“Simple, clear purpose and principles give rise to complex and intelligent behaviour. Complex rules and regulations give rise to simple and stupid behaviour.”
— Dee Hock
The Good
Towards the end of 2019, there seemed to be two schools of thought amongst advisers contemplating the imminent implementation of the FASEA Standards; one group thought the standards a well-intentioned distraction that simply rearticulated the law, while the second condemned them as impractical regulatory overreach that profoundly threatened the advice industry.
Both groups were right.
And both groups were wrong.
One of the most compelling indicators of an emerging advice profession, is the skill and intention advisers have displayed in adopting, and embedding, the FASEA standards in their advice processes.
To be fair, the Standards (and FASEA’s Guidance) are, in some respects, profoundly problematic but we’re impressed by advisers, and licensees, reaction. In most cases, they’ve had significant success in articulating and applying them.
Our analysis of our reviews to date shows that relatively few ethical contraventions/errors occur; while they often correlate with cultural issues they are significantly outpaced, as you’d expect, by the Four Horsemen of Advice Compliance – Discovery, Documentation, Process and Quality.
While there may appear to be a significant proportion of non-compliance, it’s a concentrated risk management issue and, with relatively little effort, the issues can be remediated and prevented from recurring. Those licensees that have been most successful have led, or at least encouraged, their advisers to move beyond compliance and, in a post-disclosure world, recognise that engagement is the foundation of quality advice.
For those of you that prefer listicles to graphs, our data suggests that issues occur where:
- The Adviser did not act in accordance with the FASEA Code of Ethics.
- The Adviser did not actively consider the Client’s broader, long-term interests and likely circumstances. (FASEA Standard 6)
- The file fails to demonstrate that the Adviser upholds and promotes the ethical standards of the profession. (FASEA Standard 12)
- The Adviser’s records are not kept in a form that is “complete and accurate”. (FASEA Standard 8)
- The Adviser failed to demonstrate that their Client understood their advice, its benefits, costs and risks. (FASEA Standard 5)
This is a great result for those of us that believe in the value of advice and the emerging advice profession. These behavioural and cultural changes have been operationalised faster, and more effectively, than any other compliance measure since FSR. Better yet, the data gives us hope that advisers have moved beyond financial product sales and willingly embraced their professional and ethical commitments.
The Badass
One of the advantages of supporting over 120 Australian Financial Services Licensees is the sheer variety of those practices and the depth and quality of our data. Our base, and OpenAFSL, gives us a significant advantage and empowers us to confidently assert that some advisers (and some licensees) are professional badasses – they’ve consciously invested time, resources and insight to develop advice processes that not only exceed the minimum compliance standards that frustrate so many, but have done so in a way that ensures the sustainability of their businesses.
Their ethical, considered and consistently innovative approaches to their legal obligations- including their use of technology and their courage – will be addressed elsewhere but it’s particularly obvious in their approach to the FASEA Standards.
A common and consistent factor that unites these badasses, is their commitment to satisfying the intent of the Standards. While their peers slavishly honour the form of the Standards, the better advisers move forward by focusing on their clients’ trust and reliance.
It may be over-simplified, but there seem to be two key realisations that underpin their processes:
ONE: DISCLOSURE IS NOT ENGAGEMENT
Most great insights are obvious in retrospect, but the reality is that advisers (and Licensees) have always preferred to focus on disclosure rather than understanding.
But disclosure is ineffective and reliance on single-point consents or notices, is counter-productive and, in practice, disadvantages consumers. ASIC’s REP 632 “Disclosure: Why it shouldn’t be the default” showed how disclosures and warnings can backfire and contribute to consumer harm, an observation validated by academic research showing that most people find disclosures complex, intimidating, unwelcoming and dull.
The Badasses know this, and have amended their processes to ensure that, as part of their initial engagement and on an ongoing basis, they obtain their client’s free, informed and prior consent. They take the time and effort to ensure their clients understand the scope of the advice they’re offered. Learning from the Royal Commission, they also take care to ensure that their clients clearly understand any ongoing services offered and the likely fees.
FASEA were entirely transparent when they stated that, in their view, an adviser must not proceed to engage the client, or implement the advice, unless or until the adviser is reasonably satisfied that they have received their client’s informed consent.
Consent is easy, but the qualifier imposes an additional level of difficulty. Again, the better advisers take the time, and use a range of practical techniques, to assess their clients’ financial literacy of the client and tailor their advice accordingly.
At a deeper level, these advisers seem to have grasped, and pivoted their processes to reflect, the fundamental difference between engagement and disclosure:
Engagement
- Simplicity
- Comprehension
- CX focus
- Less is more
- Equality
- Tries to mitigate asymmetries
Disclosure
- Specificity
- Clarity
- Risk focus
- More is more
- Paternalism
- Reinforces asymmetries
Two: Execution is not Consent
The second principle is a logical outgrowth of the first.
The better advisers don’t assume, or rely on, execution to prove client consent. Nor do they rely on execution to evidence client understanding.
Unlike many of their peers, these advisers don’t depend entirely on the Authority to Proceed (and the kindness of regulators) and see effective engagement as a series of connected steps. By decompressing their advice process, they provide the space and time to demonstrate the reasonableness of the clients’ consent (and secure deeper engagement).
The Ugly
“FASEA is not asking you to ‘Do More’, but simply ‘Do Better’.”
— Sean Graham, Managing Director
The pop-psychologist Douglas Adams famously wrote that “proof denies faith”.
He was right, but, paradoxically, our embrace of data-based advocacy and evidence-based conclusions forces us to recognise and acknowledge the Four Horsemen of Advice Compliance – Discovery, Documentation, Process and Quality.
To round out this article, I’d like to reveal them to you and share the most frequently noted observations from 2020.
Even without turning your mind to significance, you’ll see the horsemen too and probably observe that Process must ride a Clydesdale. The larger the box, the greater the number of issues.
You may think these results look ugly but if you, like me, had access to year on year data across thousands of files, you, like me, would be proud of advisers’ progress and optimistic about the future.
There’s more work to be done – but don’t underestimate the significant work that’s already been done.
You’re good, but now it’s time to be a badass.
