“We should be skeptical when someone apologizes for unintended consequences it can be an attempt to evade responsibility for harms they didn’t intend but should have foreseen ”
— Tim Harford, “The Inventor Who Almost Ended the World” | Cautionary Tales with Tim Harford
This article reprints “Defending advice: a two-tiered model is no victory for the profession” first published in Professional Planner in November 2022.
The parable of the Tortoise and the Hare is particularly relevant for financial services; the hare with all her natural advantages and skills speeds towards the finishing line only to be overtaken and lose the race because of her delays and bad choices.
With the recognition of an advice profession within view, the fragmented advice industry pauses and, distracted by trivialities, is overtaken (and supplanted) by product issuers and software providers.
While I unequivocally support making advice more accessible and more affordable, the Review seems to prioritise product distribution over advice. It’s a retrograde step for both consumers and the emerging advice profession and one likely to lead to the re-emergence and dominance of the vertically-integrated licensees whose systemic and recurring misconduct was exposed by Commissioner Hayne’s review.
Apart from the self-interest that flavours most responses to Treasury’s proposals, the celebration of a “two-tier” advice ecosystem is perhaps the most dubious benefit; it trivialises advice (and the advice profession) by giving equivalency to product information disguised as advice.
Product information has its place, and can satisfy some needs, but it is manifestly not advice.
Being told about the features of your industry fund is not equivalent to advice on what fund best suits your needs. Advice is, or should be, the bona fide consideration of strategies and alternatives that will satisfy clients’ needs and prudently guide their future conduct. Advice isn’t, and shouldn’t be, defined by the product or the self-interest of the provider.
As an industry, we too often distract ourselves by pedantically arguing over scope and remuneration models instead of defining the fundamental truths underpinning the advice profession; if you do not actively consider and recommend alternatives, you’re providing product information, not advice. I accept that some consumers may need little more than product information and gentle guidance to satisfy their needs and objectives, but I don’t believe that’s true for the majority. In fact, most consumers have a profound (but often unidentified) need for clear and considered recommendations about how best to achieve their goals.
You may not consider the QAR as an existential threat to an advice profession, or recognise the need to define your value, but it is, and we should.
Good advice changes lives. Advice should be more accessible and more affordable, but I struggle with the concessions provided to those that are not “relevant providers”. Anyone who provides financial advice on which another may rely to their detriment is a relevant provider and should have an obligation to act in their clients’ best interest. It’s not the payment of a fee, nor the ongoing advice relationship, that creates this obligation but rather the unequal relationship between the parties and the vulnerability of the client to the advice they receive. This duty should exist irrespective of how advice is delivered. Algorithms, trustees and product issuers who provide “guidance” to those that who act or rely on it should not otherwise be exempted from these requirements. To be clear, exempting these providers would both increase the risk of significant client detriment and “expose consumers to the risk of poorer quality advice”.
The most rational response for advisers facing these reforms might be to surrender their licenses or authorisations in favour of providing a “free” service assisting consumers to invest in schemes and arrangements owned (or partially owned) by the adviser’s entity. By eschewing commissions and fees, in favour of product fees, they cease to be relevant providers and avoid all the compliance obligations about competency and conduct that burden advice providers.
This is completely rational response to regulatory change is unlikely to improve the quality of advice.
Personally, I’m not convinced that Treasury either understand advice or appreciate advisers’ reluctance to embrace the retreat from professionalism, because, if they did, they’d more properly demarcate financial advice from financial product information. If you believe in the value of advice, and the need for an advice profession, then this is not the time to stop and rest. Instead, advisers should resist the promise of immediate reforms in favour of more enduring benefits. To do otherwise would be to allow product issuers to redefine and dominate advice.