The key to advice affordability

After 466 submissions and eight months of consultation, the upshot of the Australian Securities and Investment Commission’s recent review into advice affordability is that prohibitively high fees are the product of rising fixed costs (namely staff salaries) and steep SoA preparation costs (including research).

While that’s not surprising, it highlights that the key to advice affordability lies in finding a better way to produce SoAs and implement and maintain the advice, since paying staff less or cutting them altogether is not a feasible option.

These issues will be a core focus of Treasury’s upcoming Quality of Advice review, based on its recently released draft terms of reference (submissions are due by 4 February 2022).

The Financial Services Council is pushing for SoAs to be abolished altogether and replaced with a simplified letter of advice.

This proposal is similar to calls for records of advice (RoA) to permanently replace SoAs (a temporary measure introduced as part of the government’s COVID-19 relief package).

Whether it’s called a SoA, RoA or LoA, the fundamental reason that advice documents are long and convoluted remains. The rules that govern the provision of financial advice are complex and ambiguous, forcing licensees and advisers to address every possible interpretation.

The FSC estimates the advice process takes 23.9 hours to complete.

Mirroring the sentiments of commissioner Kenneth Hayne, the FSC has also called for the safe harbour steps to be scrapped.

It is clear that further reform is needed to make the provision of personal advice easier but, in the meantime, the industry should focus on things in their control, such as automating components of the SoA process and presenting information differently to boost client understanding.

An unhealthy obsession with length

There are three key criticisms of SoAs: they are too long, too costly to produce and clients don’t read them.

Yet, the industry has focused disproportionately on reducing the length of SoAs.

There seems to be an assumption that by tackling length, the other issues will be addressed.

However, efforts to reduce the cost of producing SoAs and increase client understanding must go beyond simply length.

While SoAs are primarily compliance documents, they also present an opportunity for advisers to showcase their advice. SoAs should be more than text and tables. They should be a visual, dynamic aide for articulating a business’ value proposition, philosophy and expertise.

Advisers are ideally positioned to drive SoA improvements because they are closest to the client and stand to benefit the most from satisfied, engaged clients.

Licensees, for all their good intentions, are largely responsible for the way SoAs are currently produced and presented.

As the entity responsible and liable for the advice provided under their licence, it is in their interests for SoAs to be lengthy and extensive.

Similarly, product manufacturers and platforms have regulatory obligations to meet. Often that looks like passing the administration burden back to the adviser.

For both licensees and manufacturers, simplification, cost to the client, and client experience are secondary considerations.

Technologists can play a bigger role in supporting advisers to enact positive change.

The production of SoAs is still very manual, time-consuming and adviser-dependent, driving up a practice’s cost to serve.

Technology can automate repetitive tasks, help advisers present complex information in a more engaging style and meet their obligation to communicate in a clear, concise and effective manner.

Technology can create an engaging interactive experience for the client.

As the industry pushes for reforms to make advice more affordable, it must also strive to make the delivery of advice more effective.

As the Baby Boomers get older, their ability to read and digest large advice documents will inevitably decline.

At the other end of the spectrum, younger clients don’t have the appetite for wordy documents. They expect a rich, digital experience similar to the one they get from other service providers in banking, entertainment and retail.

Getting the advice experience right is critical because affordability is irrelevant if clients don’t fully understand and value the advice they receive.

Kevin Liao, chief executive, Roar Software

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.