What even is good advice?

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.