In addition to proposing a new statutory best interests duty, that would only apply to relevant providers, independent chair of the Quality of Advice Review (QAR) Michelle Levy backed the imposition of a separate “good advice duty” under recommendation four of her final report.
This new obligation, which would be enshrined in the Corporations Act, would apply to all providers of personal advice to retail clients.
“A duty to give good advice is not intended to be a duty to give ‘okay’ advice or ‘good enough’ advice,” Ms Levy said earlier this year when addressing concerns that a prospective good advice duty would lower the quality of advice due to misinterpretations of the “good” standard.
“It is unlikely to be good advice to recommend a poorly performing superannuation product. It will not be good advice to recommend that a person who is unable to pay their mortgage open a term deposit and it will not be good advice to recommend a life insurance product that does not provide the protection the customer needs,” she wrote in the final QAR report.
However, ifa has since heard from numerous advisers concerned about the meaning and interpretation of good advice.
Most recently, Australian Financial Complaints Authority (AFCA) lead ombudsman investments and advice, Shail Singh, suggested that he would expect an increase in disputes following the adoption of the good advice model.
“It will be a question of interpreting what good advice means by a non-relevant provider,” Mr Singh said at the Financial Advice Association Australia (FAAA) Roadshow in Sydney.
“I think there are risks in leaving it to industry to determine whether a non-relevant provider or a relevant provider should provide the advice because … there’s things that look on their surface, quite simple, that can have very severe consequences for consumers.”
Speaking on the matter with ifa this week, Eugene Ardino, chief executive of Lifespan Financial Planning, said that the definition of good advice ultimately rests in the hands of the government, while the Australian Securities and Investments Commission will likely provide regulatory guidance.
“I would also expect that there will be consultation with the advice community and potentially others,” Mr Ardino said.
“Having said that, Michelle Levy’s explanation that good advice should be advice that is reasonably likely to benefit the client will be an easy test to apply in many situations but a very difficult test to apply in a significant number of situations because advisers spend much of their time providing recommendations based on their objective opinions,” he continued.
“When doing this, it is often impossible to determine if the advice will benefit the client because this often involves recommending one product over another that purport to do essentially the same thing or recommending one asset class over another based on a researched view which could be mainstream but also could be contrarian.”
Delving into the QAR further, Mr Ardino assessed that an adviser’s opinion should be protected by the “fit for purpose” test.
“The explanation in QAR does talk to one of the tests being that the advice needs to be fit for purpose for it to be “good” which could provide a foundation for a framework where advisers will be free to provide recommendations based on their opinions, provided those opinions are reasonable and relevant to the scope of the advice or ongoing client-adviser relationship,” he explained.
“The safe harbour provision kind of did the opposite in that it provided a framework whereby if you followed a process, your advice would be deemed to have met best interest duty almost irrespective of the outcome of the advice or whether the client would benefit, however, it made the process extremely onerous where it was simple to demonstrate that the client would benefit from a piece of advice.”
Also talking to ifa, Neil Macdonald, The Advisers Association CEO, offered an alternative perspective.
Asked to define good advice, Mr Macdonald said: “Michelle Levy has clearly stated that it is not bad advice, it’s not good enough advice, it is good advice. As a start, the adviser and the licensee will determine what is good advice. The licensee’s obligations are to act honestly, fairly, and efficiently; consider and address the client’s goals, needs, and objectives; and ensure that anyone providing advice is trained and competent”.
“Specifically, product providers will have to give good advice,” he continued.
“They are deemed to know their member’s personal situation, so they won’t be able to and wouldn’t want to give general advice, especially with the narrower general advice definition and the significant criminal and civil penalties already in place if they fail to provide good advice.”
Ultimately, Mr Macdonald said, “Advisers shouldn’t have anything to fear”, as long as the QAR is implemented as a package.
I loved Michelle Levy’s comment on page 52 & 53 of her report which explained why ‘good’…’financial advice’ doesn’t actually have to be much ‘good’ (i.e. comprehensive) from the customer’s persective:
“Financial advice is not a term defined in legislation, nor is it a term of art. Instead, it has a readily understood meaning, namely advice about financial matters. The word ‘advice’ is itself a commonly used and understood word and most of us would agree that ‘financial matters’ range from budgeting, saving, investing, superannuation and, possibly, insurance. BUT THE REGULATORY FRAMEWORK DOES NOT APPLY TO FINANCIAL ADVICE, IT APPLIES TO ‘FINANCIAL PRODUCT ADVICE’.
In contrast to financial advice, financial product advice does not have a readily understood meaning,
nor even a single meaning. Instead it is a term used and defined in the Corporations Act and the
Australian Securities and Investments Commission Act 2001 (ASIC Act) and, relevantly for the Review,
financial product advice is not the same as financial advice.
….
I have been asked to consider whether changes should be made to the law and some people have
asked me to recommend changes to the regulatory framework in order to distinguish advice from
sales….
…
Financial product advice is, as noted earlier, a term defined in legislation. Its purpose is to draw a
boundary around regulated activities, not to create a consumer facing description of the activity.
