Intensive regulatory reform has been a fact of life for providers of personal financial advice for more than a decade, since the introduction of Financial Services Reform (FSR) in 2002. So what do we have to show for it? If the results of ASIC’s shadow shopping exercises are anything to go by, the quality of financial advice certainly hasn’t improved during this time and the proportion of people accessing personal financial advice remains low.
Paying for financial advice
The introduction of the Future of Financial Advice (FOFA) reforms should go some way towards lifting the overall quality of financial advice, but only if licensees make considerable additional investment in the training, accreditation, supervision and monitoring of their financial advisers to ensure that ‘best interests’ are implemented accurately and consistently. Unfortunately, this investment is likely to push up the cost of financial advice, which already represents a significant barrier to access. The average holistic advice fee of $2,550 represents nearly 6% of an Australian’s average annual earnings after tax. Funding an expense of this magnitude out of an already tight household budget is a difficult decision, further complicated by behavioural biases that tend to undervalue the future benefits.
Much has been made of recent experience in the United Kingdom following the introduction of similar reforms, where banks replaced their low-end financial planning networks with information, education and execution-only services. High-end independent and boutique advisers have flourished, serving clients who are willing and able to pay for the best possible advice.
This is not to say that the industry hasn’t attempted to make financial advice more accessible to their broader client group. Paraplanning, better use of technology and new delivery channels, including telephone, video and email, have all contributed to improvements in financial adviser productivity. Industry funds, in particular, have made impressive inroads with the delivery of financial advice to their members. While specific regulatory provisions for intra-fund advice may have been the catalyst, industry funds see financial advice as a way to improve member engagement and fill the increasing void left by upscale advisers.
Of course, intra-fund advice has its limits. It doesn’t address the consolidation of multiple super accounts or consider whether the member might be better off with another super fund. However the alternative of spending thousands of dollars on comprehensive financial advice, the quality of which will be highly dependent on the individual adviser, simply does not make sense for the vast majority of Australians.
Many advisers would argue that there isn’t much more they can do in the absence of specific regulatory provisions that delineate between the different ‘flavours’ of personal financial advice – intra-fund, specific and holistic. Their reticence is probably somewhat justified given the wooden stick ASIC has generally applied to past efforts by the industry to move beyond comprehensive advice. However, the introduction of FOFA does provide a limited window of opportunity for the industry to work collaboratively with ASIC to deliver the next generation of personal financial advice tools.
Many of the innovative technology concepts successfully applied in other industries could potentially be leveraged to deliver guided financial advice journeys that engage clients as their financial needs evolve. Importantly, such technology could also underpin the delivery of a more consistent and compliant financial advice experience.
Next generation of advice tools
To be successful, the next generation of personal advice tools will need to be seamlessly embedded within existing client-facing applications, including online banking, online broking, superannuation and SMSF administration. This integration offers several benefits, including a reduction in data entry (your bank already knows your income and home loan balance) and seamless online support for recommended financial products. Clients could choose to access these tools either directly (online or through a mobile device), with guidance or support from front-line staff (face to face or over the telephone), or in a more traditional advice context.
Filling in lengthy questionnaires is a daunting prospect and is likely to elicit high rates of non-completion or drop-out from clients. This problem can be managed in two ways. The first is to limit the extent of data entry to only essential areas and pre-populate fields with existing data where possible. The second approach involves the use of Census data and other survey information to build a composite picture of the user based on information such as their income, age and where they live. This composite picture can then be used to populate remaining questionnaire fields, providing the user with a starting point from which they can refine their responses as required. The next generation of financial advice technologies will also frame user choices in a way that guides them to outcomes consistent with their best interests. This form of nudge theory is based on behavioural economics and has been successfully employed in the United Kingdom to deliver a 15% uplift in the timely tax lodgement response rate following communications from the tax office.
Existing technologies do not readily support the structured and systematic capture of financial advice data – such as client circumstances, needs and recommendations – in a useable manner. As a result, the systems cannot currently apply a series of business rules that allow funds to evaluate the advice, understand which strategies have proven most successful with client groups, or identify trends or potential biases in the advice being provided. The next generation of advice tools will need to make better use of all client data to help drive improved financial advice strategies, monitor compliance, evaluate risks and support the continuous evolution of business and decision support rules.
Revolution in the application of technology to the delivery of financial advice, in all its different forms, is critical if the issues around quality and access are to be meaningfully addressed. A generation of consumers has grown up accustomed to sophisticated and integrated online experiences enabled by the likes of Facebook, Google and Apple. Why should they have to settle for an abacus when it comes to financial advice?
Jeroen Buwalda is a financial services partner for Ernst & Young Australia. Maree Pallisco is the national superannuation leader for Ernst & Young Australia.
The views expressed in this article are the views of the authors, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.