The Productivity Commission has raised the prospect of financial planners providing advice about credit-based products without the need for a separate licence.
Home loans, personal loans and credit cards form a key part of our financial lives and yet ASIC-licensed financial planners can’t naturally provide advice on them.
It requires a separate licence, adding to an already taxing regulatory burden, which ironically offers a lower standard of consumer protection because it contains no best interests duty protections.
These separate regulatory regimes are little more than a historical legacy but the recent Productivity Commission draft report into competition in the Australian financial system may finally correct it.
The commission is considering increasing the scope of financial advice that planners can give to include some credit products such as home loans, personal loans and credit cards.
This would make it easier for planners to give true goals-based advice rather than refer clients to a third-party, such as a mortgage broker, when they require advice about credit products.
Many planners and brokers work well together under the one roof but when they don’t it can introduce risks: a third party may encourage a client to make decisions that can radically change the original plan without their financial adviser’s knowledge.
It can also be difficult for consumers to understand why mortgage brokers operate under different advice standards to their planner (the Productivity Commission also recommended ASIC impose a clear legal duty on mortgage aggregators owned by lenders to act in the consumer’s best interests).
Creating more uniform advice legislation aimed at raising standards while removing licensing red tape can lead to better quality advice and a stronger end-to-end advice partnership between the two sectors.
Holistic advice must include credit
Allowing planners to more easily give credit advice would also underline the shift away from commission-based product-led advice and towards holistic advice that truly engages with clients’ lives.
This just isn’t possible without considering all aspects of clients’ debt and the role it plays in both their financial position and behaviour.
Around three in 10 households (29 per cent) were classified as ‘over-indebted’ in 2015-16, according to Australian Bureau of Statistics data released in late-2017.
Property owners with a mortgage were the most likely households to be over-indebted, as were high income households. Among households with a property debt, almost two-thirds (62 per cent) of 25-34 year olds and about half (51 per cent) of 35-44 year olds were over-indebted.
Meanwhile, Australians owe a staggering $33.2 billion in credit card debt, with the average card holder paying around $700 in interest every year (if their interest rate is between 15 to 20 per cent), according to ASIC.
While every client’s individual circumstances are different, these figures show the potential that a good adviser can make by focusing on clients’ cash flow rather than becoming overly focused in attempting to select the ‘best’ financial product.
The corporate regulator’s recent report on vertically-integrated institutions and conflicts of interest found that three-quarters of customer files were non-compliant (although only 10 per cent put the client in a worse financial position).
While there is plenty of ongoing debate about the quality of advice under an institutional versus ‘independent’ structure, ASIC pointed to simpler underlying problems.
For example, some advisers hadn’t sufficiently researched and considered their client’s existing financial products. In some cases, they hadn’t based all their judgements on the client’s relevant circumstances.
Credit products weren’t included in that analysis but they should be. There’s no excuse to not truly know clients given the power of technology to reveal their actual behaviour.
The days of relying on manual data collection based on clients’ distorted memories are over. It’s hard to contemplate how advisers can truly claim to know their client when a significant component of their financial lives is beyond the scope of their plans.
While the financial planning industry continues to work hard on raising the quality of advice, including professional and educational standards, it’s time to streamline regulations that would allow them to offer more holistic advice.
Peter Malekas is founder and managing director of Moneysoft.
Just a way of killing loan commissions as it’ll be conflicted rem under AFSL licence conditions…
rubbish…you obviously have no idea what conflicted rem actually is.
I agree with what Peter says. Since the introduction of the ACL, I’ve seen heavy handed compliance reps wrap advisers over the knuckles for doing the right thing by their clients and inadvertently touch on credit advice. As a result most advisers I speak to don’t even touch the issue, for fear of breach of the ACL rules. Their SOA will include some sort of wishy washy statement. Most credit products are fairly simple, far more simple than wealth products. If the industry is to truly become ‘goals focused’ and ‘holistic’ as is often thrown around, advisers should have the ability to adequately deal with all of the financial products in the client’s life, not just their super and life insurance.
It creates a conflict of interest for an advisor to recommend a strategy and then be the person who actually implements it and gets paid a commission for it – given that when you place a loan you are paid a percentage of the loan amount. Keep them separate. Very different skill sets.
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Almost every professional service in the world has inherent conflicts of interest. They cannot be eliminated by prescribing business structures or payment mechanisms. They have to be managed through ethics and legislation.
The Best Interests Duty (BID), which only applies to licensed financial advisers, is strong legislation to manage conflicts of interest. Consumers are much safer these days to be advised by a licensed professional subject to BID, rather than mortgage brokers, accountants, or real estate agents, who are not.
As a FP, I dont want to now learn about the various loan products and requirements to push a loan through. One thing that was mentioned in the article, and I feel is key, is to surround yourself with specialists you can trust. In the same way I send clients to a lawyer to do their wills, and trust that he will do a good job as I have a professional relationship with them, the same goes for lending, find someone you can trust and work with them. Facilitate this for your clients, that way you are the go to person for the client and the client is surrounded by specialists and gets the best outcome…. Do lending myself, no thanks!
I’d like to see mortgage brokers try to become financial planners. Get ready to do a degree. I don’t think so. they wouldn’t survive the compliance and audits. No comparison and no best interests duty. That would be like real estate agents becoming financial planners. Why not used car salespeople also?
That’s a one-sided article from Peter.
Perhaps he should also consider mortgage brokers becoming financial advisers – for exactly the same reasons.
Honestly, how dodgy would planners be, recommending home/investment strategies to suit their own advice
Remember what happened at Storm and other minefields