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Financial advisers are supposed to act in the best interests of their clients. That’s not a vain hope or fluffy belief, it’s enshrined in law.
Confidence in financial advisers fell to all-time lows in the wake of the Hayne Royal Commission, which unearthed serious financial misconduct. Most notably, fees for no service and advice that left clients worse off. But then COVID-19 hit, and it’s been a gamechanger for advisers and their clients.
Demand for advice is growing
The latest Investment Trends Financial Advice Report found demand for advice doubled in the past five years. Three in four advised clients engaged with their adviser during the COVID lockdown, while 2.6 million non-advised Australians said they intended to seek advice.
Significantly, one in six Australians say they currently use advice services offered by their super fund and, of those who don’t, 37% would like to do so.
COVID has also made an impact on wealthy investors who are now more open to advice. In a separate 2021 report on self-directed high net wealth investors, Investment Trends found 56% are now more willing to accept a second opinion (up from 40% two years ago).
Clearly, there is growing recognition of the value good financial advice can provide. So how can you protect yourself and get the most out of your adviser? Because despite some cases of wrongdoing, there are many good advisers out there.
It starts by knowing what you are entitled to expect from a financial adviser or planner.
Under the Corporations Act, advisers are legally required:
- To act in the best interests of their client
- To provide appropriate advice
- To give priority to the interests of the client if there is a conflict of interest.
It’s not enough for advisers to pay lip service to their best interest duty. It requires documented processes and actions that clearly demonstrate they have acted in the best interests of their client. Unfortunately, that doesn’t always happen despite significant reforms in recent years.
The Future of Financial Advice (FOFA) reforms introduced in 2013 prohibited certain types of conflict of interest in the financial advice industry. This includes conflicted remuneration such as the payment of commissions for selling certain products and volume-based payments.
Financial advisers are also required to increase their professional, ethical and educational standards under an amendment to the Corporations Act in 2017, which comes into effect between January 2019 and 2024.
Advisers are also now obliged to provide annual fee disclosure statements to clients and invite clients to opt-in to ongoing fee arrangements every two years. Yet a lack of transparency around fees and ongoing fees for no service were major themes of the Hayne Royal Commission.
Despite these significant reforms, and the legal duty to act in the client’s best interests, too many advisers continue to offer conflicted advice. This is due in large part to the vertically integrated business model that is prevalent in the industry.
The risks of vertical integration
Vertical integration is the business model where two or more different stages of production are combined. This model has been enthusiastically adopted by our big banks and financial institutions who not only produce financial products such as managed funds and superannuation platforms but also offer financial advice.
There are obvious benefits for the institutions, which can use their advice arms as a channel to sell their products, although their obligation to act in the best interests of their clients is meant to address any conflict of interest.
There can also be benefits for clients. Vertical integration produces economies of scale that, theoretically, should produce cost savings for the banks and their clients. Some people may also be attracted to the convenience of a one-stop shop and the perceived safety offered by doing business with a large, well-known brand.
As the Royal Commission heard, this perception of safety and cost effectiveness is not always the reality. Indeed, one of the criticisms of the commission itself is that it did not recommend the separation or sale of the wealth management arms of the big four banks and AMP from the rest of their business.
Entrenched conflicts of interest
The financial industry regulator, the Australian Securities and Investments Commission (ASIC) conducts regular reviews and surveillance of financial advisers. An ongoing issue of concern is financial advisers licensed by big financial institutions placing most of their clients’ money in approved in-house products.
ASIC has found that this practice occurs even where in-house products are in the minority of products offered, with clients’ interests often coming off second best.
While advisers are not required to have an approved product list, such lists are often used as a risk management tool. Most institutions have specialist teams to research and approve products for their advisers, to save them time and compliance worries.
However, these approved product lists can act as a barrier to advisers considering and approving clients’ existing products. Even if an adviser is not actively prevented from recommending an existing product not on their approved list, the time-consuming bureaucratic hoops they must jump through to prove the product is in their client’s best interest may be enough to dissuade them from even considering it.
Examples of bad advice
In a 2018 surveillance report, ASIC provided two case studies from the client files it reviewed that demonstrate the conflicted nature of some of the advice being given.
How to avoid the risks
You can avoid some of the risks of conflicted advice like the examples above, especially where the adviser is aligned with product provider, by asking questions.
- Are the products being recommended in-house products?
- Can you offer advice on my existing products?
- Can you give me a breakdown of fees?
- Can you give me evidence that I will be better off switching out of my existing products to new ones recommended by you?
The benefits of good advice
Enough of the risks. Despite some bad behaviour in the financial advice industry, a good financial adviser can be enormously beneficial.
There is plenty of research showing the advantages of advice. For example, in its 2020 report entitled Future of Advice, Rice Warner cited research showing that people who get advice accumulate 3.9 times more assets after 15 years than those who make their own decisions.
Appropriate advice that takes all your relevant personal circumstances into account can help you:
- Set and prioritise your financial goals
- Learn how to manage cash flow and start a savings and investment plan
- Put in place strategies to build wealth
- Learn the difference between good and bad debt
- Protect your assets and income with appropriate insurance cover
- Get any government assistance you are entitled to
- Make sure your assets end up in the right hands when you die
- Avoid expensive mistakes.
Younger advisers catering to a new generation of investors are increasingly positioning themselves as money coaches who are there to help you make the most of your money and keep you on track to achieve your goals.
Professional financial advice can be particularly helpful at key points in your life. People typically think about getting advice when they are approaching retirement, with all the planning that entails. But strategic advice earlier in life could potentially make a big difference to your financial health.
Times when it could be an advantage to seek financial advice include:
- Starting a family
- Receiving an inheritance or other windfall
- Being made redundant.
Rice Warner estimated the dollar increase in wealth at retirement from taking advice at age 25, 40 and 50. As you can see in the table below, which shows the benefit of savings advice only and savings plus investment advice at different ages, it pays to seek advice well before retirement.
Total wealth at retirement, age-based scenarios for various levels of advice
Financial advice doesn’t have to be ongoing. You can seek advice for a single issue and pay a one-off fee for service. You may also be able to get low or no-cost advice from you super fund. See SuperGuide’s article Financial advice through super funds: What’s on offer.
As people progress through life and their financial affairs become more complex, it is common to build a team of advisers including an accountant and lawyer as well as a financial adviser.
The intangible value of advice
It seems the Beatles were on the money when they sang Money can’t buy me love. But as the Rice Warner report points out, professional advice that helps you manage and make the most of your finances can improve your quality of life.
Research has consistently found that people who are advised tend to have:
- Greater levels of happiness
- More peace of mind
- Improved relationships due to the alleviation of financial stress (money is one of the top three causes of divorce in Australia)
- Better health.
If you do choose to seek out financial advice rather than go it alone, it is still important to educate yourself about money, investing and super. You also need to stay well-informed about financial markets, economic trends and investment issues. That way you can assess the advice you are being given, know what questions to ask and sniff out any conflicts of interest.
If you have found your way to SuperGuide you are already doing just that.