If anyone has doubts that the financial advice industry needs a thorough overhaul, they would do well to take a look at the latest shadow-shopping study of the industry by the Australian Securities and Investments Commission.
It does not paint a pretty picture. While early reports of a 97 per cent failure rate were overblown, the best ASIC could say about most financial plans was that they were adequate. Damned by faint praise.
Just two of the 64 pieces of advice it studied were rated as good (that's where the 97 per cent figure came from) and 39 per cent were deemed to be poor.
Despite moves by the government and groups such as the Financial Planning Association to lift standards and remove conflicts of interest, the old problems remain. Advice structured around selling products, a failure to address investors' needs, switching clients to "in-house" products and the use of standardised or "pro forma" advice rather than advice tailored to the client's circumstances all resulted in plans being marked down.
The study, by Colmar Brunton Social Research last year, recruited people aged 50 to 69 who intended to seek retirement advice, or had sought advice in the past 15 months. These were real clients with real financial needs and they were not directed by ASIC on where to go for advice or what sort of questions to ask.
They did, however, provide the regulator with information about their personal circumstances and copies of the advice they received. Eleven of the 64 participants also underwent interviews to get a better idea of their experience and all completed a questionnaire after receiving the advice.
This was no set-up job, as the industry has been wont to describe previous shadow-shopping exercises. The plans were judged against standards set in consultation with an expert reference group that included representatives of the advice and super industries nominated by the main industry associations. Each piece of advice was assessed by at least two ASIC analysts and if they disagreed it was sent to a third analyst or the expert reference group.
The industry had input into how the advisers would be assessed and, frankly, knew the shadow shopping was going on. So you would think advisers would have put in their best efforts. Unfortunately for consumers, ASIC hasn't named the advisers or firms that didn't pass muster, nor the two shining examples who got it right.
The best we can say is that all examples of poor advice have been referred to the regulator's misconduct and breach reporting team for further review. These weren't just "poor" plans - they failed to meet regulatory requirements.
ASIC says there was a wide range of quality within the 58 per cent of plans judged "adequate", with some just missing out on a "good" rating and others pretty close to poor.
In some cases, the poor advice left gaping holes in addressing the client's circumstances or left them worse off than before. ASIC says the 25 cases of poor advice generally occurred when the client's expressed needs and objectives were not met. Advisers commonly failed to address areas that didn't directly involve investment products such as debt.
For example, one client went to an adviser to see if their retirement finances were on track and to get an idea of when they could afford to retire and what their income would be. The adviser came up with recommendations but didn't take their existing debt into account or state that it had been excluded from his considerations.
In another case, the client was seeking broad financial planning advice but the adviser tried to exclude the impact of the client's cash flow, expenses, defined benefit fund and insurance within super from the scope of the advice. That's quite an exclusion. In other cases, advisers didn't take into account the wider implications of their recommendations on aspects such as tax, social security entitlements and estate planning.
In 11 cases, ASIC found advisers assumed a different level of risk tolerance from what the clients indicated in the personal-circumstances form they filled out for the survey. In other cases, the advised asset allocation directly contradicted the client's expressed wishes. For example, one client wanted advice on reducing risk in their super portfolio. They had a substantial balance and relatively modest retirement income requirements and didn't need to take risks to meet their objectives.
However, the adviser recommended a high-growth portfolio with the majority of the client's money in shares and property. This was not properly explained to the client, who believed their risk profile had been reduced.
In other cases, ASIC found that while the advice might have been justifiable, the benefits would be eaten up by extra fees and charges.
Not surprisingly, conflicts of interest were a major factor in reducing the quality of advice. Despite the industry's claim to be moving away from commissions, in 78 per cent of cases the adviser was paid commissions or a percentage of the amount invested. Where the advice fees were contingent on a product recommendation, it was not surprising that advice appeared structured towards selling products.
It is also not surprising that the survey found widespread replacement of existing products with in-house products from the adviser's parent company. In the 57 pieces of advice where new or replacement products were recommended, three-quarters were for in-house products.
While some of these recommendations may have been justified, the survey found cases in which a client's existing super was switched to inappropriate or more-expensive products (often in-house) without any obvious advantages to the client.
Perhaps the most sobering finding was that the majority of clients were happy with the advice they had been given. Even those who got bad advice.
No, these people aren't stupid or naive. This disparity simply confirms that they genuinely expect to be able to trust their adviser to guide them through the complex financial issues involved in retirement.
Coming reforms will help, but advisers need to do more to earn trust. Merely adequate is not enough.