“Advice templates such as SoAs, file notes and fixed term agreements etc do not differentiate an adviser. If we could get to a stage where we have close to universal agreement on what those templates should look like, there can be massive productivity gains in engaging the providers.””
— Conrad Travers, Professional Planner
Humanising the machine age
It’s one of the great ironies that people who often criticise “formulaic, prescriptive and mechanical approaches” to advice are the same people who embrace and endorse “formulaic, prescriptive and mechanical approaches”.
We see more and, largely as a consequence of our experience, see the industrialisation of advice as the fundamental problem; not the absence of ubiquity.
In our submission to Treasury on Quality of Advice, we advocated for the amendment or removal of the more prescriptive requirements of s947A, s947B, s947C and s947D to enable providers to make their own determination about the form and content of the advice they provide, to remove significant barriers to the provision of advice and improve consumers engagement with the advice process.
It’s the latter goal that is too often missed; although a Statement of Advice is a consumer warranty document it’s one of the few documents that allow advisers to properly differentiate themselves from their competitors and peers. Unfortunately, industrialisation and risk aversion have reduced the opportunity to highlight experience, insight and understanding to bloated mass of insipid and uninspired observations overwhelmed by generic text, mindless repetition and meaningless (and ineffective) disclosure.
The solution is not to mandate and adopt universal templates but instead to demonstrate the professionalism and skill that advisers ask to be formally recognised. In fact, until advisers prefer substance over form, the emerging advice profession is likely to retreat in the face of streamlined product distribution.
Although legal reform would encourage advisers to make their personal advice documents more personal, the current law already provides them with the confidence and certainty to make these changes.
In fact, we think it’s not only possible, but essential.
The pursuit of ubiquity
“Perhaps the most important observable ‘trend’ is placing value on knowing where products come from and how they were made – there is a new wave of consumers who prefer objects that have personal connection with their maker, and value genuine artistic expression over mass-production. ”
— Artelier.com, “Art in the Age of Mass-Production: Re-establishing the Value of the Artist”
It’s confusing that despite recognising the importance of the advice relationship, few advisers recognise that consumers’ search for connection is as much a product of the collateral they provide as the conversations they have. The cynicism about advice documents is understandable, but it creates a systemic blindness to how important these documents become when consumers face uncertainty, tragedy or loss.
While we might rage at formulaic and mechanistic solutions to compliance issues, we need to accept that the industrialisation of advice has provided some significant advantages – including more predictability, accessibility and affordability – but, unfortunately, these have come at too high a price.
Although the inherent tendency of industrialised advice to subordinate clients’ interests to the commercial interests of the licensees is now addressed by legislation, our deification of process and our over-reliance on disclosure retarded the development of an advice profession while, paradoxically and perversely, working counter to our clients’ interests and our own.
The inevitable downside of our pursuit of ubiquity is that formalism and disclosure have become the goals of compliant licensees, rather than necessary but not sufficient steps towards client understanding and engagement.
At a high level, a Statement of Advice provided by an Authorised Representative has less than ten formal elements that need to be covered including the advice and its basis. Admittedly, regulations and replacement product disclosures increase the depth of the disclosure but it’s a logical and relatively contained requirement. There are identification elements and structural requirements, but the bulk of the requirements relate to interests and influences that may affect the recommendation.
In fact, these requirements seem eminently reasonable and easily managed, particularly since s947B/947C already require an SoA to
a. contain “the level of detail about a matter that … a person would reasonably require for the purpose of deciding whether to act on the advice as a retail client”; and
b. be “worded and presented in a clear, concise and effective manner”.
The missed opportunity
“Risk aversion, rather than regulatory action, is a key reason why Statements of Advice have ballooned out of control.”
— Assured Support, 2019
Licensees, and advisers, unsure what amount of information was reasonably required, erred on the side of caution.
As a result, advisers’ individual voices and effective differentiation, was abandoned in favour of volumes of information including mandated disclosures, external research, projections, modelling and third-party information. Rather than acknowledging that s947C(3) provides advisers with a discretion and flexibility commensurate with their understanding of their client, institutional licensees aimed at the lowest common denominator.
Aiming for the lowest common denominator makes sense to both technology providers and licensees; common standards reduce coding and production costs and provide a scalable risk mitigation strategy for industrial advice model. Perhaps it even provides a measure of consumer confidence, but is it either appropriate or desirable for a profession that provides, or aspires to provide, personal and tailored recommendations?
