26/05/2010

Don’t you find it paradoxical that at the very time the Federal Government is implementing the recommendations of the Ripoll Inquiry, allegedly to better protect consumers from the disasters of poor financial advice, they are broadening the scope for so-called ‘single-issue advice’?

 

Recent research apparently shows that so-called ‘full service’ advisers (who used to be called ‘financial planners’) will decline by almost 50% in the next 14 years while this new breed of ‘single-issue’ advisers will make up the majority of the profession constituting 55% of the total number of financial advisers in Australia.

 

This trend is not only taking place with the approval of the Government but is actively being encouraged by them at the request of the industry super funds and the tacit approval of the banks.  Both those sectors of the market benefit from ‘single issue’ advice. 

 

The industry funds want to keep their members on a short leash, not wanting them to seek advice from an independent financial planner who might provide the client with alternatives to their industry fund membership.  The industry funds successfully lobbied firstly for the introduction of so-called ‘intra fund advice’ and now for its expansion.

 

The banks would not be unhappy with this development either, making it simpler for their tied advisers to operate as ‘single issue’ advisers who don’t have to meet all the requirements for full service financial planning.

 

What is ‘single-issue’ advice? Well whatever it is, it is not financial planning.  It has been a bug bear of the Australian financial advising industry that there is no statutory definition or industry code pronouncement on the meaning of ‘financial planning’.  Gwen Fletcher tried to have the term defined under the Trade Practices Act in the early 90’s but the then Trade Practices Commission, being profoundly ignorant of financial planning as an industry, was suspicious of the industry’s motives.

 

The FPA has adopted principles that help a consumer identify financial planning so they can be sure they are receiving what they’ve paid for.  But despite their best efforts, limited budgets have meant that the message is still far from universally understood in Australia.

 

Section 945A of the Corporations Act says that in providing “personal advice” a financial adviser must determine the client’s relevant personal circumstances and make reasonable inquiry in relation to those circumstances.  They must then investigate and consider the subject matter of their advice against the backdrop of those circumstances and ensure the advice is appropriate.

 

Section 945B requires the adviser to warn the client if the client has failed to provide sufficient information about their personal circumstances.  The warning cautions the client that they should seriously consider the appropriateness of the advice before acting on it.   

 

Section 949A requires a warning to be given where the adviser is providing only general advice (as opposed to personal advice) so that the client knows that the advice hasn’t taken into account the client’s objectives, financial situation and needs.

 

While the two latter sections are designed to clearly alert the client to the limitations of the advice, the real challenge for the legislators is to create a system that maximises the ability of the client to understand what these limitations really mean.

 

And this is the danger of the innocently-sounding ‘single issue’ advice.  It is justified on the basis that the consumer wants it.  “Our projections show that the demand for simpler targeted advice will increase substantially” said the researcher (who was commissioned by the industry funds).  Far from that being the reason for extending this type of advice, it is the reason for NOT extending it.

 

Clients do not understand the limitations of limited advice.  They might think they want it because it is cheaper, quicker and less complicated but taking the easy way out has never been a good idea in any sphere.  How will this kind of advice stop another Storm Financial happening?  The adviser who suggested that a couple in their late sixties cash in their super to invest through Storm, even though they would have had no way of meeting a margin call, will now simply argue ‘that’s all I was required to advise on’.

 

Through the warnings and exemptions single-issue advice pushes the responsibility back on the person least able to handle it – the consumer.  Consumers do not understand that to be fully confident of their financial advice it is generally crucial to take into account their whole financial picture.  They do not understand the rights they are giving up by accepting single-issue advice.  They do not understand that yet again their protections are being sacrificed by the vested interests. 

 

The researcher suggests that to survive, financial advice firms need to offer both types of advice.  In other words, ‘if ya can’t beat ‘em, join ‘em’.  A much more appropriate response would be for financial planners to force the FPA to lobby government and consumers hard on why ‘single-issue’ advice is so dangerous and work to limit it.

 

As always in this area consumer education is critical.  But even if the FPA had the will to provide that education it lacks the necessary resources.  Only government has those resources, but if recent developments are anything to go by, it lacks the will. 

 

For further enquiries, please contact Peter Townsend of TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.