Dear minister Jones,
Congratulations on your appointment as minister for financial services.
I read your early plans with both hope and trepidation about your priority to address the hot mess that is the Australian advice marketplace. I understand the weight behind your focus, considering your government's long-term agenda to raise the superannuation guarantee to 15%.
Future policy needs to recognise that financial advice has advanced far beyond outdated definitions in Corporations Act that fundamentally treats advice as a financial product.
A lot of good work has been done by many regarding the reform of financial advice.
However, these attempts to reform advice have failed to reach more Australians and provide the needed value as they are akin to making a silk purse out of a sow's ear. This has resulted in the entangled mess of red tape, which has stunted, not propelled, the necessary growth of Australia's world-class advice, superannuation and financial services industries.
Here is a possible approach to advance the advice industry:
Advice must be reclassified into four sectors.
The four sectors are different variations of complexity - as complexity is the driving reason people seek advice.
The horizontal axis dividing the sectors represents the complexity of the purchased financial product or service.
It ranges from simple financial products and services (e.g. transferring a small superannuation balance) to far more advanced financial products and services (e.g. handling complex family estates with multiple vested interests and beneficiaries).
The vertical axis dividing the sectors represents the complexity of the clients' issues seeking advice.
It ranges from simple problems, concerns and consequences (e.g. young couple seeking a savings plan) to much more severe and significant consequences (e.g. saving a marriage crumbling under excessive financial pressure).
The Supplier Advice sector desperately needs the promised red-tape cutting to create greater access and affordability for more Australians.
However, any new reform policy must also create a level marketplace that fosters competition, service differentiation and price transparency within all advice sectors, particularly the Supplier Advice sector.
ASIC must work with the advice industry to define simple products and services (e.g. mortgages, shares, savings, insurance, loans, credit cards, tax, superannuation, and property transactions of agreed balance limits and features) for distribution 'over-the-counter' via Supplier Advisers.
Individual providers, not firms, must be licensed for specific simple product groups.
Supplier Advisers will require initial and ongoing accreditation and experience to hold and maintain a license, but they will not require a university degree.
Fees for Supplier Advice can be in whatever method the client and provider agree (hourly rates, brokerage, flat fees, or fees for service). However, every sale by every client must be approved, signed and consented to by each client, with all associated costs clearly expressed in dollar amounts for the purchased services and products.
There can be no ongoing advice fees for Supplier Advice or any of the four advice sectors.
Building upon the FASEA Standards, the following Standards must be adhered to for Supplier Advisers:
- #1 (obey the law);
- #2 (act with integrity and in the best interests of each client);
- #4 (act only with client consent);
- #7 (client gives informed consent of all adviser benefits);
- #8 (maintain client records);
- #9 (all advice is in good faith);
- #10 (maintain knowledge and skills);
- #11 (cooperate with the authorities); and
- #12 (uphold and promote ethical standards).
Supplier Advisers may include accountants, financial advisers, mortgage brokers, insurance brokers, and fintech advisers, provided all adhere to accreditation, experience levels and noted FASEA Standards.
Supplier adviser firms will resemble many of today's accounting, mortgage brokering and financial planning and similar firms proudly serving their communities with quality financial products and services. These firms will become the first point of contact for many ordinary Australians currently excluded from the financial advice marketplace.
While they may exist as standalone businesses, Supplier Adviser firms may also have a division for Specialist Advice.
After the tragic 1996 Port Arthur massacre, Prime Minister John Howard was only a month into his role but managed to forge significant gun laws restricting access to advanced types of weapons.
The same logic should apply to advanced financial products and services.
Advanced and complex financial products should only be available to Australians from Specialist Advisers licensed for specific advanced products and services.
Due to the complexity of a particular product or service, financial product specialists perform a role similar to engineers and pharmacists when either the complexity of a development project or the need for certain drugs requires more than off-the-shelf solutions.
As well as the FASEA Standards being adhered to by Supplier Advisers, Specialist Advisers must also adhere to the additional Standards:
- #5 (Advice is appropriate for individual's circumstances); and
- #6 (Advice is consistent with the client's broader long term interests).
