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.