Given this, I DO NOT THINK THERE IS ANY UTILITY IN EITHER ADOPTING A DIFFERENT TERM OR DIVIDING FINANCIAL PRODUCT ADVICE INTO MORE CATEGORIES. To the extent an adviser or another provider of advice is worried that the term might lead a consumer to expect something they should not, I would encourage
providers not to use the term or to only do so in conjunction with an explanation if that will assist the
consumer.
There you go – sorted ! (not)
The only stakeholders wanting ‘good advice’ are the Institutionally aligned who want to make it easier to sell internal products with a ‘cloudy anti – consumer legal outcome trough’ and Lawyers who are licking their chops over future fees. It seems someone we all know has a foot in both camps!
How will a bank customer know the product being recommended is relatively expensive or has performed poorly? The bank employee pushing it (to meet targets) is unlikely to explain these details. This isn’t “good advice” and down the track class actions will begin or another Royal Commission will be called.
Why don’t we apply this concept to every other job/career?
Universally get rid of qualification and experience requirements and replace them with a “good job” requirement. You want to be a doctor but have no qualifications? Sure, just make sure you do a “good job”.
Want to be an Air Traffic Controller with no experience? Sure, just make sure you do a “good job”.
Everything will be cheaper, more accessible and the world will be in a better place.
If I am a non relevant provider and my customer has a small account invested in the Balanced option (eg a 90/10 growth defensive split) and my online tool profiling the customer suggests they are a Balanced customer am I providng them good advice if I recommend they put the $500K from their business sale or inheritance into my inhouse balanced fund? Would that stand up to the ” good advice test ” because my inhouse asset allocators deem 90/10 a good mix for their balanced investors??? When the market drops 40% and my customer is down 30% odd?
It going to get messy if this gets up…..!
So is it true – Product Providers are not able to provide Advice that is in the clients best interest – and somehow this is all OK?
It is less strigent than the current unworkable definition so stop whinging.
Didn’t Levy, in her draft QAR report, say an example of good advice is adding money to super. This, she said, ‘is always good advice’!!!!
Using terms like ‘relevant’ provider and ‘non-relevant’ provider is inappropriate and can be misconstrued or misunderstood by consumers, and I find it difficult to comprehend within the context of financial advice. Why not say Product distributors/dealers/seller providers (conflicted) and independent professionally qualified providers (financial advisers) or even more clear conflicted provider and independent provider. Or are AFSL product providers afraid of being considered conflicted by the general public, given the consumers want independent advice? The US and UK did something similar and made it difficult for consumers to distinguish between the two types of providers.
Agreed good Dr although this should also require an update to current idealigocal definition of “independant” under Corps Act. No such thing as commissions for investment/super advice for retail client but if I offer commission as payment option for insurance advice I’m not “independant” (which 99% of clients make informed decision to pay via commission on successful implementation…who wants to pay for advice that may never actually get up? how does that leave clients in a better position?). As it stands I am forced to consider establishing 2 AFSL’s – one “independant” under corps act for investment/super/fin planning advice and the other to be able to offer insurance advice via commission for the 99% of clients that make an informed decision to pay for insurance advice via commission on success vs fixed fee for unknown outcome.
Anyone know of other countries where different rules (in this case provision of Financial Advice) for different people (Product Providers verses Qualified Individual Financial Planners – not controlled by Product Providers?) is recommended or allowed?
There’s ALWAYS 3 versions of advice.
1. The actual advice that the adviser understands intricately in their own head for that client.
2. How that advice is substantiated and recorded on file by the adviser
3. How that advice is portrayed/explained to the client in a way they can comprehend and understand and act on
They will never fully converge into a single thing, but the closer they get, the better.
If advisers have a fiduciary duty and ‘good advisers’ do NOT have a fiduciary duty, then it will be a free for all with a Royal Commission in the medium term future.
There is another way to look at it: Once it is going, take 100 examples of ‘good’ advice and see how different wholistic advice from a fiduciary (somebody who puts the client’s interest first) would be.
” Advisers shouldn’t have anything to fear “……..!!!!!
Neil, as you very well know as you have been around long enough, Advisers have been living and surviving in an environment of fear for 10-15 years now and that relentless regulatory and legislative uncertainty has created an anxious, fearful, uncertain & nervous environment in which to work.
For many, this has been the crossroads in making there very difficult decision to either look after their clients or simply look after themselves by electing to leave.
The mental health impact on Advisers has been catastrophic and in many instances, irreversible.
Whilst there has been some extremely thorough studies completed on the state of Financial Adviser’s mental health over the last 2-3 years, this should not be an area that is now forgotten with a change in Govt and a potential change in legislative requirements.
If another profession or industry had sufferred the level of negative mental health impacts that Financial Adviser’s have endured, there would have been a lot more noise.
Many have suffered in silence, many have tried to battle on and many have been lost.
When you have been shot a number of times, you become very gun shy and so I believe many Advisers will be continually living in a constant state of anxiety and nervousness…..they may just not show it.
For those with drivers licences, you must drive and consider all other road users – for those without – good driving is OK it seems? Is this the sort of thing Michelle Levy is recommending?