Paradoxically, I believe this misalignment increases advisers’ liability rather than effectively minimising it; when these documents are not read, and are unlikely to be read, can anyone accept the legitimacy of the clients’ informed consent?
Research consistently highlights one of the key problems with reliance on disclosure as a consumer protection measure; its success depends not only on the quality, adequacy, specificity and timing of the disclosure made by the adviser but also on the capability of the client to understand the consequences and implications of the matters disclosed.
In our view, it’s past time for advisers to recommit to their best interest duty and the FASEA Standards. Advice professionals must, and to a degree already have, replaced their reliance on mandated disclosure in favour of commitment to avoiding conflicts, embracing objectivity and prioritizing clients’ interests.
Waiting for Godot
“…a more direct and better way to regulate the provision of advice is to start precisely where the current regime does not – with the content of the advice. Consumers want good advice – not documents and processes. And advice can be more easily measured and assessed than conduct.”
— Quality of Advice Review Consultation Paper (“Proposals for Reform”) dated August 2022
The idea that progress can only occur by entirely rejecting “documents and processes” is not new. Documents and processes are demonised and trivialised in turn, in favour of principles (that are too quickly sacrificed on the alter of certainty). Prescription, is the inevitable result. For example, in a report prepared by the Productivity Commission in 2006, entitled Rethinking Regulation, one submission argued that ‘Rather than drowning consumers with vast amounts of disclosure, a far better alternative would be to ensure that fundamental protections are built into the legislation itself.’
This is also our position and, unlike Ms Levy, we do not believe that the Statement of Advice has no utility and does not “provide any real consumer benefit”. Notwithstanding the deficiencies of these documents, Statements of Advice (and to a lesser degree Financial Services Guides) are important consumer warranty documents. This is why we’d love to see the back of the more prescriptive requirements of s947A, s947B, s947C and s947D and advisers renewed focus on the expression of their ideas and insights with “the level of detail .. a …. client would reasonably require to make a decision about whether to act on the advice.” As it stands, the current Statement of Advice spectacularly fails to satisfy either goal; documents are bloated, generic and largely incomprehensible disclosure documents that are also expensive and time consuming to produce.
Irrespective of the form, content and format of the advice, the adviser must still be “reasonably satisfied” that their client understands the advice and the benefits, costs and risks of the recommended products (FASEA Standard 6).
Our position, supported by academic research and ASIC Report 632, is that disclosures and warnings are often ineffective tools, and sometimes perversely counter-productive strategies, for influencing either providers’ conduct or consumers’ behaviour. Furthermore, in respect of complex products and strategies, disclosure is particularly ineffective and can contribute to consumer detriment. In 2019, ASIC’s Report 632 drew on international research to confirm the expert view that disclosure has real and undeniable limitations as a consumer protection mechanism. However, for reasons of pragmatism, philosophy and convenience, disclosure has became broadly acceptable to most stakeholders; at least in theory, it protects and empowers retail clients, provides businesses with an alternative to heavy-handed regulation and facilitates informed participation in the market.
In reality, templated documents haven’t delivered these results and our industry’s reliance on disclosure has resulted in formal compliance, risk- aversion and disclaimers being prioritized over substantive conduct, client understanding and informed consent.
As acknowledged by ASIC in Regulatory Guide 90 “The purpose of an SOA is to communicate to the client important and relevant information about the advice being provided to enable the client to make an informed decision about whether to act on the advice”. Although always intended to be a consumer-friendly warranty and engagement tool, risk-aversion and increasingly prescriptive conventions transformed the SOA into an expensive, inaccessible and occasionally incomprehensible risk-management device.
Where to from here?
“It is .. incumbent on industry not to hide behind technical compliance with disclosure obligations.”
— ASIC Report 632 “Disclosure: Why it shouldn’t be the default”, page 52
Your Statement of Advice is not only a critical consumer warranty document but one of the few documents that allows you to properly and effectively differentiate yourself from your competitors and peers.
Consumers seek a lot from their advisers including reassurance, solutions, understanding, insight and connection. Instead of pursuing universal templates, pursue the opportunity to highlight your experience, insight and understanding and engage your clients in an authentic way.
It can be done and, with a little courage and imagination, this new approach can be both more efficient and more cost effective.
The only obstacle to making your advice more engaging, is your willingness to try.