Nearly half of all Australians who seek financial advice are confused when it comes to understanding the difference between personal and general financial advice. This is putting investors at risk of poor financial decisions.
A survey commissioned by the Australian Securities and Investments Commission (ASIC), found that a staggering 47 per cent of respondents incorrectly identified general advice. Only 19 per cent of those surveyed could identify personal advice.
The report, Financial Advice: Mind the Gap,also found that nearly 40 per cent of those surveyed believed that a financial adviser needed to take their personal circumstances into account when providing general advice.
ASIC deputy chair, Karen Chester says: “This disturbing gap in understanding whether the advice they are getting is personal or not means many consumers are under the false premise their interests are being prioritised, when no such protection exists.”
Additionally, nearly 40 per cent of respondents were unaware that advisors were not legally required to act in their clients’ best interest.
As a result, the responsibilities of financial advisers when providing general advice are murky and not well understood, as the Future of Financial Advice (FOFA) protections only apply to personal advice.
The protections include acting in a client’s best interests, providing appropriate advice for client’s circumstances and prioritising client’s interests.
The corporate regulator says its findings reinforce those of the Murray Financial System Inquiry and the Productivity Commission reports on the financial and superannuation systems. Recommendations were made about the term ‘general advice’, which is considered misleading.
“ASIC is seeing increased sales of complex financial products under general advice models – so not tailored to personal circumstances – leaving many consumers, especially retirees, exposed to the potential risk of financial loss,” Chester says.
Further regulation has come in light of the Royal Commission recommendation 2.4. The Government has announced regulations requiring advisers to pass grandfathered commissions onto their clients remaining in contracts after 1 January 2021.
The Government has also issued Ministerial Direction requiring ASIC to monitor and report on industry behaviour in the period 1 July 2019 to 1 January 2021.
Treasurer Josh Frydenberg says the regulations will impose obligations on the financial product manufacturers to keep records on the commissions that are passed to clients.
“Grandfathered conflicted remuneration can entrench consumers in older products even when newer, better and more affordable products are available on the market, ”he says.
The regulations come at the time that the big four banks are looking to back out of personal advice. It was only late last month that Westpac abandoned their personal financial advice in BT Financial to Viridian following ANZ’s sale of financial planning groups to IOOF.
The educational and professional reforms from the Financial Adviser Standards and Ethics Authority (FASEA) and the rise of robo-advice has seen the industry in turmoil.
Speaking at a media roundtable hosted by OpenInvest, NMG principal consultant David Hutchison predicts that there will be fewer financial advisors due to the tougher requirements and lack of income incentive.
“There are really interesting dynamics happening in the advisor market, while the overall number of financial advisors will come down, the way that people consume advice will completely change,” he says.
Instead of a holistic financial solution, consumers will go to advisors for transactional advice.
