Financial advice: accessibility, affordability, quality

On Wednesday, 15 February, the Institute hosted a panel event where Michelle Levy discussed her recently released Quality of Advice Review Final Report.

Fellow panellist and Actuary Estelle Liu highlighted that 240,000 Australians move into the pre-retirement cohort each year. Many are desperate for advice because they’re forced to navigate a complex web of products and regulatory systems – superannuation, retirement income, social security, insurance, aged care, estate planning and more. But the number of people working to provide that advice is getting smaller, with adviser numbers dropping from 28,000 in 2018 to under 16,000 today. That is making advice more difficult to access – and more expensive.

• The cost of advice was the most common reason Australians didn’t seek financial advice. Sixty-four per cent of people surveyed agreed that financial advisers were too expensive (ASIC).

• Adviser Ratings found that 80% of Australians aged 45–54 said they need financial advice – but can’t afford it.

• Consumers are happy to pay around $800 for advice. But the average cost of comprehensive advice is well over $3,000.

As pointed out by Institute President Naomi Edwards, herself who had been a long service non-executive director, this mismatch – and others in the system – are having “catastrophic consequences” for individuals and families.

As Naomi mentioned, some miss out on significant income by taking too long to apply for the Age Pension.

Others live crimped retirement lifestyles because they fear running out of money (FORO). Yet as the Retirement Income Review pointed out, many also leave large bequests to their children. Those bequests could have funded a more enjoyable retirement if those retirees had access to advice that helped them understand the retirement income available from optimal use of their nest egg capital.

“A hot mess?”

In her keynote, Michelle Levy said the prohibitive cost of advice is just one problem with the current regulatory regime. According to Levy’s Review, the regulatory system is complex, difficult to understand and difficult to comply with – one attendee called it ‘a hot mess’. The result is advice that’s expensive, difficult to access and not of the quality Australian consumers need.

Levy’s key suggestion is to rethink the link between quality advice and comprehensive advice. As her Review outlines, there are plenty of occasions where consumers need “incidental, simple and limited advice” – for example when they receive a significant but non-life-changing inheritance.

Under Levy’s revised approach, this demand for limited advice could – and should – be met by super funds, investment houses and banks. That means consumers would get the advice they need, advice that’s appropriate for their circumstances, without excess cost.

The key to Levy’s suggested regime is a move to a focus on “good advice” – advice that is fit for purpose, relevant and aligned with the specific needs of the client.

Levy’s view is that this will result in more focused, useful advice for more consumers. If, along the way, the days of 120-page Statements of Advice are numbered, that will be welcome to both consumers and advisers. As one seminar panellist quipped, “disclosure is not the same as consumer protection.”

Points of debate

One of the most striking elements of the Twilight Seminar was the diverse range of ideas in the room. Levy acknowledged those diverse views in her opening address, noting that some critics (including Choice magazine) had already accused her of rolling back the consumer protections embedded in the 2012 Future of Financial Advice (FOFA) reforms.

Some of the Seminar panellists aired similar concerns, highlighting that many consumers are completely unengaged in their super decisions, exposing them to poor or conflicted advice under a regime and expressed a view that replacing ‘best-interest’ duty with a duty to give ‘good advice’ is a weakening of consumer protection.

Others agreed about the need for limited, ‘event-based’ advice but doubted the Review had gone deep enough into the true nature of advice, suggesting that regulation should be more closely tailored around the concept of risk to the consumer.

According to one panellist, questions like “How much life insurance do I need?” can be readily answered by super fund staff – or by a digital engine – but questions about super strategy involving a member and their spouse are complex and risky and need to be managed differently.

Safer by design?

Levy’s response was to point out that today’s consumers benefit from a whole range of additional consumer protections such as design and distribution obligations (DDO), anti-hawking provisions, bans on conflicted remuneration and enhanced executive accountability that have commenced since, or around the time of, the Hayne Royal Commission. This means the overall regulatory landscape for consumer protection is fundamentally different to when FOFA was introduced. Indeed, Levy says her Review moved a whole range of advice-style conversations into regulatory coverage, thus giving clients enhanced protection.

Levy also made the crucial point that the responsibility for delivering good advice will be with the institution providing it. This is necessary in her view given the staff delivering it are paid by the institution so accountability must rest at that level of the institution. They will be forced to deliver good advice by new regulatory structures, be encouraged to charge appropriately for complex advice and their service can often be augmented by the use of technologies including AI, online scripts and other digital tools.

A role for the robots?

The role of technology in an evolved advice landscape was another debating point for the seminar panellists and audience members who posed questions in the Q&A. One panellist pointed out that digitally-assisted advice was key to providing cost-effective advice and that all major financial institutions in the UK are on track to deliver digital advice as a strategy by 2023.

However, other panellists argued that while digital advice looks like a silver bullet, current digital advice models have limited popularity. The future role of the digital advice model is more likely to succeed in a hybrid way where they can be used to empower human-led conversation by an adviser rather than replacing it. Another powerful use of technology is enabling institutions to harness client data they already have, to tailor better, more all-encompassing advice with a personalised experience.

A bigger picture

As the brief summary above suggests, seminar attendees acknowledged the depth and value of Levy’s Review without shying away from suggestions on how to improve it. One area where there was unanimity was the belief that things need to change – and soon.

There was also a strong feeling within the room that whilst enhanced advice regulation was imperative, to reduce overall complexity and ensure alignment and consistency as well. It will be interesting to see where the Australian Government’s response to the Quality of Advice Review lands on these and many other questions.

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