Concerns on retirement advice

Consumers struggle to judge whether they have received poor quality financial advice.

By InvestSMART · 28 Mar 2012

By InvestSMART ·
28 Mar 2012

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Consumers struggle to judge whether they have received poor quality financial advice.

CONSUMERS struggle to judge whether they have received poor quality financial advice, the results of a ''shadow shopping'' sweep by the corporate regulator have revealed.

The Australian Securities and Investments Commission late yesterday unveiled the final results of a secret exercise testing the standard of retirement advice around the nation, revealing a stark contrast between how consumers felt about the advice they received and the standard of that advice.

The 64 consumers that took part were overwhelmingly happy with the advice provided by their financial advisers, with 86 per cent rating it as ''good quality'' and just 5 per cent rating the advice provided as poor. About 81 per cent said they trusted the advice they received ''a lot''.

But 39 per cent of the retirement advice examples, when later reviewed and assessed by ASIC analysts, were found to be of poor quality, with 58 per cent rated as ''adequate'' and just two rated as ''good''.

''The research highlights the important position of trust that advisers are in when giving financial advice,'' ASIC said. ''Because it is difficult for clients to assess the quality of the advice, it is crucial that licensees ensure that their advisers provide good quality advice.''

The plans were provided to consumers aged between 50 and 68, who were seeking financial advice for their retirements. In 78 per cent of the advice examples, the adviser was paid through product commissions or fees based on a percentage of the clients' assets.

The release of the shadow shopping report follows last week's passing of the government's Future of Financial Advice reforms, which included a ban on commissions and a requirement for planners to act in their clients' best interests.

ASIC said the results of the sweep - some of which were unveiled in January - showed ''scope for significant improvement''. ''Our research found there are several areas where the financial advice industry needs to lift its game,'' ASIC commissioner Peter Kell said.

He said it was not surprising that consumers had difficulty assessing the advice they received, saying those who understood personal finance were less likely to need a financial planner.

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Frequently Asked Questions about this Article…

What did ASIC’s “shadow shopping” sweep reveal about retirement advice quality?

ASIC’s secret ‘shadow shopping’ review found a big gap between consumer perceptions and technical quality: 64 consumers aged 50–68 overwhelmingly rated the advice they received as good (86%) and 81% said they trusted it “a lot,” yet ASIC analysts judged 39% of the retirement advice examples to be poor quality, 58% adequate and only 2% good.

Who participated in the ASIC retirement advice review and what was tested?

The review involved 64 consumers aged between 50 and 68 who sought financial advice for their retirements. The exercise tested the standard of retirement advice provided to these everyday investors across the nation.

Why do consumers struggle to assess whether they received poor quality financial advice?

ASIC found consumers often struggle to judge advice quality because they tend to trust their adviser and lack the technical knowledge to assess suitability. The regulator noted it is difficult for clients to assess quality, which places an important responsibility on licensees and advisers to ensure good-quality advice.

How were financial advisers typically paid in the retirement advice examples reviewed by ASIC?

In 78% of the retirement advice examples, the adviser was paid through product commissions or fees based on a percentage of the clients’ assets, according to the ASIC report.

What recent policy changes (FoFA reforms) are relevant to adviser commissions and duties?

The article notes the passing of the government’s Future of Financial Advice (FoFA) reforms, which included a ban on commissions and a requirement that planners act in their clients’ best interests—changes intended to reduce conflicts and improve advice quality.

What did ASIC say the industry needs to do after the shadow shopping results?

ASIC commissioner Peter Kell said the results show ‘scope for significant improvement’ and that several areas of the financial advice industry need to lift their game. ASIC emphasised that licensees must ensure their advisers provide good-quality retirement advice.

If most consumers rate advice as good but ASIC finds many examples poor, what should everyday investors take away?

Everyday investors should recognise that consumer satisfaction and technical quality don’t always match. High trust in an adviser doesn’t guarantee the advice meets professional standards, so investors should seek transparency about how advisers are paid and expect advisers to act in their best interests.

Did the ASIC report say who is less likely to need a financial planner?

The report observed that people who understand personal finance are less likely to need a financial planner, highlighting that personal financial literacy can affect reliance on professional advice.