PORTFOLIO POINT: Want financial advice on retirement, pensions or Centrelink entitlements? Read this before you make your first phone call.
You wouldn’t have believed some of the squealing that followed the release of the latest adviser shadow shopping report.
Responses from advisers included gems such as “staggered with the arrogance of ASIC” and “why not note that 85% were happy with the advice”. (It was actually 86%, but what’s 1% hey?). And then my favourite: “it’s not what ASIC thinks, it’s what the clients think”.
The comments suggest something pretty scary – that many financial advisers believe all they need is to be liked by their clients. They don’t need to actually help them.
The latest shadow shopping report from the Australian Securities and Investments Commission found exactly that. The advice handed out to about two in five shoppers was of “poor” quality.
ASIC’s report pertained to advice given to pre- and post-retirees, roughly those aged 50 to 69. It was specifically investigating the quality of advice as it related to retirement. For anyone considering getting financial advice about transition to retirement, Centrelink pensions, allocated pensions, salary sacrifice, debt reduction versus pensions, whether in a SMSF or a public-offer fund, then this is a must-read document. Here’s the link.
The report will give you a good indication of what you need to read from your adviser.
If you assume ASIC can be a reasonably unbiased judge (they need to weigh up the best interests of customers, versus their ongoing role as the policeman for financial advisers), then their report was pretty damning.
ASIC’s top-line findings were:
- Just 3% was considered “good” advice.
- 58% scored “adequate”
- 39% was rated “poor” advice.
When “poor” advice outweighs “good” advice by 13 to 1, there’s need for concern. But of greater concern, ASIC highlights, is that 86% of respondents believed that they’d been provided with good advice.
So, why do those who are considering retirement need to read the report?
ASIC laid out clearly what it believed to be good advice, what was so-so and what was bordering on evil.
What it said it wanted to see in a “statement of advice” (the written document that must accompany financial advice) included a thorough investigation of a client’s current situation, good communication and coaching from the adviser about realistic goals in retirement.
Most importantly, it wanted to see strategies that enhance a client’s retirement, which would include strategies such as transition to retirement, starting pensions, rolling back pensions, use of defined benefit funds, structuring of assets for Centrelink purposes, estate planning and taxation considerations.
Only six advisers were graded “good” for strategy. Four of them then let their clients down with issues such as poor product recommendations.
What ASIC didn’t want to see (and clearly saw too much of) was the flogging of unsuitable or unjustifiable higher-fee products, sausage factory pro-forma advice documents, unnecessary product switches, debts and defined benefit funds being ignored because it was too to hard to deal with, strategies that left the client worse off and investment risks not matching the client’s stated risk profile.
There were four cases where a SMSF had been recommended to clients. Three of those recommendations weren’t justified, said ASIC.
“Problems identified included recommendations to start an SMSF where the client’s funds were unlikely to make this an economically viable option, and cases where the basis for recommending the commencement of an SMSF, instead of using a public offer superannuation fund, was not explained.”
So, what constitutes good advice in the area of retirement and income streams?
These start with completing a proper “financial analysis”, or having enough detail of the client’s income, expenses, assets and liabilities, along with their aims and what they’re seeking. The adviser then needs to lay out the “scope of advice”, or exactly what will and won’t be covered and why.
There needs to be sufficient discussion of the client’s risk profile and tolerance to risk.
Simply, if they don’t ask enough questions about you, get you to fill in enough detail on forms, and didn’t discuss with you the relative dangers of shares and property over fixed interest and cash, then doing a good job on the rest is going to be difficult.
But while there were only two of the 64 SoAs that were rated good, plenty of others were nearly good, but let themselves down in an area or two.
Focus on strategy
ASIC was pretty clear that the best place customers could be helped was with good strategy.
Sometimes the “strategy” is about number-crunching and telling a client something they might not want to hear. That is, you don’t have enough to achieve the income in retirement that you want to achieve. Or, more importantly, that “if you go on spending like you are, your money will run out in five years”.
The sorts of strategies that clients need from their advisers are the sorts that are going to increase their retirement nest-egg, or better place them for retirement. We’ve mentioned some of those strategies above.
Often, the best advice could be using super to pay down debt, because the relative return is going to be better than super could hope to achieve.
One example was highlighted by ASIC. The client wanted to reduce the risk in their portfolio. They had a substantial super balance and modest income needs – that is, they had enough to fund their retirement.
“However, the adviser put a high-growth asset allocation in place, with the majority of the client’s retirement funds in shares and property. While the SoA stated the investment mix, the asset allocation was not sufficiently highlighted or explained to the client, who believed that their risks had been appropriately adjusted.”
Consideration of alternative strategies
There is always more than one way to skin a cat. Advisers are required to give you some of the alternatives that they considered. They might have discounted them quickly, but they need to tell you what they are and why they didn’t think they suited your requirements.
Replacement with in-house products
About 83% of the advice investigated was from a major bank, super fund or major financial services institution.
“We saw widespread replacement of existing financial products with ‘in-house’ products. In this study, when replacement products and new products were recommended to research participants (57 advice examples), almost three-quarters were for ‘in-house’ products. Eleven of the 14 advice interactions with advisers from one of the ‘big four’ banks (or their financial planning divisions) resulted in an in-house product recommendation.”
This is the argument for financial advisers with at least some degree of independence. Independent advisers might have their preferred products, but their ties to them are usually substantially smaller.
Conflicted remuneration structures
ASIC also pointed out that there was a link between the quality of advice and remuneration structures. But it also noted that the review was undertaken last year and some of its concerns would be addressed by the FoFA reforms, now out.
The biggest chasm
This is the difference between what ASIC thought was good advice (3%) and what clients thought was good (86%).
Financial advice can be very complex and ASIC stated that clients simply didn’t have the financial knowledge to determine whether the advice they had received was good or not. If they were knowledgeable enough, they were unlikely to seek out an adviser.
The saddest element of this is the comments at the top of this column from advisers. For advisers to claim that it only matters what the client thinks of the advice is an indictment of their level of expertise. For ASIC to discount that largely positive feeling from “clients” makes complete sense.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser, as some of the strategies used in these columns are highly complex and require high-level technical compliance.