosure? Should you disclose that your attendance at theFinancial Planning Association(FPA) convention was subsidised by the convention sponsors, and that you went to one of their dinners? Where does it stop?
But it seems ASIC has now drawn the line as far as platforms are concerned. They regard them as products, not an administration service. Does this mean that I should disclose that I only use one platform that just happens to be owned/ badged by my dealer, and who gets a substantial sponsor fee? Maybe I have an equity interest. Do I call myself independent, or independently owned, yet have a sponsor role and/or equity position in a platform?
Disclosure should extend to what I can and can’t do for the client, but more importantly, my business model, especially what I’m paid for. Am I paid for giving advice or for placing business? Either model is valid, but the client should know which one applies to your business. There is not one right model. Nor are commissions inherently wrong.
What is wrong is holding one’s self out to be something other than what you are. If you are a pure product flogger, say you are. If you can only sell house products, say so. However, in either case don’t hold yourself to be an adviser. What we should have is agreed financial planner/adviser/product sales person labels, so that clients are not confused. And maybe what they can do should also be defined. For example, if someone wants to call themselves an adviser, should they be allowed to deal, that is, implement?
To me, what this all boils down to is client expectations. Financial planning should be rethought around ensuring that clients’ expectations are properly understood, and that the outcomes deliver on these expectations. Our language, both oral and written, should be such that the client can easily understand it — leave no room for misinterpretation.
For large dealers, the way to overcome their financial planners delivering advice of an inconsistent quality will require processes, systems and better ways of reviewing the advice that their planners are giving.
The process starts with the first contact with the client. The client has to have their expectations of you set at this point, as you have to understand and know the client’s expectations by the end of the first meeting. Systems should not just be modeling systems, but for the processes and the management of the practice and the client. So the days of engaging financial planners and letting them run and hoping that compliance and audit will be sufficient are over.
Compliance and audit are both reactive. What is needed are management systems that allow for pro-active supervision. Once a large dealer has his/her financial planners delivering consistent quality advice, their brand will have value, ASIC won’t be a threat and they’ll attract quality advisers.
