Financial planning is too complex! It is a catchcry that many financial planners can relate to and have probably uttered themselves on a number of occasions, but now superannuation and banking consumer finance activist, Peter Mair, a formerReserve Bank of Australiaexecutive, has weighed into the debate by taking a stand against the growing complexity of financial plans.
Mair’s comments relate specifically to superannuation investments, where he believes increasingly verbose financial plans do little more than confuse those they are aimed at.
“It is time to find Plan B,” Mair wrote, in an article published on crikey.com.au’s web site last month.
“The response of the regulators to problems in the financial planning process is to produce more complicated plans. But the last thing ageing and vulnerable superannuants need is an even longer plan. What such Australians need is some honest advice.”
Like many, Mair criticises the recent Australian Consumers’ Association/Australian Securities and Investments Commission(ASIC) survey for equating long and detailed financial plans with good quality financial planning. But beyond that point he parts company with most of the financial planning industry.
“I think detailed financial plans play into the hands of planners. It gives them an excuse for charging high amounts of money, or, more usually, taking the commissions embedded into products,” he says.
“There are cheap and effective superannuation products called industry funds out there, but how often do you hear financial planners recommending them? Never.”
Despite these pot shots, Mair makes a practical suggestion that could gain favour among the ever increasing numbers of financial planners suffering from compliance-induced paper fatigue.
Mair is calling for a debate over whether Standards Australia should be asked to come up with a limited number of generic financial plans, one of which would suit the circumstances of most employees who simply want to change their superannuation fund or choose an allocated pension.
“When it comes to financial plans, the reality is that one size fits many,” Mair says.
“Within minutes of meeting them, every financial planner has clients suitably boxed. There are four key questions: life expectancy; size of investment assets; size and type of other assets; and binding relationships.”
Mair believes that too much emphasis is placed on developing individual plans.
“All individuals have much in common with many others and, ideally, those in similar situations would be given similar plans. There is no magic here. Across the community there should be a manageable set of standard financial plans and most people would comfortably fit into one of them.”
Mair considers that concepts like disclosure of product characteristics and pricing are reasonably in reach of an Australian Standard.
Investment options could be standardised as balanced, capital stable and growth, and another standard would relate to costs, allowing benchmarking to facilitate cost comparisons.
Mair says he believes the standards should be rounded out by administrative protocols to protect consumers from taking too much market risk via delays in switching from one service provider to another.
Standards Australia is open to approaches from individuals requesting standards. Once it receives a request it sends letters to as many people in the relevant industry as possible, outlining the suggested standard, and the given reason for standardisation. Standards Australia only goes ahead with the project if it feels there is consensus about the need for a standard.
And, in fact, as reported byMoney Managementin early March, Standards Australia is already in the process of developing a standard for financial planning.
However, David Williams, chairman of the Standards Australia committee for the project, concedes that the outcome is likely to be very different from the generic financial plans that Peter Mair wants developed.
“Standards Australia is working with the International Organization for Standardization (ISO) to develop a standard for the provision of personal financial services,” he says. “The plan is simply one part of the process.”
Finding a standard for a service is an unusual and difficult task for standards organisations, which traditionally deal with goods.
But Williams says that committees from 18 different countries have already identified the five core component parts to financial planning: process, competency, experience, ethics, and practice management. Representatives from most of the member countries will meet in Australia on April 2-3 for an update on how each committee defines those parts.
“It’s not unreasonable to say that throwing an umbrella over everything has created an unwieldy result, but calling for standardised plans ignores the fact that people are different,” Williams says. “Also, does the service stop once the strategy is done? We all have different views on this.”
The limited advice model of financial planning is already available for those who want advice in only a narrow area. The problem, as Williams acknowledges, is that planners don’t like to provide limited advice because it requires asking clients to sign a waiver and seems to put a limit on the future relationship.
Generic, specific-purpose financial plans may be a less awkward route towards the same end, although there can be legal complications. ASIC declined to comment on Mair’s suggestion.
Williams believes that a solution to the problem posed by Mair will eventually be found in legally-compliant computer software.
“To get plans in the hands of most people, I think you need to go down that path.”
Williams says one of Australia’s contributions to the ISO’s financial planning project was the suggestion that definitions shouldn’t confine the delivery of a plan to a person. That has caused some comment among committees from other countries, he says.
The development of a broadly applicable international standard does not preclude the subsequent development of an Australian standard, although Williams is optimistic that the international standard — due for delivery in 2005 — will be specific enough to raise practice standards in Australia.
Meanwhile, to give Mair the last word: “Choice in super is not objectionable, but as of now, consumers cannot reasonably get sufficient understanding of superannuation options to choose sensibly.
“A widely publicised standardised approach would see customers coming to financial planners knowing fairly clearly where they are, where they are headed and with a good idea of the current professional consensus about how to get there in good financial shape.”
