How do you really separate product from advice?

Separating product from advice will not mean an adviser can’t, or shouldn’t, recommend a product solution. Of course, they will, and in many cases, certainly, they should.

How would it be if we went to the doctor, explained we had a headache, the doctor diagnosed us as having a migraine but then did not prescribe a solution, often a pharmaceutical product, to help manage it?

What separating product from advice should mean that product providers can’t go about pretending to provide advice when what they are actually doing is providing information on their own product. In other words, they should not be allowed to tell people that the information they provide about their migraine product is medical advice.

This is the reason The Advisers Association (TAA) has issued such a clarion call for the removal of the word ‘advice’, from ‘robo-advice’, ‘intra-fund advice’ and ‘general advice’. When a consumer hears the word ‘advice’, they may, not unreasonably, assume that they have received personal financial advice, advice that is relevant to them and their situation. In our opinion, the word ‘advice’ in these contexts is therefore not only incorrect but potentially misleading.

As we have consistently said, most recently in our ALRC Interim Report submission, we believe the time for separating financial advice from the product is long overdue. For far too long, there has been far too much focus in the law on financial products, to the detriment of financial advice. We need to separate the two in order to better align with consumer expectations, reduce the risks of vertical integration and recognise the changing operating environment of professional advisers.

As a side note, there seems to be an outdated idea that AMP financial advisers are still vertically integrated to AMP, a ‘tied sales force’. For the record, AMP and Hillross advisers have a wide Approved Products List (APL) and the same Best Interests Duty obligations as all other authorised representatives on the Financial Advice Register when making any recommendations – the days of being conduits for the sale and distribution of AMP products are long gone.

But back to the point – how do we separate product from advice?

As Paul Harding-Davis from Advice IQ recently observed, "the biggest mistake made by the Financial Services Reform Act was defining financial advice as the recommendation (sale) of a product". We agree with Paul – so what actually needs to be done to undo that?

We see the process as follows:

1. Change definitions within the Corporations Act - The definition ‘financial product advice’ needs to change to ‘financial advice’. This is something the ALRC Interim Report recommended, and we support. It would mean financial services would be better-picked up and the roles of the licensee and authorised representative structure better-captured.
2. Personal advice then needs to change to reflect both the definition of financial advice and potentially who and what structures are required to offer personal advice.
3. General advice – as discussed above, we strongly believe the word ‘advice’ should be divorced from the term ‘general advice’ and re-termed something like ‘general information’ or ‘general product information’. Financial advisers rarely give general financial advice, as they have Best Interests and Code of Ethics obligations. We therefore did not support the ALRC recommendation to substitute the term ‘financial product advice’ with the terms ‘general advice’ and/or ‘personal advice' until after Treasury has completed its Quality of Advice Review (QAR).
4. Changing the above will set the scene for the clear distinction between product providers, who are giving information to sell or retain their products, and financial advisers, who are providing strategic advice and using a product solution to meet and service a client’s advice needs.
5. We need financial advice to be recognised as a profession by using principles-based law to enable this. The professional bodies should be developing the operating guidelines, and advisers using their professional judgement to give personal advice, like any other profession.

Transforming the financial advice industry to a genuine profession requires the uncoupling of advice and product and a collective will - the willingness for all stakeholders to work together collaboratively. It has been refreshing to see so many members of the financial advice community willing to embark on that journey.

Neil Macdonald, CEO, The Advisers Association

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.