“Comparison is the thief of joy”
— Theodore Roosevelt, “Thinking about your Ex?”, Mens’ Health, July 2019
The iterative path to quality
One of the things often overlooked in popular conversations about adviser compliance is the data.
Too often, strong opinions are built on anecdotal evidence and definitive conclusions drawn from generalisations and common knowledge.
Our capacity to see further, and to see more than others, is drawn on the data we’ve collected as a result of our scale and systems. After reviewing approximately 14,000 files*, we think we’re in a good position to talk, authoritatively, about the state of advice.
If you’re used to binary and formalistic approaches to compliance, you might be thrown a little by our observations and our conclusions; we take a substantive, risk-based approach to compliance that considers context, consequence and implications in the assessment of compliance issues.
Admittedly, our sample might not be entirely representative of the broader advice industry, but we’re comfortable generalising from this sample to offer a few observations about advisers.
First, despite the fear-mongering, advisers continue to get better year on year. Despite what our friend Julian might describe as the overwhelming compliance burden, advice quality is improving.
Second, when you compare year-on-year results, it’s clear that the introduction of the FASEA Standards had a significant impact in highlighting issues and expectations that were successfully rectified by the advisers themselves. The results suggest that, just as Commissioner Hayne stated, explaining to advisers why things need to be done is a much better approach than simply insisting on compliance.
Third, the number of identified issues in 2021-2022 decreased, despite higher expectations and a greater number of reviews.
Fourth, low to medium process failures were the greatest source of issues in 2021-2022 and greater than 2020-2021. This may alarm you until you realise that disclosure and ethical failures were the greatest source of issues in 2020-2021.
Advisers’ processes may need some attention, but the data suggest that the conflicts, conduct and cultural issues that afflicted us in the past may be behind us.
Fifth, advisers’ considerations of alternatives (strategies, platforms and products) may be a perennial issue, but it’s dropped out of the Top 5 in 2021-2022. The templated alternatives used in the past, seem to have been abandoned in favour of a bona fide consideration of real alternatives. We appreciate that many attribute this change to the declining influence of vertically-integrated businesses, but we’d prefer to attribute it to deliberate and consistent advice improvements.
Sixth, and the one qualification, is although clear Best Interest Failures appear far less frequently in 2021-2022 than they did in 2020-2021, they represent a higher proportion of identified issues. Before you panic, please appreciate that the differences between the small number of issues is immaterial. Specifically, BID issues represented 0.44% of identified issues in 2020-2021 compared to 0.90% in 2021-2022. Even allowing for the fact that our clients may be more committed to continuous improvement than most licensees, an incidence of failure less than 1% should reassure us that we are moving, slowly but inexorably, towards professionalism.
A picture of progress
For those of you that are visual learners, the following tables compare and contrast observations (ie compliance issues) for the periods 1 July 2020 to 30 June 2021 against 1 July 2021 to 30 June 2022.
Notwithstanding Red October, there were no material changes in either our methodology or regulatory expectations in that time. So, allowing for ASIC’s facilitative approach to regulatory reform, the periods are generally comparable.
We haven’t shared precise numbers, but the larger the block the greater the number of issues identified in that year.
Interestingly, although advice quality issues have been overtaken by advice process issues, they are, in the aggregate, responsible for more issues now than they were historically. It also suggests that, despite what the QAR submissions might assert, there is a symbiotic relationship between process and quality. While it’s counter-productive to prioritise process over outcome/intent, ignoring process entirely is likely to deliver equally sub-optimal outcomes.
This is one of the reasons we’re concerned about the likely consequences and implications of the QAR proposals.
Top Five Observations (01/07/2020-30/06/2021)
- The adviser did not act in accordance with the FASEA Code 5.39% of identified issues
- Aspects of the advice, although reasonable, were not documented in the Statement of Advice. 3.09% of identified issues
- The file indicates a flaw or failure in the adviser’s process 2.80% of identified issues
- The explanation of how the recommendations will satisfy the clients’ needs and objectives was insufficient or unclear. 2.74% of identified issues
- A methodical and considered process for product selection was not followed. 2.72% of identified issues
Top Five Observations (01/07/2021-30/06/2022)
- Aspects of the advice (or advice process) require attention 5.21% of identified issues
- Aspects of the advice, although reasonable, were not documented in the Statement of Advice. 4.21% of identified issues
- The explanation of how the recommendations will satisfy the clients’ needs and objectives was insufficient or unclear. 2.93% of identified issues
- The file indicates a flaw or failure in the adviser’s process 2.89% of identified issues
- A methodical and considered process for product selection was not followed. 2.80% of identified issues
Cautious optimism?
Although there’s still progress to be made, advice quality is improving despite the increased incidence of low to medium process failures. There are demonstrably fewer ethical and conduct issues being identified and, despite indications to the contrary, advisers’ processes are improving.
In my opinion, what clouds the progress being made are legacy issues and poor processes inherited from previous institutional licensees, and implementation issues following the Red October changes. But what is, in my mind, indisputable is the fact that advisers are better informed, and better motivated to manage their professional and legal obligations.
After years of inertia, the emerging advice profession is building momentum and moving towards the trusted profession it has always aspired to be. With advisers now prioritising engagement, intent and outcome over process, both compliance results and client engagement is increasing.
While the journey towards quality is still impeded by conservatism and risk aversion, the journey will not be as hard as you might fear.
We’re happy to help prepare you for that journey or help you identify what’s holding you back. If you’d like our help, please reach out.
