The Quality of Advice Review (QAR) has made a number of recommendations that relate to several aspects of the way in which advice is created and delivered. Importantly, the QAR has attempted to answer:
- What is the nature of advice that investors should expect to receive? and
- What is the documentation and other supporting material which should accompany that?
And implicitly in the consultation paper:
- Who should be entitled to provide what is represented as advice?
The Institute of Managed Account Professionals’ (IMAP) review of the consultation paper and the questions that the QAR required responders to address, suggests that the intent of the recommendations is Quantity of Advice, not Quality of Advice. It is IMAP’s opinion that the QAR will reduce the emphasis on the provision of advice by individual advisers in favour of enhancing the capacity for institutions, both private and industry funds, to provide something that represents a new definition of personal advice – ‘good advice’.
Firstly, there were a couple of good points to come out of QAR. One of these points was the recognition of the bureaucratic approach at ASIC, which has resulted in needless box ticking, paperwork and duplication. QAR Chair Michelle Levy recognises this, although her proposed solution – of ‘just keep it on file and give it to them if they ask’ – is likely to lead to greater risk of poor documentation and a future increased workload for the Australian Financial Complaints Authority (AFCA). We also believe that making digital advice creation easier will be of value.
The Consultation paper’s definition of personal advice is:
- The relevant provider is an individual;
- The service involves a fee;
- The provider or licensee receives a commission, or some other compensation, presumably from a third party; and
- There is an ongoing relationship, or the presumption that there will be an ongoing relationship.
This means that an organisation that provided one-off, ‘free’ advice, would, presumably, not even be subject to a ‘good advice’ standard.
IMAP has a number of objections to the proposals and these include:
- ‘Good advice’ isn’t defined in the consultation paper – and the process of determining what it is, probably by ASIC, at best will leave it looking very like the current safe harbour steps. The process of defining it is likely to result in heavy institutional lobbying of ASIC for something substantially less than the current Best Interest Duty
- Michelle Levy misunderstands how quality services are created. She says that the current regime addresses process not outcomes. However, that’s actually one of its strengths – ask any athlete whether they set records by ‘just doing it’, or whether great outcomes are a result of good process rigorously applied. Best Interest Duty is a principles-based approach to process and we believe it works.
- Michelle Levy’s proposals leave individual advisers still subject to the Code of Ethics with all the constraints that imposes, but removes those constraints from organisations that don’t even have to meet a ‘good advice’ standard; and
- Michelle Levy’s proposal to allow super funds to levy all members, so they can provide ‘free’ advice to a select few, is the very definition of ‘fee for no service’. The proposal represents a retrograde step for the provision of advice;
- The advances over the last decade towards professionalism amongst advisers appears to count for little; and
- Advisers will be operating in an environment where institutions can provide something that looks like free advice but without being obligated to meet the same standards as personal advisers.
These recommendations set us up for another Royal Commission in a decade or so, as we try to unpick why so many retail investors got sold products by institutions, apparently under the guise of advice.
Where do Managed Accounts fit in all of this? Why do we care about the professionalism of advice?
Managed Accounts are, at their core, the systematic application of good investment processes to individual investor’s circumstances, intermediated by a professional adviser who is equipped to understand the investor’s goals and constraints in detail. There is a Best Interest Duty embedded in every step of the chain which links adviser, managed account issuer and Responsible Entity of the funds that comprise so much of the managed account FUM. We believe this is a systemic strength.
If followed through, these proposals will lead us back to advantaging a product-based approach that is biased towards institutions – the goal of which is to sell investments.
You can read IMAP’s submission by clicking here.
The views expressed in the submission and this email are attributed to IMAP and not to the IMAP Regulatory Group or any member of it.
Kind regards
Toby Potter
Chair
Institute of Managed Account Professionals Ltd