Scaling back advice

The idea of scaled advice has attracted a degree of controversy in the last few years, much of it bound up in the former Government's packaging of its Future of Financial Advice (FOFA) reforms. 

In isolation, the concept of advice that is limited in scope is not without merit, particularly as the industry moves to improve the reach of financial advice.

In fact, a third of Australians would prefer piece-by-piece advice to a comprehensive plan, according to research by the Australian Securities and Investments Commission (ASIC). 

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However, what precisely constitutes scaled advice, and how advisers can incorporate it into their existing service offering, has been slightly more confounding.  

Critics say the definition has been unclear, while some feel the concept challenges or even reinvents advisers' traditional approach to advice.  

The confusion was pointed out in a 2011 explanatory memorandum to the FOFA Bill, which said advisers were unsure how much work scaled advice entailed.  

"There is also uncertainty over the ability for providers and clients to agree on the scope of scaled advice," it said.  

But that's not where the resistance ends.  

According to owner of The Fold Legal, Claire Wivell Plater, the scaled advice proposition challenges advisers' long-practised "diagnostic" approach to client relationships.  

"Advisers are used to solving all of the clients' problems, they think that's their job but it's not necessarily unless that's what the client wants," she said.  

"My experience of advisers is they've been a little bit like doctors in a sense." 

Wivell Plater attributed this adviser trend to the way dealer groups train their staff, with a skew towards holistic advice.  

"The skills required to operate in that matrix are skills they haven't been taught¬ Ultimately it will be a culture and professionalism issue," she said.  

Early challenges 

One of the issues with scaled advice that's been most contentious is around how to uphold the client's best interests within a limited scope.  

Despite being promoted as one of the pillars of the FOFA reforms, the definition of what scaled advice entails - and requires - has been vague at best.  

When it was introduced in Bill form, the former government said "the scaling of the advice by the provider must itself be in the client's best interests, especially since the client's instructions may at times be unclear or not appropriate for his or her circumstances".  

So how does a planner execute that advice, in a cost-effective and quick manner, without potentially misunderstanding their client's situation? How much groundwork do they have to do beforehand? 

The answer was no simple equation, according to ASIC. The regulator cautioned advisers that opting for limited advice does not mean the expected standard is any lower and would still require an investigation of circumstances on the part of the adviser.  

It said advisers needed to spell out whether or not they have used scaled advice in a Statement of Advice (SOA), what has not been provided, the implications and why they have taken such an approach.  

As the Financial Planning Association's (FPA) general manager of policy and conduct, Dante De Gori, pointed out "the obligation to actually identify the client's financial situation, needs and objectives is still paramount both in scaled advice and holistic advice; there is no difference".  

Nonetheless, the question of how the best interests duty fits, and to what extent the adviser has to delve into the client's financial situation, divided the industry.  

Certain other stakeholders, like the Insurance Brokers Association of Australia, questioned why advisers would have to thoroughly scrutinise the client's finances before giving advice and called for change on that provision.   

Others, like consumer advocacy group Choice, opposed removing the provision to ask questions about the client's financial history, saying it could encourage advisers to bypass or "contract out" their best interest duties.  

But according to the Financial Services Council (FSC), an adviser could still agree with the client on the scope of the advice, and maintain their best interests, without doing a "full fact find".  

After a lengthy consultation process, a Senate standing committee into the issue earlier this year confirmed that the definition was not clear enough and needed to "unambiguously" spell out best interests obligations.  

The key change for advisers is to warn clients that the advice that they are providing may be incomplete or based on inaccurate information.  

"The best interests duty, all it requires is that the advice is fit for its purpose and that it's appropriate for the client. So long as you've agreed for the client what you're going to be doing for them, then you should be able to deliver advice within that," Wivell Plater said.  

The committee asked the Government to keep a close eye on the process and possibly intervene if it feels best interests duties are not being met.  

Scaled advice at work 

Despite initial confusion, once the scope is agreed between adviser and client, it's a fairly breezy transaction, according to providers.  

If the client knows to arrive prepared, it should only take one hour, according to AMP Financial Advice Network director of advice and licensing Simon Wallace.  

"For very simple transactional type advice, the adviser and the client can do only one meeting on the basis that the client brings the right information to the meeting," he said.  

However, that timeframe hinges on the client knowing what the process is and what they want to discuss, he added.  

"In the very first meeting that the client has with the adviser, the adviser must explain the process. We often find if the client's happy to sit down and go through that process, they are happy to know that there's a plan." 

Wivell Plater said it requires great discipline from the planner to keep the meeting on topic.  

"Of course what happens is you tend to go from one box to another very easily and then all of a sudden you've gone from general to personal, or you're dealing with one issue and then you touch on another and you have to decide whether that's in scope or not," she said.  

As a consequence, Wivell Plater said advisers tend to resort to the holistic advice model out of comfort and habit.  

"What we tend to see happening is that advisers find that sort of breakdown somewhat challenging because life isn't that simple when you're talking to clients and so they feel safer giving full advice. 

"What's interesting about that is that the reality is almost every statement of advice you see is not full advice. You often see a situation where the adviser determines what they're going to advise on rather than the client and they leave out the bits that they can't or don't want to advise on at a particular point in time. Alternatively they decide to deliver the advice in stages and all of that is scaled advice." 

For Proviso CEO Cameron O'Sullivan, who frequently employs scaled advice in his practice, it's not too challenging to stay on track.  

He said scaled advice has improved efficiency in his business model and encouraged planners to be more goal-driven, than strictly investment advice-driven.  

"We were like a lot of planning practices where we previously used the reports that came out of the platforms that we used and they are by their very nature quite investment performance focused¬ then what you end up talking to your clients about is what investments you're going to change. Suddenly you go from being your planner to almost being by default an investment adviser," he said.  

"The reality is for most planners that that's not really the core of what they do. What they're really there to help you with is goals and adapting your plan to those."  

When asked if scaled advice would reduce follow-up business for the planner, O'Sullivan said he doesn't think so.  

"I think scaled advice has a huge place to play in the ongoing review and service capability of clients." 

He went further to say that the future of advice lies with a primarily scaled model.  

"The scaled advice tool should generate somewhere between 70 to 80 per cent of SOAs," he said. "That doesn't mean they will be single issue¬ (but) true comprehensive advice with difficult modelling will be something that you do rarely." 

Wallace disagreed and said scaled advice still has to find its place within a holistic rubric.  

"To me it still needs to be the entrée to a more lasting relationship. We really want it to be the start of an ongoing relationship," he said.  

But Wivell Plater said it should be dictated by what the client wants.  

"If the reality is the demand is in piece by piece advice, then why is the business not training the adviser in how to do that? 

"Think about the services you want to offer the client and how that will benefit both the client and the business," she said.  


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