The Quality of Advice Review: Understanding the dimensions of quality

By Jayson Forrest - Managing Editor  - IMAP Perspectives

With submissions now closed for the Quality of Advice Review, Adrian Kwa (Strategie3) and Toby Potter share their thoughts on what quality advice is and outline their key recommendations to Treasury

Consistent with three recommendations made by the Hayne Royal Commission - recommendation 2.3 (Review of measures to improve the quality of advice), 2.5 (Life risk insurance commissions) and 2.6 (General insurance and consumer credit insurance commissions) - the Government is currently undertaking a review into the quality of financial advice in Australia.

The Quality of Advice Review (QAR) is aimed at ensuring that all Australians have access to quality, affordable and accessible financial advice. The review will also consider how to ensure the regulatory settings support Australians getting access to affordable financial advice.

IMAP and numerous other industry stakeholders have submitted their submissions on QAR. These submissions are an important part of stakeholder feedback, as the QAR - which is being led by Allens partner, Michelle Levy - determines whether previous measures implemented by the Government, regulators and industry, have improved the quality of financial advice, and whether further reforms or changes are needed.

Amongst a range of issues, the review will assess:

• whether there are opportunities to streamline and simplify regulatory compliance to reduce costs and duplication;
• how to improve the clarity and availability of documents provided to consumers; and
• whether parts of the regulatory framework have created unintended consequences.

Speaking at an IMAP webinar on the QAR, the Managing Director and Chief Executive Officer of Strategie3, Adrian Kwa, shared his key recommendations on this broad review. He says with over 20 years of layered regulatory reform, the QAR is an excellent opportunity for the industry and Government to carefully assess whether existing regulation was applicable and actually needed.

Adrian outlined six recommendations he believed were particularly important for improving the quality and accessibility of advice. These were:

1. Measuring the quality of advice.

2. Increasing access to advice.

3. Amending the Safe Harbour steps.

4. Conflicted remuneration.

5. Fee consents.

6. Improving advice documents.

1. Measuring the quality of advice

According to Adrian, advisers can measure advice quality by referencing what the client was seeking to achieve, and determining whether the advice provided was more likely to achieve the client’s goals or address the particular issue they were seeking to address.

When measuring the quality of advice, he believes this can be assessed in six ways:

* Advice that is more likely to solve the problem/goal of the client;

* Advice that educates and empowers the client;

* Advice that represents value to the client;

* Advice that can be put into action;

* Advice that manages risk appropriately; and

* Advice that is technically sound/feasible.

“Quality should always be assessed in light of what the client is trying to achieve,” says Adrian. “The client is always at the centre of this framework. When you add all these factors together, it’s all about what the client wants to achieve and how the advice got them there.

“If we could more closely align the Best Interest Duty to these factors and be less focused on the documentation aspect of advice, then I think we might have a chance of focusing more on quality of advice and less on process in our documentation pieces.”

2. Increasing access to advice

Adrian believes the key to increasing access to advice is to enable advisers to engage in greater levels of initial and ongoing advice through the provision of general advice.

“We can actually talk to clients about a whole range of issues without going as far as making an actual recommendation on a specific product or strategy. I believe the industry should be doing a lot more of that but unfortunately, the law currently doesn’t allow us to do that,” he says.

“And another important part of accessing advice is reducing the cost of advice. That means we not only have to drive down the cost of the SOA, but also address the ongoing cost of servicing a client, which is a lot more than just advice documentation.” 

• As part of increasing access to advice, Adrian believes:
• Advisers should be allowed to limit the scope of advice with client consent;
• Advisers should have their prior education and relevant industry work experience recognised;
• There should be Government support for advice, such as the tax deducibility of advice or even advice subsidies; and
• The industry needs to facilitate solutions that will help drive down the initial and ongoing cost of advice, which will help free up adviser capacity to service more consumers in need of advice.

3. Amending the Safe Harbour steps

One of the fallouts from the Royal Commission was whether the Safe Harbour steps should be removed. There is widespread industry consensus that the Safe Harbour provisions are the reasons why there is so much compliance and why the advice steps have become proscriptive. 

Although the Safe Harbour provisions act as a safety net for advisers, to ensure they are compliant with each step of the advice process, there is strong argument that these provisions are driving procedural compliance at the expense of advice. However, if the Safe Harbour steps were removed, what would replace them?

Adrian concedes that while there are some current problems with the Best Interest Duty, including the Safe Harbour provisions, his recommendation is to maintain them, but more closely align the steps to what an adviser actually does.

4. Conflicted remuneration

According to Adrian, there is currently an appetite to remove life insurance commissions entirely from the remaining exemptions. However, he believes this will have a negative structural impact on the industry, with many advisers no longer choosing to provide insurance advice.

