a few minutes ago, I finished speaking by phone to the son of a long-standing client. Our client’s son is 23 years of age and is in his first job, having completed university earlier this year. Rob is the type of, seemingly all too rare, committed Australian saver who the Federal Government should be welcoming into the workforce with broad, open arms.
In his own words, Rob wants to get started “on building a solid financial foundation for my future”. What more could the Government and his parents ask for? A young Australian committed to becoming financially independent with all the benefits it will bring him and, while this is not at the top of his mind, the tax it will save future governments and tax payers.
Rob has $6,000 in savings, a job that pays him $35,000 a year, plus the compulsory 9 per cent in superannuation. He needs to buy a car, and will also need to accumulate a cash reserve for those emergencies that will inevitably come along. He has some shares that he bought when he was 16, which have done quite nicely for him, and a managed share fund.
He should be thinking about insuring his income and the contents of his flat. His work super will generally give him a minimum level of life insurance and, really, he needs a will and should perhaps also think about granting his parents power of attorney. Then, of course, he also needs to contend with superannuation choice and, in not too many years down the track, might want to buy a home of his own.
The cost of advice
Rob wants my firm to provide him with advice, but that’s where the Financial Services Reform Act (FSRA) starts to get in the way of him achieving his initial objectives. In an ideal world I, like any Certified Financial Planner, could advise Rob verbally on what he should be doing at his young age, in a 90-minute meeting.
However, under FSRA, he and I need to meet and complete a questionnaire, and then we need to prepare written advice for him, followed by a second meeting to present the advice. Again, ideally, there should be a third meeting after he has considered the statement of advice (SOA). Added to this will be, say, 30 minutes of time following each meeting to write a file note as a record of the conversation.
A conservative tally of the hours involved totals over $1,000 plus GST in costs for Rob. While this would likely represent close to break-even for the business, for Rob it is a huge cost that will rip into his hard earned savings. This strikes me as a perfect example of where a puritanical view of charging at an hourly rate would simply be a case of gouging fees.
Some would argue that it is an investment in his future but right now for Rob, and possibly thousands like him, it’s just too expensive to get professional financial planning advice. He has his heart set on getting advice, but the cost just acts as a disincentive.
For all the good that was intended with FSRA, there is a lot to be said against the more deleterious aspects of the legislation. Pushing up the cost of advice through compliance bureaucracy is top of that list. Couple FSRA with superannuation choice and many hundreds of thousands of younger Australians now face, legislatively enforced, the uneconomic need to get advice on superannuation fund investing.
The younger generation
The Australian Securities and Investments Commission’s (ASIC) recent 12-page model SOA is an interesting document which, while commendable for its achievement in delivering clear, concise and effective advice, is still short of being a cost effective antidote to Rob’s need for advice.
The point is that we — financial services and ASIC — need to find a way to deliver advice to the new entrants in the workforce that is clear, concise, effective and economical.
These same young people are witnessing their retired grandparents endure the financial rigors of retirement, and seeing their parents worry about looming baby boomer retirement. They know that, for Nanna and Pop, compulsory superannuation just didn’t exist in their younger years, and the Superannuation Guarantee came all too late for Mum and Dad. They want none of that worry for themselves and, sponge-like, absorb as much financial information and knowledge as they can.
Financial literacy
In this regard, the Government’s initiative in establishing the Financial Literacy Foundation is a wonderful start to giving people a basic financial skills toolkit. It shows recognition that too many Australians fail to have simple financial comprehension faculties.
Over time, the end result of the foundation should be that people are more aware of basic financial matters and, possibly, they will also instinctively know, like Rob, to seek professional advice as they begin their working lives. Financial services should be legislatively equipped to meet what will be a growing demand for advice from new entrants to the workforce.
There is some lack of equivalency in this analogy, but Rob’s desire to get advice at a price he can afford could be compared to the difference between a stock standard $150 two page will and a two centimetre thick, $2,000 testamentary trust.
While it may be too rudimentary for some, perhaps a standard, handwritten, menu-driven advice format could be one solution. A form of written advice that could be completed during a single consultation and has legislative protection for the licensee.
The impact of FSR
Sadly, the overly burdensome aspects of FSRA, which inhibit the delivery of affordable advice to younger Australians, will not rid financial services of criminals who steal their clients’ money, and it will not ensure that all advice given is entirely appropriate for all clients. Such advisers will always find a way to circumvent the law no matter where they live in the financial services world. Indeed, it was the Greek philosopher Plato who reputedly said “good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws”.
As for Rob’s need for advice, in this instance we’ll find a way to get him the FSRA complying advice he needs at a cost that makes sense to him. We will simply wear the time cost losses, mindful that business is not always about the bottom line.
If not, however, for the dozen years of professional dealings with his parents, we would not be able to afford him such a concession. It would be a much better outcome for both parties, however, if the law made it possible to give him advice in a more cost effective manner.
Ray Griffin is a Tamworth-based planner and former chairman of the Financial Planning Standards Board International CFP Council.
