The institutional tightrope act

There is a book to be written on the unintended consequences of the regulator relaxing the personal advice regulations (introduction of ‘scalable advice’ RG 244).

The good intent was to make financial advice more accessible and affordable to less affluent Australians, by allowing personal advice to be limited in scope to a single financial topic, e.g. just looking at someone’s superannuation.

The outcome, however, has been that every institution, bar possibly none, that has offered advice within this regulation has been issued with a related EU (enforceable undertaking), and a public scandal to boot.

Why did it go so wrong and what lessons can be learnt, are topics for another time.

The immediate question is ‘what are the institutions going to do next?’ because they have funds under management to protect and grow, which is why they got into financial advice in the first place.

Relying on aligned – rather than directly employed advisers – to protect and grow their FUA is high risk of a different kind.

It is high risk because the vast majority of their account holders are consumers holding a smartphone and they are not afraid to use it.

Their increasingly least preferred channel for getting information or doing stuff is making an appointment to meet face-to-face, or even over the phone.

However, trying to digitise the type of personal financial advice that has got the institutions into trouble is a flawed strategy because automating anything fundamentally flawed just makes the mess bigger, quicker.

The topic of the advice is to consolidate and move products from one provider to another. It is impossible to wholly objectively recommend and evidence the best possible product, such as a superannuation account, based on an individual’s personal circumstances.

To digitise this advice is to design an algorithm. To achieve this, all the product features and fees of all the compared products would have to be normalised, and the user would need to understand the features to weigh up their relative importance.

Neither of those two hurdles will be overcome anytime soon.

Digitisation can remove bias and conflicts of interest but using it to sell product veiled as a personal product recommendation is a fool’s pursuit.

That is why the news that financial institutions are moving away from the traditional model of institutionally-aligned advisers comes as no surprise. The risks of damage to brand reputation and regulatory intervention are simply too high.

Digitisation of a completely different kind, however, is the future of financial advice for ordinary, non-affluent Australians.

It is what every Australian needs and can benefit from; will protect and grow the institutions assets, depending on how well they deliver it; and finally, it does not require the regulator to try to be a catalyst for change.

It works like this:

Firstly, an institution will automatically generate a personal financial plan for every account they manage, like a superannuation account. A real-time plan is generated digitally and tailored to the life stage of the account holder.

Being a real-time plan means it is continually and automatically updated incorporating all inputs and actions authorised by the account holder.

For example, the account holder may well receive proactive advice to change contributions, underlying investments, change insurance cover, or roll it over in preparation for retirement.

Secondly, all the account holder has to do is check the assumptions about their personal situation are correct, or adjust them, and authorise for the advice to be implemented with a single click.

Yes, this real-time financial plan is limited to only one account and too many Australians still have more accounts than they require.

If the features and fees of all these accounts are too complicated for someone to understand and hence consolidate without influence from a conflicted adviser, then are we not back where we started?

The simple answer is no, because irrespective of how many first time recipients of their real-time financial plan have only one account, it will be the long-awaited catalyst for all Australians, especially the less affluent. If you only have one account and are with a provider you trust, then you are on your way.

In this new world, institutions will compete for assets under management based on the ease, clarity and transparency of the real-time financial plans they offer with their products.

They will always be free, of course. And they can be free because they will be 100 per cent digital, which means all the back-office support can also be 100 per cent digital, even the compliance audits.

If an institution does not offer real-time financial plans as part of their product, then they will wither fast. If their underlying fees are not competitive then their own real-time financial plans will expose that.

Generation of a real-time financial plan or suggesting any actions, is of course personal financial advice, which means an SOA is always required and the guidelines associated with digital advice also kick in.

With complete digitisation comes complete traceability. The regulator, consumer and their institution will be aligned.

Jan Kolbusz is founder and executive director, strategy and innovation, at Decimal