“Over a seven year period, the percentage of new business going into life insurance products has dropped by about 50 per cent,” he says. “Removing commissions will mean that while some advice businesses will still be able to afford to provide insurance advice - by packaging it up as part of a client’s advice fees - ultimately, it will disadvantage those everyday consumers who simply can’t afford advice. So, this is a real issue.”

Adrian is therefore of the opinion that insurance commissions are necessary to facilitate access to advice. He adds that the Life Insurance Framework (LIF) reforms have gone beyond their intention, and have directly resulted in major shortages in advice.

5. Fee consents

In his QAR recommendations, Adrian calls for the Fee Disclosure Statement (FDS) to be dropped entirely, as there is now an annual client consent in place. He also strongly advocates for trustees and platforms to align to the same industry forms and fee consent dates with their documentation.

6. Improving advice documents

And finally, Adrian believes advice documentation needs to change to something simpler. He is calling for the Government to scrap the SOA and ROA, and replace it with an Advice Record, or Letter of Advice, which is much shorter than an SOA.

“An Advice Record shouldn’t be the primary vehicle used to educate clients on advice,” says Adrian. “Instead, it should be a document that clearly and concisely articulates the key points of the advice. That’s because no client should have to wade through a 70-100 page advice document, which is what most SOAs are. Unfortunately, the size and complexity of SOAs have become one of the unintended consequences of the current regulatory framework.”

In IMAP’s submission on QAR, IMAP largely addressed the first and last questions in the review paper: Question 1 - What are the characteristics of quality advice…?; and Question 83 - What further actions could ASIC, licensees or professional associations take to improve the quality, accessibility or affordability of financial advice?

According to IMAP Chair, Toby Potter, in addressing this question, it was important to first discuss the key ‘dimensions of quality’ of an advice process.

“My main concern with the whole QAR is it views advice as a transactional process. It views advice as just being a 4-10 week process to arrive at a document and that’s the end of the process,” says Toby. “But it isn’t the end of the process, it’s really just the beginning. Quality is about client outcomes, achieved through time.

“If we think about the ‘dimensions of quality’, first and foremost, quality advice isn’t just about advice itself. The quality of advice process is about doing those things that increase the probability that the client will achieve their personal goals within their personal constraints.”

Toby says another ‘dimension of quality’ is being able to accomodate multiple goals or manage multiple constraints within the advice and investment process. For example, ESG objectives, which may be in conflict with a client’s return objectives or the objectives of existing holdings.

Other dimensions of quality include cost and value. These include the cost of the advice and its implementation, including underlying investments, and the value attributed to the advice by the client. While consistency with the client’s risk appetite is another dimension of quality.

Toby’s sixth dimension of quality is the timeliness of decision-making, including the implementation of advice and investments. And finally, there is the continued delivery over time, the ability of the adviser and their organisation to continue to meet client needs over time.

According to IMAP, the purpose of providing personal advice relating to investments is to meet client goals through those investments over time. Toby believes the probability of client success with investing is improved by:

• Close alignment with client specific circumstances;
• A structured process for investment management; and
• Timeliness and certainty of investment implementation.

Importantly, Toby adds that the other dimension that raises the probability of client success is the systematic implementation of investment decisions through the use of managed accounts, which will generally:

• result in more regular reviews of portfolio composition than is possible by individual advisers;
• is less likely to result in erratic outcomes and variation between clients;
• is lower in cost than individual adviser implementation;
• allow advisers to dedicate more time to those activities clients say they value; and
• enables advisers to service and provide advice to more clients.

As an example of putting these dimensions into practice, Toby points to the recent experience of an advice business, which revealed it took it one year to remove one manager from about 65 per cent of 300 client portfolios. This experience highlighted the need for the business to implement a managed accounts solution.

According to Toby, the one year it took the business to implement this change for its client portfolios cannot be a measure of a quality process.

“The costs of creating and implementing advice over time far outweigh the upfront costs of creating a single SOA,” says Toby. “If we’re thinking about dimensions of quality of advice, we need to be thinking of those factors that relate to the delivery of an advice relationship over time. It’s those factors that will lead to the higher probability of the client achieving their personal goals.

“It’s the accretion of value over this 20-year advice relationship, which demonstrates whether quality has been delivered or not,” says Toby.

Submissions for the QAR are now closed. The final report will be provided to Treasury by 16 December, 2022.

You can view the webinar video on IMAP's YouTube channel by clicking HERE

Speaking at an IMAP webinar on the QAR, the Managing Director and Chief Executive Officer of Strategie3, Adrian Kwa, shared his key recommendations on this broad review. He says with over 20 years of layered regulatory reform, the QAR is an excellent opportunity for the industry and Government to carefully assess whether existing regulation was applicable and actually needed.

