Complexity, clarity and 'best interests'.
The financial services industry has much to recommend it; it’s complex, uncertain, frequently changing, over-regulated and highly scrutinised. These elements make it a challenging and dynamic industry, but it’s precisely these conditions that make the emergence of an advice profession both necessary and inevitable.
One should generally be sceptical of such confident predictions. In the early 2000s, at an SIA function, a Practice Management expert asked me how I felt working in a doomed part of the financial services industry. As Jim explained to me, compliance would shortly be replaced by practice management. His was a confidently expressed view of the future, and only slightly less accurate than the career advice I received to stay out of compliance because “all the work has been done”.
Neither expert was right because neither expert recognised that complex systems become more, and not less, complex over time. As structures falter, fail or threaten to collapse, most entities tend to reinforce them rather than question whether they’re necessary. Fewer still let them collapse. Unfortunately, by trying to minimise more risks we actually make the consequences of the inevitable failure much more significant. Uncertainty, fear and good intentions lead us to embrace solutions that are often far worse than the problems they’re trying to prevent.
If you need a practical example, consider the Statement of Advice. The long-promised “clear, concise and effective” SoA is seldom sighted. Academics can postulate whether it’s endangered, extinct or entirely mythical but the reality is that both consumers and advisers struggle with dense, repetitive and often incomprehensible advice documents. To better protect consumers we’ve subjected them to un-engaging templates created by lawyers, scrutinised by risk managers and finessed by compliance. Too many SoAs are documents where formal disclosure frustrates both engagement and understanding.
If you require another example, consider your “Best Interest” duty. Section 961B requires advisers to act in the best interests of their clients but, instead of asserting principles and parameters, it provides a process. It’s a reasonable process, but perhaps focusing on the outcome and effect of the advice would have been a better approach. Admittedly, s 961E introduces a requirement to exercise care and objectively consider a client’s needs and circumstances, but it doesn’t require you to ensure that your client is left in a “better position” as a result of your advice. Even the "appropriateness" of the advice is determined by reference to the process outlined in 961B.
ASIC, to their credit, have published policy articulating their expectation that advice in a client’s best interest should leave the client in a better position. The Regulator, at least, is consistently suggesting that the substance of the advice is more important than the process by which the advice was produced. Whether the Courts will endorse ASIC’s interpretation of the law is a matter of some debate. While some lawyers may dismiss this type of regulatory legerdemain as another example of “ASIC’s dark arts”, it’s a position that, despite its imprecision, should be adopted by the emerging advice profession.
I’ve long asserted that acting in a client’s best interest should always be an adviser’s goal but, because it’s an unclear and imprecise test, it should never be a formal requirement. My concern was that applying the “best interests” doctrine to financial product advice, even within a narrow legal definition of financial benefit, was likely to create obligations and uncertainties that would ultimately harm consumers. Arguably, one can formally comply with s961B and still provide recommendations that, on balance, deliver short term benefits that hide long term harm. ASIC’s recent reports on advice have proved the reasonableness of this apprehension.
Consider insurance within superannuation; it provides a means for consumers to obtain essential levels of life insurance, TPD and income protection without impacting their cash-flow. However, it’s not free cover, and the premiums can, over the long term, and in the absence of effective management, significantly erode the client’s retirement benefits. Unfortunately, s961B provides little guidance on which outcome is in the client’s best interest.
Experienced Advisers understand that process is a poor substitute for ethics, expertise and empathy. Perhaps acting in their client's best interest should simply require an adviser to show that the benefits of implementing their recommendation are, on balance, greater than the costs and consequences of not doing so (and materially greater than the benefits received by the Adviser).
FOFA was presented as a significant reform of our industry but, in many respects, it’s proved a wasted opportunity. Good advisers were already exceeding the somewhat rudimentary requirements of 961B and others have found that adopting, or appearing to comply with, formal processes removed the need to fundamentally change their approach. Unfortunately, the rhetoric of change conceals the fact that the underlying problems of conflicts, capability and culture have not been addressed.
Neither legislation nor regulation can change the nature of the financial planning industry but change is possible, even if it is both difficult and uncertain. The emergence of an advice profession is, however, entirely dependent on those who can conceive and create an industry less constrained by structural and commercial conflicts and more focused on duties, independence and substantive outcomes. Process and formal compliance will continue to matter but, even in the face of great complexity, they’re far less important than empathy, objectivity and genuine concern.