Mindsets, profiles and preferences
Given my experience, I’m frequently asked to recommend a “good adviser”.
This is not a simple question to answer, because most compliance arrangements are simply designed to manage regulatory risk; generally, and with varying degrees of success, they identify process failures and documentation errors.
Relatively few have the scope and granularity to actually focus on outcomes, advice quality and advice process. Fewer still have the capability to objectively and consistently assess financial advisers and the advice they provide. But I believe that Compliance, as a strategic management discipline, should provide the data and insight to recognise, promote, embed and encourage exceptional advice practices. I’ve addressed the “red flags” in a previous post, but what are the “green lights” that are equally important and should serve to reassure clients and potential clients?
- How, in the absence of a specialised compliance system, can Consumers and Compliance experts identify great advisers?
- What simple rules of thumb can help them separate the wheat from the chaff?
I think there are seven indicators and I’ll address these in detail below.
The stark reality for financial services professionals is that while many Australians would significantly benefit from receiving financial advice, relatively few ever seek or receive the financial advice they need. Cost, complexity, inconvenience and apathy all play their part, but consumer apprehension, the fear of being “ripped off”, is also a significant contributor to this outcome.
Unfortunately, the extensive media coverage of the Couper case, CBA and Commonwealth Financial Planning (covered on this site as Couper: An Insider’s view and Gliding Over All) has increased consumer apprehension and undermined public confidence in the financial planning profession.
While I believe it’s important to appreciate the critical impact of structure and conflict, I also think it’s dangerous to generalise from specifics. Financial advice can significantly improve the quality of people’s lives. The challenge for the industry is to not only make financial advice more accessible and more affordable but to restore public confidence in the integrity and competence of financial advisers.
The real value of advice
Thankfully, the Financial Planning Association of Australia continues to courageously advocate for the profession. Even though their efforts are often drowned out by a seemingly relentless focus on conflicts, commissions and vertical integration, they continue to lead reform and promote the value of advice.
One thing I can confidently say, based on my personal experience with over hundreds of Licensees and even more advisers, is that there are some exceptional financial advisers operating in Australia. The challenge for most consumers is how to find these advisers.
This article won’t provide personal recommendations, but it will outline seven practical considerations that would help identify a better financial adviser. Individually, none of them is sufficient, but together these seven aspects will help weed out the pretenders and point consumers in the direction of the professional advice they need.
I’ll cover the detail in a series of posts, but before a Consumer commits themselves to a particular adviser, licensee or financial strategy they should consider:
2. Education, skills and knowledge
3. Business model
4. Advice (Benefit and Process)
5. Engagement (Confirmation and understanding)
6. Willingness to provide “Tough Love”
7. Transparency (Documents and proof)
This is generally the default consideration for most consumers who need advice; they do an online search, look for social proof (either through social media or referrals) or find an adviser known to friends or colleagues or associated with a known and “trusted” brand. In any event, their selection process is influenced by the adviser’s reputation. But a public reputation (even a reputation for likability, performance, competence, honesty or credibility) is a poor indicator of quality; it’s a trailing indicator and one subject to both confirmation bias and to the commitment and consistency principle – particularly for services that defy easy assessment.
Unfortunately, there’s seldom a positive correlation between good quality and a sound reputation; even industry accolades are not sufficient. However, there is generally a positive correlation between poor quality and a poor reputation.
In fact, research confirms that most decisions to proceed are based, primarily, on the results of the initial on-line search search. While one might criticise this approach – and an over-reliance on recommendations and endorsements – as superficial due-diligence the consequences and implications of this need to be appreciated. Not only is an online presence very important for advisers but the quality, construction and currency of the website are critical.
In reality, social proof [ii] is becoming an increasingly important part of consumers’ selection and engagement processes. According to Digital Marketing experts, Tipping Point, a digital information search is a critical and ubiquitous component of the modern consumer’s decision making process; most consumers routinely validate their buying decisions (or crystallise their preferences) through internet searches, a review of the Provider’s website and by reference to their own social networks.
So even those advisers who consider their website to be nothing more than an on-line business card need to appreciate that their website (including their blog posts, website and tweets) will be used by consumers in their decision making process to understand the adviser and assess their credibility and capability. This is true even in the absence of other social proof of credibility and capability such as client reviews, endorsements and client recommendations.
WARNING: Recommendations are becoming increasingly powerful instruments of social proof and consumers should be cautious not to confuse likeability with either competence or integrity. Likeability is a powerful influencer but it can work to a client’s disadvantage; I’ve seen many clients who have been (and remain) financially disadvantaged by their unwillingness to take action against likeable but dishonest, lazy or incompetent advisers. (My personal belief is that a Consumer should engage an adviser they don’t like; the adviser will work harder to prove their assessment wrong but, more importantly, the client’s dislike will lead them to more critically analyse the adviser’s recommendations and performance. And, if the adviser fails to deliver, the client will have no hesitation in walking away or pursuing their own interests.