Adrian outlined six recommendations he believed were particularly important for improving the quality and accessibility of advice. These were:

1. Measuring the quality of advice.

2. Increasing access to advice.

3. Amending the Safe Harbour steps.

4. Conflicted remuneration.

5. Fee consents.

6. Improving advice documents.

1. Measuring the quality of advice

According to Adrian, advisers can measure advice quality by referencing what the client was seeking to achieve, and determining whether the advice provided was more likely to achieve the client’s goals or address the particular issue they were seeking to address.

When measuring the quality of advice, he believes this can be assessed in six ways:

* Advice that is more likely to solve the problem/goal of the client;

* Advice that educates and empowers the client;

* Advice that represents value to the client;

* Advice that can be put into action;

* Advice that manages risk appropriately; and

* Advice that is technically sound/feasible.

“Quality should always be assessed in light of what the client is trying to achieve,” says Adrian. “The client is always at the centre of this framework. When you add all these factors together, it’s all about what the client wants to achieve and how the advice got them there.

“If we could more closely align the Best Interest Duty to these factors and be less focused on the documentation aspect of advice, then I think we might have a chance of focusing more on quality of advice and less on process in our documentation pieces.”

2. Increasing access to advice

Adrian believes the key to increasing access to advice is to enable advisers to engage in greater levels of initial and ongoing advice through the provision of general advice.

“We can actually talk to clients about a whole range of issues without going as far as making an actual recommendation on a specific product or strategy. I believe the industry should be doing a lot more of that but unfortunately, the law currently doesn’t allow us to do that,” he says.

“And another important part of accessing advice is reducing the cost of advice. That means we not only have to drive down the cost of the SOA, but also address the ongoing cost of servicing a client, which is a lot more than just advice documentation.” 

As part of increasing access to advice, Adrian believes:

• Advisers should be allowed to limit the scope of advice with client consent;
• Advisers should have their prior education and relevant industry work experience recognised;
• There should be Government support for advice, such as the tax deducibility of advice or even advice subsidies; and
• The industry needs to facilitate solutions that will help drive down the initial and ongoing cost of advice, which will help free up adviser capacity to service more consumers in need of advice.

3. Amending the Safe Harbour steps

One of the fallouts from the Royal Commission was whether the Safe Harbour steps should be removed. There is widespread industry consensus that the Safe Harbour provisions are the reasons why there is so much compliance and why the advice steps have become proscriptive. 

Although the Safe Harbour provisions act as a safety net for advisers, to ensure they are compliant with each step of the advice process, there is strong argument that these provisions are driving procedural compliance at the expense of advice. However, if the Safe Harbour steps were removed, what would replace them?

Adrian concedes that while there are some current problems with the Best Interest Duty, including the Safe Harbour provisions, his recommendation is to maintain them, but more closely align the steps to what an adviser actually does.

4. Conflicted remuneration

According to Adrian, there is currently an appetite to remove life insurance commissions entirely from the remaining exemptions. However, he believes this will have a negative structural impact on the industry, with many advisers no longer choosing to provide insurance advice.

“Over a seven year period, the percentage of new business going into life insurance products has dropped by about 50 per cent,” he says. “Removing commissions will mean that while some advice businesses will still be able to afford to provide insurance advice - by packaging it up as part of a client’s advice fees - ultimately, it will disadvantage those everyday consumers who simply can’t afford advice. So, this is a real issue.”

Adrian is therefore of the opinion that insurance commissions are necessary to facilitate access to advice. He adds that the Life Insurance Framework (LIF) reforms have gone beyond their intention, and have directly resulted in major shortages in advice.

5. Fee consents

In his QAR recommendations, Adrian calls for the Fee Disclosure Statement (FDS) to be dropped entirely, as there is now an annual client consent in place. He also strongly advocates for trustees and platforms to align to the same industry forms and fee consent dates with their documentation.

6. Improving advice documents

And finally, Adrian believes advice documentation needs to change to something simpler. He is calling for the Government to scrap the SOA and ROA, and replace it with an Advice Record, or Letter of Advice, which is much shorter than an SOA.

“An Advice Record shouldn’t be the primary vehicle used to educate clients on advice,” says Adrian. “Instead, it should be a document that clearly and concisely articulates the key points of the advice. That’s because no client should have to wade through a 70-100 page advice document, which is what most SOAs are. Unfortunately, the size and complexity of SOAs have become one of the unintended consequences of the current regulatory framework.”

Adrian Kwa is Managing Director and Chief Executive Officer of Strategie3; and Toby Potter is Chair of IMAP.

They spoke at an IMAP webinar on the ‘Quality of Advice Review’.

A copy of the webinar is available HERE