Focusing on needs, not sales

The financial advice industry has come a long way in the last few years, but the journey has revealed just how far there still is to travel.

The findings in ASIC’s recent report 562 – which raised issues about the quality of advice provided on in-house products by major vertically integrated institutions – would surprise few.

But it also reveals a knot so deep into the fabric of the industry that it’s easily overlooked: product sales are still entwined so tightly around financial advice that they risk strangling it.

The ASIC report revealed that three-quarters of customers received advice that failed the best interests duty and related obligations. Key problems were failing to base judgements on the customer’s objectives, financial situation and needs; and not sufficiently researching and considering the customer’s existing financial products before giving advice.

Yet, Australia has built the sixth-largest managed funds industry in the world and the fourth-largest pension pot, according to the Investment Company Institute.  

This shows a major disconnect given the top unmet advice needs of everyday Australians centre around retirement planning and budgeting, according to the latest Investment Trends research.

Retirement is a unique destination for each Australian and planning for it is complex territory. Retirees, who are living longer than ever before, need substantially more savings to fund these extra years in retirement.

They want income, certainty and flexibility but meeting those desires involves difficult trade-offs: there is no single product-led solution and no client asks for one. Yet, the ASIC report found that in 10% of cases, customers were switched to a superannuation platform where they were demonstrably worse off than before.

Budgeting (which can be thought of as the plan, like an SOA) and cashflow planning or money management offerings (which can be thought of as the service) may be the most undervalued offering a planner can deliver to their clients. There is no natural product to sell: it involves education and behavioural change, so many planners choose to ignore it or put it in the too-hard basket.

Technology can help scale this service but many planners are still not sure how to charge for it. There’s a large gap between what clients want to pay for personal advice and what advisers say advice costs ($750 versus $2,500). The irony is that true cashflow or money management advice can not only change the lives of clients, it can create new wealth, enabling them to pay for holistic advice.

What is at stake? Around 3 million Australians plan to see a financial adviser in the next two years – that’s double the number in 2013. However, planners typically lose three clients for every two they gain, according to the Investment Trends data. Delivering what clients want, such as goals-based advice, wealth accumulation or debt reduction strategies, or traditional retirement planning, rather than products wrapped around advice, can help stem that loss.

The status quo is no longer good enough. The industry knows this – hence the rise of goals-based or objectives-based advice and increasing professional standards. Helping clients to meet their goals and live the way they want may seem obvious, but changing the financial services industry’s processes and culture takes time.

There’s still fear that if the industry moves away from a traditional product-centric view, clients won’t pay for advice – just look at submissions to ASIC’s retail life insurance reforms, which capped commissions in the sector. Yet we regularly see financial planners who are able to reshape client finances, which is often the first step towards financial freedom. These clients are happy to pay for advice when it meets their needs.

Advisers who provide practical, real-world solutions to clients’ needs demonstrate their own value and can carve a pathway to building sustainable businesses.

Peter Malekas is founder and managing director of Moneysoft.