Specialists Advisers can also charge for their services in any agreed methodology (fees for service, brokerage, hours, flat fees or combination thereof) with all costs clearly expressed for every client for every transaction in dollar amounts.
Specialist Advisers may include investment specialists, underwriting experts, aged care specialists, tax experts, brokers, finance specialists, trust or estate lawyers, valuers and similar financial expertise.
Most referrals to Specialist Advisers will probably come from another advice sector - Principal Advisers.
Principal Advisers perform a similar role to medical physicians.
In Australia, medical physicians are considered the specialist general practitioner, providing a high-level specialist approach to comprehensive diagnosis, treatment and patient management.
So too, a Principal Adviser's speciality is comprehensive advice for clients simultaneously dealing with both complex life situations and complex financial services or products.
Principal Advisers will focus on specific niches of client and technical complexity.
For instance, the number and variety of client and technical complexities involved when sibling families conflict as complex estates are being distributed would probably require Principal Advice.
Principal Advisers can not have any perceived or real conflict associated with their advice when advising comprehensively and treating both personal and technical complexities. Therefore as well as the FASEA Standards being adhered to by Supplier and Specialist Advisers, these advisers adhere to the most controversial FASEA Standards:
- #3 (Not acting, referring or advising where there is a conflict of interest or duty.
Australians may only require a Principal Adviser if and when complex personal and technical situations arise during their financial lives.
Notably, the ultimate reason for access to any advice sector is primarily the agreed level of complexity to be resolved rather than the amount of wealth to be managed.
Once a client's technical complexities are resolved or reduced, those clients still confronted by non-technical, personal financial complexities may require the advice from a Mentor Adviser.
The financial services industry lacks the equivalent of a 'nurse' role.
These roles provide the day-to-day essential health role that advises on a range of technical issues but, more importantly, manages the majority of the complex personal issues faced by those unfamiliar, vulnerable and unable to best progress without external support.
Mentor Advisers are another advice sector currently strangled by excessive red tape.
While Mentor Advisers deal with less technical financial products and services than Principal Advisers, any technical product or service will have less long-term benefit without their care and advice on a client's complex personal issues.
Similarly technically accredited as Supplier Advisers, Mentor Advisers are additionally accredited and continuously skilled in client management, treatment and strategic helper competencies in their roles.
Being responsible for comprehensive personal advice, Mentor Advisers must adhere, like Principal Advisers, to all 12 FASEA Standards. Importantly, therefore, neither Mentor nor Principal Advisers can be affiliated or receive any benefits from firms providing Specialist or Supplier Advice.
Minister, unfortunately, most Australians today do not receive, have access to or perceive value in financial advice. It is primarily for those already with wealth seeking ways to protect and maximise it.
Today's advice platforms are not a fair foundation upon which to consider extending the superannuation guarantee to 15%.
Advice in Australia must become a two-way street providing access to those with or without wealth while providing the boundaries to the product and service providers on distributing their offerings for the greater good of the majority of Australians.
The majority of Australians do not require complex financial products or services for the majority of their lives. However, similar to their health, when most Australians face complex situations, proper advice and treatment become more significant.
The hard work done by many provides your incoming government with many of the jigsaw pieces to re-work our unfair and broken advice marketplace.
Affordability is too often quoted as the fundamental problem of today's financial advice. It isn't.
The problem is the systemic belief that products and advice are synonymous.
Both are very important and very different.
This confusion has built a powerful product-based industry, which is embedded deep in our mindsets, which still drives too many advice narratives, which is strangling our laws (Section 7 of the Corporations Act) and is the reason your government has inherited a burgeoning compliance industry with the excessive red tape and the ridiculous cost of simple advice.
Client outcomes, rather than supplier outcomes, have to be the focus for a better future for Australia's financial advice market.
While affordability and cutting red tape are essential, value is the new currency for financial advice.
These are the best and most important times to be in your position, minister. I trust you and your team have the leadership required.
Advice is not a product.