Being an NPC is risky business

By Natalie Dolan

Advisers are very comfortable with the concept of risk when it comes to investing. They understand that exposure to risk increases the probability of a client achieving their long-term goals, hence most diversified portfolios hold a sizeable allocation to growth assets.

Yet, when it comes to business (often an adviser’s largest investment), many actively avoid risk (which is a risk in itself).

This is arguably because they are accidental entrepreneurs.

Many advisers stumbled into financial planning and set up their business at a time when the barriers to entry were very low. They are great at helping clients grow, manage and protect their wealth but when it comes to seizing opportunities to grow their business, many are paralysed by fear and inertia.

Round upon round of regulation will have that effect.

As a result, advisers are increasingly acting like non-player characters – otherwise known as NPCs – to use a gaming analogy courtesy of my teenage sons.

Those of you with teenagers of your own will probably already be familiar with the acronym NPC. It’s a barb used to highlight a person’s irrelevance in a situation. NPCs exist only on the periphery. They don’t make autonomous decisions or influence outcomes.

But the government’s Quality of Advice Review presents an opportunity for regulators, policy makers and businesses to expand their risk appetite in order to help more Australians and, in doing so, build a stronger financial advice sector.

The resistance some recommendations have faced is a sad reflection of this country’s attitude toward risk.

Compare our traffic rules and speed limits against the autobahns of Europe.

The German government recommends a speed of 130 kilometres per hour on autobahns but there is no official speed limit. Drivers self-regulate and determine their own speed.

In Australia, on the other hand, strict speed limits apply; typically around 110 kilometres per hour on freeways.

Australians have been conditioned to believe that the higher the speed limit, the greater the risk of accidents and casualties but a 2020 report by the Australian Department of Infrastructure & Transport found Australia recorded a higher number of road fatalities than Germany.

Looking at the road safety performance of 36 Organisation for Economic Co-operation and Development (OECD) nations, Australia was ranked 20th with 4.26 motor accident deaths per 100,000 population compared to Germany’s tenth place with 3.27 motor accident deaths per 100,000 population.

The data shows that with the appropriate guardrails, wider risk parameters are not necessarily more dangerous.

Conversely, conservative policy settings do not guarantee fewer accidents.

As the QAR final report stated, the current regulatory framework “has not even proved effective in preventing consumer harm”.

According to the QAR, existing consumer protection legislation already provides the necessary guardrails but must be regulated more effectively.

Under current laws, financial services providers are obligated to act efficiently, honestly and fairly, and only design and distribute financial products that are likely to be suitable for their customers. They cannot accept conflicted remuneration for investment products and must act in their clients’ best interest. The law also prohibits the unsolicited selling of financial products, and there are significant breach reporting obligations and penalties for non-compliance.

Within those broad and reasonable parameters, advisers can determine how they go about their business.

They can innovate and try new things to reach more people. They can expand their value proposition and invest in systems and technology to drive efficiencies.

Unfortunately, the advice industry’s inability to independently interpret legislation has led to an over-reliance on regulators, licensees and lawyers for guidance, despite these groups having a vested interest in making things complex and a tendency to focus on everything that might go wrong.

The result has been a highly prescriptive regulatory framework and NPCs who robotically follow the rules even if it defies common sense.

There can be no better example of this than the increasing number of advisers sending clients elsewhere because they can’t find a way to help them.

However, the recent announcement by the Minister for Financial Services Stephen Jones of the government’s plans to implement 14 of the 22 recommendations made in the QAR final report, is an opportunity for advisers to become ‘Player 1’ and make decisions to gain a strategic competitive advantage.

With the regulatory burden set to ease, advisers will have greater autonomy to use their minds, training and experience to make smart, calculated moves to advance.

While the government is taking its time to consider the remaining recommendations, entrepreneurs should not be deterred from taking greater risks to serve their clients better.

QAR has been important for many reasons, the least of all being that it has challenged the industry to think outside the box and reimagine the future. It has painted a picture of what can be achieved with broader risk parameters.

Read more of Paul Barrett’s articles in Professional Planner

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