Reviews and recommendations
Unlike the United States, Australia has yet to grapple with the issue about whether client endorsements are advertisements for financial services (which require regulation and additional disclosure). Reviews, endorsements and client recommendations are the raison d’etre of social media marketing but a consumer should appreciate two key limitations of endorsements before they commit themselves to an adviser or licensee:
1. The adviser determines what reviews, endorsements and recommendations are published on their site. The positive statements they publish may be a selective and unrepresentative sample of client feedback; and
2. In a series of regulatory surveillances of financial advice providers[iii], ASIC have highlighted a concerning discrepancy between what clients’ believe is “good advice” and what is objectively good advice. In many cases, clients lack the knowledge and competency to actually assess the quality of the recommendation and strategy or the likelihood that it will ultimately satisfy their needs and objectives[iv] – but these are the people providing the recommendations and endorsements on which you might rely. ASIC have also highlighted an additional difficulty for clients trying to assess advice quality – most financial product advice is (or involves) a “credence good” which is an asymmetric relationship where the purchaser lacks the information to accurately assess the worth of the good and where the value or real cost of the good will often not be known for some time.
So, if it’s not possible to accurately or reliably assess an adviser’s reputation, is an adviser’s website a good proxy for their professionalism or a good indicator of their capability and skill?
In most cases, yes.
Poor drafting, jargon, incomplete or error ridden pages and a lack of original content can indicate a distinct lack of focus, analysis and care. Despite arguments to the contrary, this may, in fact, accurately represent the quality of the service the adviser will actually provide.
Although a well structured and maintained website will not necessarily indicate a better adviser, it does, at the very least, indicate that the adviser understands commercial realities and believes in investing time and resources to achieve required outcomes – hopefully, this indicates an approach that will also be reflected in the financial services they provide.
A methodical search and critical review process will assist consumers to select a better adviser but it’s not enough and they need to consider other components of quality – like education, qualifications and professional development.
TIP: A Consumer should scour the internet, look for social proof and review advisers’ websites to help them make their decision – but they should try to understand the practical difficulties and biases in assessing reputation. As an alternative, after critically examining the adviser’s website, access MoneySmart and check ASIC’s professional register.
2. Education, skills and knowledge
Darwin, who asserts that the planning profession has advanced so profoundly in recent years that financial planners might soon be “walking upright”, believes that education most reliably correlates with competence.
Identifying that the current Diploma standard is broadly equivalent to some High School qualifications, Darwin emphasizes the sheer irrationality of entrusting significant life decisions to those with such basic competencies. This is a point also echoed by the CFA Institute which, in their recent report, noted that while “None of us would go to a doctor [who] wasn’t properly qualified, wasn’t properly educated and had something to demonstrate that…. [but] we often trust our wealth to someone who may not be properly qualified”.
While the Diploma level education provides technical and theoretical knowledge only degree level education provides the capability to analyse, generate and transmit solutions to unpredictable markets, changing life events and sometimes complex problems[v].
Advocating for profound educational reform similar to that proposed by ASIC Consultation Paper 153, Darwin advises consumers to look to more robust qualifications than Industry Standards or Designations created by the Advisers’ Associations.
Darwin is non-specific about what graduate and post-graduate qualifications deliver the best education. Darwin emphasizes that the self discipline required to obtain an appropriate qualification is in some cases more important than the specific qualification – because it is on this framework that industry knowledge and technical skills are built. The importance of a degree level qualification is recognized by the Financial Planning Association of Australia that proposes that new entrants to the profession must, at least, possess a relevant undergraduate degree.
Darwin recognizes their adoption of this requirement but suggests that without the FPA also mandating rigorous education on cognitive biases, ethics and behavioural finance its utility is limited.
Darwin’s points are well made and on point; Consumers should look for the degrees on the wall, confirm qualifications, seek evidence of membership of a professional association or, as a shortcut, look to obtaining financial advice from a CPA, CFP or equivalent.
Unfortunately, although education is an important indicator of capability it is not silver bullet, which is why consumers also need to consider the adviser’s business model.
What do you think? Are these the first things that help you identify great advisers? Share your views and opinions (particularly if you think reputation can be objectively and accurately assessed).
 A pseudonym
[i]“Rising Star falls from grace” http://www.ifa.com.au/news/13220-rising-star-falls-from-grace
[ii] For further detail on the psychological phenomenon by which individuals look to, and conform with, the conduct of others research “herd behavior” or “Social proof”. The tendency for uncertain individuals’ to look to look to their peers for social cues or to confirm and validate appropriate behavior is not new but has been exacerbated by the emergence of mobile internet and social media (twitter, facebook, yelp and google+) that facilitate and aggregate shared social cues.
[iii] In Report 279 Shadow shopping study of retirement advice dated March 2012 ASIC noted at 202 that because “ …. most people lack the knowledge and expertise to assess financial advice, proxy measures are used instead. For example, the client may be influenced by the adviser‘s confidence, approachability, friendliness or professional manner. Or they may simply view the adviser as the expert in what is generally a complex subject matter, and assume, as a result, that the advice and service is high quality. However, these subjective evaluations rarely agree with the technical assessment of quality of advice provided. “