Major problems and significant weaknesses in a large percentage of financial advice.
LAST week legislation to introduce major reforms to the financial advice industry was passed by the House of Representatives in Canberra. Thankfully the legislation passed with few amendments despite massive lobbying by the financial advice and product industries. That these reforms are needed has been supported by ASIC's most recent examination of the quality of financial advice.
If this had been a proper exam, the financial planning industry would have failed miserably. This exercise differed from those in previous years because it concentrated on baby boomers seeking advice about retirement. In total, 64 financial planners were approached for advice.
The people recruited to conduct the shadow shop were aged from 50 to 69 and genuinely needed financial advice related to retirement and investment issues. They found and chose their own adviser and paid for the advice. Of the 64 statements of advice issued, only two were rated as good, 37 adequate and 24 poor. The adequate rating was not necessarily a pass as although the advice had some good elements, there was significant weaknesses in strategy or products.
The major problems and significant weaknesses identified included:
?Investigation of the client's personal circumstances was not fully carried out or was inaccurate
?Selling of an investment product was concentrated on, rather than strategies devised to meet the client's needs and objectives
?Clients were advised to switch investments without adequate reasons for the advice that in most cases left them worse off
?Almost one-third of the advice given did not provide cash flow projections showing the impact of the recommendations and about 44 per cent did not provide estimates of how long the client's money would last in retirement.
Because the size of the sample was not large enough, ASIC could not unequivocally state that there was a direct link between the poor quality of the device and the conflict of interest related to earning commission income. ASIC did, however, say that there was evidence the conflicts of interest harmed the quality of advice received.
It was not surprising that ASIC found that, where the fees earned related and depended on the selling of a financial product, the advice provided concentrated on the selling of financial products rather than strategies designed to achieve what the clients wanted. The focus on product-oriented advice by most of the 64 financial planning advice firms can be linked to only 17 per cent being independently owned. Of the remainder, 45 per cent were owned by banks, 20 per cent licensed by superannuation funds and 17 per cent owned by large financial planning companies.
With the future of financial advice reforms not applying for another year and given that the ASIC exercise indicates many advisers are still putting earning commissions ahead of clients' best interests, this delay provides a further year of opportunity for these advisers to feather their nest before being hopefully being forced out of the industry.
Max Newnham's Funding Your Retirement - A Survival Guide is available in bookstores and as an e-book.
Frequently Asked Questions about this Article…
What did ASIC’s recent examination reveal about the quality of retirement financial advice?
ASIC’s shadow-shopping exercise targeted baby boomers seeking retirement advice and reviewed 64 statements of advice. Of those, only two were rated as good, 37 adequate and 24 poor, showing major problems and significant weaknesses in a large percentage of financial advice provided to retiring clients.
What common weaknesses in retirement advice should everyday investors watch for?
ASIC found advisers often failed to fully investigate a client’s personal circumstances, focused on selling financial products rather than designing strategies to meet objectives, recommended switches without adequate reasons, and frequently omitted cash-flow projections or estimates of how long retirement savings would last.
How can commissions and conflicts of interest affect the quality of financial advice?
The review found evidence that conflicts of interest harmed advice quality: where fees depended on selling products, advisers tended to concentrate on product sales rather than client-focused strategies. ASIC said the sample size prevented an unequivocal causal claim, but the link between commission-based income and poorer-quality, product‑focused advice was clear.
Does the ownership of a financial planning firm influence the type of advice I might receive?
Yes—ASIC noted only 17% of firms in the sample were independently owned; 45% were owned by banks, 20% licensed by superannuation funds and 17% owned by large planning companies. The examination linked the prevalence of product-oriented advice to firms whose fees were tied to product sales, which can be more common in non‑independent ownership structures.
What financial advice reforms were recently passed and when will they apply?
Legislation introducing major reforms to the financial advice industry was passed by the House of Representatives in Canberra with few amendments. The reforms do not apply immediately—the changes are not due to take effect for another year, giving advisers and firms a transition period.
What questions should baby boomers ask their financial adviser about retirement planning?
Ask your adviser to fully explain how they assessed your personal circumstances, to show cash‑flow projections and estimates of how long your money will last in retirement, to justify any recommended investment switches, and to disclose fees, commissions and firm ownership so you can see any potential conflicts of interest.
Why did some advisers recommend switching investments even if it left clients worse off?
ASIC found advisers sometimes concentrated on selling investment products rather than on strategies tailored to client needs; where adviser fees were linked to product sales, recommendations to switch could be driven by commission incentives rather than client benefit, which in many cases left clients worse off.
Where can I find plain‑English guidance on funding retirement if I’m worried about adviser quality?
The article notes Max Newnham’s book, Funding Your Retirement – A Survival Guide, is available in bookstores and as an e‑book and can provide practical, plain‑English guidance on retirement funding for everyday investors.
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