Approved product lists are a useful tool for licensees to mitigate risk, but making them too restrictive only serves to inhibit advisers in meeting their clients’ needs.
Imagine going to a doctor for the treatment of an ailment. You are diagnosed with a particular condition but the doctor then declares that he or she does not have access to the medicine to treat your specific illness, so will prescribe another, less appropriate medicine that was developed in-house.
Sounds crazy right? And yet, that is the type of situation that thousands of financial advice clients around Australia face when they meet with financial advisers who use overly narrow APLs (approved product lists).
It is difficult to believe that an APL without sufficient choice can effectively and compliantly meet client needs under every circumstance, particularly in relation to life insurance products.
Indeed, at a parliamentary joint committee on corporations and financial services in November last year, ASIC deputy chair Peter Kell raised concerns around the limited number of life insurers on the APLs of some large financial institutions.
This practice continues despite the recommendation by the 2015 Review of Retail Life Insurance Advice – more commonly known as the Trowbridge report – that APLs should include “at least half of the authorised retail life insurance providers”.
More recently, the parliamentary joint committee on corporations and financial services released its report in March this year, which made two key recommendations in relation to APLs: “the [financial planning] industry should transition to open APLs”, and “ASIC and the ACCC should jointly investigate whether the past use of APLs in the life insurance industry breaches any anti-competitive laws”.
In my opinion, the recommendations from the PJC were excessive, however to understand the bigger picture we need to look at what the purpose of an APL actually is and how it has evolved to the point where the PJC would make such statements.
A licensee is responsible to consumers and ASIC for the conduct and recommendations (product or otherwise) of its authorised representatives (ARs).
If you go back to the days when there was very little vertical integration, an APL was provided to advisers as a resource.
Instead of advisers having to practice with limited resources and research many or all products available on the market, the licensee would perform this task and provide an APL, which would represent the best products available (in the licensee’s view).
APLs were generally extensive enough to give the adviser enough choice from a list of products and meet most clients’ needs.
Perhaps the most important function of an APL is as a risk mitigation tool to protect the licensee, AR and client by limiting advisers from recommending certain products that the licensee may see as being too high risk, such as solicitor mortgage funds or heavily geared hedge funds.
A good APL will strike a reasonable balance between choice and risk mitigation.
Having said this, there must be a mechanism for advisers and their licensee to review, and at times recommend, non-APL products to allow the best interests duty to be met.
The fact that a product is not on an APL should not be sufficient reason to switch a client out of that product. If that were the only justification, the best interests duty would be breached.
Over time, some vertically integrated licensees began using excessively limited APL structures, to restrict planners to offering products owned by, or that remunerate, their licensee or a related party.
So, instead of an APL being used as a resource and a risk mitigation tool, it has been used by some organisations as a means to distribute high margin product, which has triggered the concerns from the PJC and ASIC.
Opening up APLs and increasing competition among product providers, would promote greater innovation and improved client value.
Of course, a more open APL is only beneficial to the client if their financial planner has the knowledge and experience to select the products that are best for their individual circumstances, which is why a licensee is probably better resourced to act in this capacity than a smaller advice business.
Licensees will often also subscribe to research houses to perform some or all of this function.
It is also worth noting that overly narrow APLs are not consistent with the current push to improve advice standards across the industry.
Using the medical analogy again; how can the financial advice industry genuinely make the transition to a profession when many of our practitioners still don’t have access to the right medicine to treat our patients’ conditions?
Let’s be clear: with more expansive APLs comes a greater commitment from planners to become educated on the pros and cons of the products for different client circumstances.
That means more work for advisers, a heavier compliance burden and other administrative costs. But, as an industry, we are kidding ourselves if we think the best interests of our clients can be met 100 per cent of the time with excessively narrow APLs designed to control distribution of product.
Eugene Ardino is the chief executive of Lifespan.
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