Don’t mind the gap: Why a two-tier advice system will work

By Natalie Dolan

From reading some Quality of Advice Review submissions, compliance managers have been left alone to respond to Treasury. Business leaders must take charge to stop the industry from getting stuck in the weeds and missing an opportunity for visionary reform

Simplicity and flexibility are foreign concepts in financial services yet they are the hallmarks of Treasury’s Quality of Advice Review interim proposals.

Advisers have become so used to regulatory complexity; many are baulking at proposals designed to make their life easier.

This is evident reading some submissions to the advice review proposals paper.

Their hesitance to fully embrace Michelle Levy’s proposals has been the most interesting of reactions. The staunch objection of consumer groups and enthusiastic support of product issuers has been largely expected but it seems advisers are perplexed by Treasury’s shift to more principles-based regulation, despite fighting for it.

Most intriguing is their reluctance to completely abandon Statements of Advice and replace Best Interests Duty with the simple requirement to provide “good advice”.

Their concerns are legitimate.

Giving product issuers the green light to provide personal advice with very few controls is a scary thought.

There are concerns the divide between relevant providers (financial advisers) and non-relevant providers (customer service representatives) is too wide.

Even the Financial Services Council is calling for customer service representatives to hold minimum education and training standards, preferably a subset of the qualifications required of professional advisers.

But the chasm between relevant and non-relevant providers is not a dangerous consumer hazard. It’s more like a flashing sign that will make it easier for consumers to distinguish objective, holistic advice from the restricted, conflicted type.

The bigger the gap the better, as seen in the UK’s regulatory model where there are independent advisers and restricted advisers, with clearly defined roles and labels.

This delineation supports consumers to understand what they are getting and what they’re not.

It also supports professional financial advisers to articulate their value proposition and points of differentiation.

There should be no middle ground.

The industry has worked hard to lift standards of professionalism, education and training. Introducing a mid-tier adviser, perhaps one that is only Diploma qualified, would be a greater threat to that progress than an unskilled customer service representative.

History has proven as much.

It is clear from both Levy’s proposals and her subsequent comments that she sees financial advice as a profession.

Levy is seeking to give advisers the same professional benefits she enjoys as a lawyer, such as the discretion to take simple notes and provide good advice without formal documentation.

She has come into this review with an open mind and an understanding of what works in other professions.

Her proposals signal the rise of a two-tiered system of relevant and non-relevant providers.

This model exists in other developed markets. On one hand, there are financial advisers who provide comprehensive advice and act as fiduciaries. On the other, there are vertically-integrated employees who provide product-related advice.

The advice industry should avoid selectively supporting the advice review proposals and, instead, look to support them in their entirety and give it a go.

With another round of consultation expected before the final report is due in December, the responsibility for evaluating and responding to proposals should not be left to compliance managers alone.

Boards and business leaders should lead the discussion to avoid the tail wagging the dog.

Unlike previous reforms, where there have been clear losers (usually advisers), everyone stands to benefit from the review.

Consumers will get better access to affordable personal advice. It may be limited in scope and related only to the product they are already in, but it will meet a need, at a point in time.

Product issuers will be able to better serve their customers by confidently answering personal product-related questions.

Financial advisers will be able to exercise their professional judgement when assessing a client’s needs. They will be able to provide personal advice without having to meet overly-burdensome compliance obligations.

While the advice industry has been conditioned to focus on the worst-case scenario, the advice review is an opportunity for optimism to triumph over fear.

Read more of Paul Barrett’s articles in Professional Planner.

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