Advisers fail ASIC test on plans

A SWEEP by the corporate regulator has uncovered "disappointingly high" levels of poor-quality advice provided by financial planners.

By InvestSMART · 25 Jan 2012

By InvestSMART ·
25 Jan 2012

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A SWEEP by the corporate regulator has uncovered "disappointingly high" levels of poor-quality advice provided by financial planners.

As a war of words continued yesterday over the federal government's planned reforms to financial advice, the Australian Securities and Investments Commission released the first results of a "shadow shop surveillance" of advisers last year.

ASIC, which used real consumers seeking retirement advice, revealed that of the 64 plans provided, more than a third were rated as poor, 61 per cent as adequate and just 3 per cent two good.

ASIC commissioner Peter Kell noted a "consistent failure" by advisers to talk to clients about what their retirement savings could realistically fund, with many plans containing "woefully inadequate projections" and "poor or unrealistic" technical assumptions. There was too much generic advice, Mr Kell said, and conflicts of interest remained a problem.

ASIC unveiled the results at a parliamentary committee hearing examining the government's proposed Future of Financial Advice laws. The laws, sparked by damaging investment collapses such as Storm Financial and Westpoint, will require financial advisers to act in their clients' best interests, ban conflicted payments like commissions, and boost the regulator's power to refuse or cancel financial services licences.

The government says the reforms will increase consumers' access to advice. But industry groups warn that the associated costs of the reforms $700 million, says the Financial Services Council will make advice less affordable and result in big job losses in the sector, as many as 35,000, according to the Association of Financial Advisers.

That figure was labelled "silly" by Treasury official Jim Murphy at yesterday's hearing. Mr Murphy pointed to IBIS research that adviser numbers would grow 2 per cent to 2015.

According to Rice Warner research cited by the government last year, 6800 planners will leave the industry by 2024. But Mr Murphy said that research commissioned by the Industry Super Network had factored in a ban on insurance commissions, which did not eventuate.

Industry groups, including the Australian Bankers Association, the FSC and the AFA, have pressed for changes to the proposed laws, and for their introduction to be delayed by a year to July 1, 2013.

The opposition has attacked the present laws for imposing "excessive and unnecessary" red tape.

Much of the contention centres on a new "opt in" requirement, under which advisers must send clients a renewal notice every two years, and a new requirement to send clients an annual statement of fees charged and expected to be charged.

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Frequently Asked Questions about this Article…

What did ASIC’s sweep of financial planners find about the quality of retirement advice?

ASIC’s review using real consumers found a high level of poor-quality advice. Of 64 retirement plans assessed, more than a third were rated poor, 61% were rated adequate and only 3% (two plans) were rated good.

What specific problems did ASIC identify in advisers’ retirement plans?

ASIC commissioner Peter Kell flagged several issues: advisers often failed to discuss what clients’ retirement savings could realistically fund; many plans had woefully inadequate projections, poor or unrealistic technical assumptions, too much generic advice and ongoing conflicts of interest.

What are the main features of the government’s proposed Future of Financial Advice (FoFA) reforms?

The proposed FoFA reforms would require financial advisers to act in clients’ best interests, ban conflicted payments such as commissions, and strengthen the regulator’s power to refuse or cancel financial services licences. The reforms were prompted in part by past investment collapses such as Storm Financial and Westpoint.

How could the FoFA reforms affect consumers’ access to and the affordability of financial advice?

The government says the reforms will increase consumer access to advice. Industry groups, however, warn the compliance costs (estimated at about $700 million by the Financial Services Council) could make advice less affordable and lead to significant job losses — the Association of Financial Advisers suggested up to 35,000. Treasury and other research offer more optimistic forecasts, so views differ.

What is the new 'opt in' requirement and the annual fees statement under the proposed laws?

Under the proposed 'opt in' requirement advisers would need to send clients a renewal notice every two years. There is also a new requirement for advisers to send clients an annual statement of fees charged and fees expected to be charged.

What is 'shadow shop surveillance' and how did ASIC use it to assess advisers?

Shadow shop surveillance is a testing method where real consumers seek advice and the regulator evaluates the service provided. ASIC used this approach for retirement advice last year to observe actual adviser behaviour and assess the quality of written plans given to clients.

Did research predict advisers will leave the industry because of the reforms?

Research projections vary. Rice Warner research cited by government suggested about 6,800 planners might leave by 2024, while IBIS research referenced by Treasury forecast adviser numbers could grow by about 2% to 2015. Some studies that predicted larger exits assumed measures (like a ban on insurance commissions) that did not occur.

Which industry groups are asking for changes or a delay to the FoFA laws?

Several industry groups, including the Australian Bankers' Association, the Financial Services Council (FSC) and the Association of Financial Advisers (AFA), have sought changes to the proposed laws and asked for a one-year delay to their introduction to July 1, 2013.