8 minute read

The four major problems facing financial advisers – Part 2

Published on
September 30, 2022
Matthew Esler
Co-CEO & Co-Founder

There are four major challenges facing financial advisers and the financial advice industry:

  1. Time taken to produce advice
  2. Cost of producing advice
  3. Quality of advice; and
  4. Trusted or engaged advice.

In this 2nd part we are highlighting the Quality of Advice and Trusted or Engaged advice.

Quality of Advice

In 2003, ASIC released the “The financial planning shadow shopping project” which included the first line: “As you know, overall, the quality was disappointing. Too many plans were poor on core elements of advice. It wasn’t just a ‘few rotten apples’. The end product reflected the skill levels, the company processes and the remuneration drivers within the industry.”

Nearly a decade later, in 2012, ASIC released Report 279 - Shadow shopping study of retirement advice. In this report, only 3 per cent of advice was rated good quality by ASIC. Interestingly, ASIC outlined the difference between good, adequate, and poor advice quality.

We’re now another decade down the track, and not much has changed. The Quality of Advice Review (QAR) is expected to be released by 16th December 2022. While there has been conjecture around what changes may ensue, the initial recommendations of the QAR confirm that in order to provide high quality (or good) advice, certain elements are unavoidable.

At Padua, high quality of advice means the following key elements need to be satisfied:

  1. Compliance – The first step is ensuring that the best interest and safe harbour (or good advice) rules have been satisfied and these are well documented.
  2. Optimising the qualitative outcome – the second part is ensuring that the advice aligns to the needs, objectives, and specific and relevant circumstances of the client. This should be covered off in the compliance step, but it’s so important it renders further reinforcement.
  3. Optimising the quantitative outcome – The final step is not covered in the Compliance or Qualitative steps but is just important. At Padua, we are making this part easy for financial advisers, as outlined below:

  4. Padua Discover – client-facing and adviser-to-client facing digital fact find is completed.
  5. Virtual Technical Manager (VTM) – once digital fact find is complete, VTM will show the adviser each strategy the client is eligible for - leveraging 520 advice strategies. Think about what this does for advisers. Firstly, it makes ALL advisers, whether they are an industry stalwart of 30+ years or a young gun in their Professional Year, into technical geniuses.
  6. Strategic outcome optimisation – Once client eligibility is determined we remove the strategies that aren’t relevant to them. Padua then runs an optimisation algorithm to rank each eligible strategy by quantitative strategic outcome. The adviser can highlight the actual benefit for each strategy for their clients.

This last step is part of Padua’s approach to give advisers the tools necessary for Value Creating Advice (VCA). Benefit minus Cost equals Value. The adviser has now provided VCA to their clients.

Client Experience = Client Engagement = Trusted Advice

The better the experience, the greater the engagement, the more likely the advice will be trusted. In 2020 the CFA released a survey which showed that in Australia, less than a quarter of retail investors (24 per cent) trust the financial advice industry. This compared to the global average of 47 per cent (see Figure A).

Figure A – Australia is lagging when it comes to investors trusting the advice industry

Source: CFA

To understand the client experience you need to look no further than the advice process – and the role the client plays in it (which is extremely limited). The client and adviser meet for the fact find and then the client is not generally re-engaged again until the SOA presentation meeting. This means the client has had no input to the trade-offs at a product or strategy level. How can they be expected to trust the advice? To enhance trust, we need to enhance the experience and client engagement.

Figure B: The current advice process excludes the client

While actions such as the Quality of Advice review may help advisers grapple with many of the issues facing them, including the regulatory burden, the role of technology will continue to grow. It provides the key to resolve the four major issues facing advisers today – the time taken to produce advice, the cost of producing that advice, maintaining the quality of advice, and ensuring clients trust the advice and are engaged with it.