PORTFOLIO POINT: ASIC’s latest 'shadow shopping’ report on the financial advice industry is a damning indictment of the quality of advice received by many clients.
The reaction from financial advisers to ASIC’s latest 'shadow shopping’ report on the industry was both predictable and revealing.
But firstly, some background: ASIC’s report analysed the advice given to clients aged between 50 and 69, who in the previous 15 months had independently sought financial advice about retirement. ('Shadow shopping' refers to the technique of analysing advice given to real clients, without their financial advisers being aware of the survey).
For anyone considering getting financial advice about transition to retirement, Centrelink pensions, allocated pensions, salary sacrifice or debt reduction versus pensions, whether in an SMSF or a public-offer fund – this is a must-read document. Here’s the link.
Comments from advisers such as “[I’m] staggered with the arrogance of ASIC” and “It’s not what ASIC thinks; it’s what the clients think [that matters]” suggest something pretty scary. The message is that many financial advisers believe they only need to be liked by their clients – they don’t actually need to help them.
If you assume ASIC is a reasonably unbiased judge (they need to weigh up the best interests of customers against their ongoing role as the policeman for financial advisers), then their report is pretty damning.
ASIC’s top-line findings (based on a total of 64 usable responses) were:
- Just 3% of advice was considered “good”.
- 58% of advice was deemed “adequate”.
- 39% of advice was rated “poor”.
When “poor” advice outweighs “good” advice by 13 to 1, there’s cause for alarm. But of greater concern, ASIC highlights, is that 86% of respondents believed that they’d been provided with good advice.
So, why do those who are considering retirement need to read the report?
ASIC clearly outlines what it wants to see in a “statement of advice” (SoA), the written document that must accompany financial advice. This includes a thorough investigation of a client’s current situation and good communication, as well as coaching from the adviser about realistic goals in retirement.
Most importantly, ASIC wants to see strategies that enhance a client’s retirement, which would include strategies such as transition to retirement, starting pensions, rolling back pensions, use of defined benefit funds, structuring of assets for Centrelink purposes, estate planning and taxation considerations.
Only six advisers (out of 64) received a 'good’ rating on strategy, with four of them subsequently letting their clients down over issues such as poor product recommendations.
What ASIC didn’t want to see (and clearly saw too much of) included: flogging of unsuitable or unjustifiable higher-fee products; sausage factory pro-forma advice documents; unnecessary product switches; debts and defined benefit funds being ignored, because they were too hard to deal with; strategies that left the client worse off; and investment risks not matching the client’s stated risk profile.
There were four cases where an SMSF had been recommended to clients. Three of those recommendations weren’t justified, according to ASIC.
“Problems identified included recommendations to start an SMSF where the client’s funds were unlikely to make this an economically viable option, and cases where the basis for recommending the commencement of an SMSF, instead of using a public offer superannuation fund, was not explained.”
So, what constitutes good advice in the area of retirement and income streams?
Financial advice should start with the completion of a proper “financial analysis”. At the very least, an adviser should have enough detail of the client’s income, expenses, assets and liabilities, along with their aims and what they’re seeking. The adviser then needs to lay out the “scope of advice”, or exactly what will and won’t be covered, and why.
There needs to be sufficient discussion of the client’s risk profile and tolerance to risk.
Simply, if an adviser doesn’t ask enough questions about you, get you to fill in enough detail on forms, and doesn’t discuss with you the relative dangers of shares and property over fixed interest and cash, then doing a good job on the rest is going to be difficult.
Although only two out of 64 SoAs were rated as “good”, plenty of others almost made the grade but let themselves down in an area or two.
Focus on strategy
ASIC was pretty clear that the best way customers can be helped is through good strategy.
Sometimes the 'strategy’ is about number-crunching and telling a client something they might not want to hear, such as: “you don’t have enough to achieve the income in retirement that you want to achieve”. Or, more importantly: “if you go on spending like you are, your money will run out in five years”.
The sorts of strategies that clients need from their advisers are those that will increase their retirement nest eggs, or better place them for retirement. I’ve mentioned some of those strategies above.
Often, the best advice may be to use super to pay down debt, because the relative return is going to be better than super could hope to achieve.
One example was highlighted by ASIC. The client wanted to reduce the risk in their portfolio. They had a substantial super balance and modest income needs – that is, they had enough to fund their retirement.
“However, the adviser put a high-growth asset allocation in place, with the majority of the client’s retirement funds in shares and property. While the SoA stated the investment mix, the asset allocation was not sufficiently highlighted or explained to the client, who believed that their risks had been appropriately adjusted.”
Consideration of alternative strategies
There is always more than one way to skin a cat. Advisers are required to give you some of the alternatives that they considered; they might have discounted those alternatives quickly, but they need to tell you what they are, and why they didn’t think they suited your requirements.
Replacement with in-house products
About 83% of the advice investigated was from a major bank, super fund or major financial services institution.
“We saw widespread replacement of existing financial products with 'in-house’ products. In this study, when replacement products and new products were recommended to research participants (57 advice examples), almost three-quarters were for 'in-house’ products. Eleven of the 14 advice interactions with advisers from one of the 'big four’ banks (or their financial planning divisions) resulted in an in-house product recommendation.”
This is where financial advisers with at least some degree of independence have an advantage. Independent advisers might have their preferred products, but their ties to them are usually substantially smaller.
Conflicted remuneration structures
ASIC also pointed out that there was a link between the quality of advice and remuneration structures. But it also noted that the review was undertaken last year, and some of its concerns would be addressed by the FoFA reforms (for more on this, see my column FoFA: what happened?)
The biggest chasm
This is the difference between what ASIC thought was good advice (3%) and what clients thought was good (86%).
Financial advice can be very complex and ASIC stated that clients simply didn’t have the financial knowledge to determine whether the advice they had received was good or not. If they were sufficiently knowledgeable, they were unlikely to seek out an adviser.
The saddest element of the report is the comments at the top of this column from advisers. For advisers to claim that what the client thinks of their advice is all that matters is an indictment of their level of expertise. ASIC’s decision to discount that largely positive feeling from 'clients’ makes complete sense.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser, as some of the strategies used in these columns are highly complex and require high-level technical compliance.