By Andrew Baker, Senior Adviser, Ignition
Just before Christmas 2021, Treasury released the draft terms of reference for the Quality of Advice Review (QoA)which will be undertaken over 2022. This is one of the most important financial services policy reviews which will be held this year, and the first major revisit of financial advice since the trauma of the 2018 Royal Commission into Misconduct into Banking, Superannuation, and the Financial Services Industry.
The QoA Review will be hugely important not just for the financial advice industry, but for super funds, asset managers, and others where financial advice is either a service they provide or facilitate for their members / customers, or a distribution channel key to their business model.
The proposed goal of the QoA Review reads as something of a post-Royal Commission rethink: it will “consider how the regulatory framework could better enable the provision of high quality, accessible and affordable financial advice for retail investors“.
Since the Royal Commission, these goals have been contradictions in terms – the quality of advice may have improved, but accessibility and affordability certainly have not. Rather, what has been observed is:
- A sharp reduction of financial adviser numbers, significantly reducing capacity to serve traditionally delivered advice (both investment and risk).
- A significant rise in the cost of traditional advice delivery, in part due to complying with much higher costs of industry regulation.
- Unsurprisingly, a largely evaporated ability for the industry to deliver advice at affordable price points (from the perspective of the consumer) has largely evaporated, and it is now common to see traditional advice providers setting a floor for client investible assets of ~$500,000 – well above typical assets of mass-market retirees and investors.
Proposed areas of investigation for the Review will include excessive compliance obligations, principles vs rules-based regulation, clarity of disclosure, and undesirable unintended consequences arising from the post Royal Commission regulatory framework.
By far the most interesting of the proposed areas to which the Review should have regard is digital advice and regulatory technology (notwithstanding Ignition’s specific aspirations, the other areas of the Review are fairly predictable):
4.4 ….innovation and the development of technological solutions including the use of regulatory technology and digital advice. The Review should pay particular attention to how technology and digital advice might enable mass market adoption of low-cost advice, particularly by young consumers, those with low asset values and consumers who do not currently engage with the advice industry
This is a recognition of the advice gap which has opened up between the declining supply of traditional advice vs the growing demand for advice (in all its forms) from the rapidly growing pre-retirement and at-retirement segments, but also the younger segments often ignored by advice providers (large numbers of whom will inherit significant wealth in coming years).
Notably, there is no reference in the draft terms of reference to “robo-advice”. Although the industry often uses “digital advice” and “robo-advice” as inter-changeable terms, there are in fact significant differences:
- Robo-advice is typically an online service which takes customers through a simple fact-find and then uses algorithm calculators to allocate or suggest a suitable investment portfolio, usually outside of retirement products such as super. Robo-advisers provide customers with an opportunity to self-serve, and can be a quicker, more affordable way to invest savings. Because of its relative simplicity, there are many providers of robo-advice services, ranging from fintechs to major asset managers.
- Digital advice is the digital enablement of advice delivery. Digital advice encompasses retirement and investment needs, and includes delivery of personal advice with a Statement of Advice that complies with the best interest duty and related obligations. Digital advice also uses fact-finds and algorithms, but where robo-advice simply told you how to allocate your investment, digital advice tells you whether or not you should be investing or adding to super, because of affordability, suitability of or complexity of advice needs. This is a far more complex task to perform, and consequently there are far fewer providers of digital advice.
From the perspective of Ignition Advice, if a serious step change is to be made towards achieving the Review’s proposed goal of “high quality, accessible and affordable financial advice for retail investors”, the adoption of digital advice technologies is key. There is no other realistic route to providing low-cost, consistent, compliant, robust personal advice at the sort of scale contemplated.
This conclusion has been obvious to many in Australia’s financial services industry for some years: the past problem has been a lack of sufficiently sophisticated digital advice solutions for institutions to consider. However what seemed blue sky even five years ago, is now in production. Ignition Advice, for example, is live with multiple clients in Europe, providing adviser-supported, direct-to-customer, and hybrid advice models across the key topics of retirement, investment and insurance.
The UK & Irish wealth industry in particular is rapidly embracing hybrid digital advice as a means of addressing the advice gap, finding new sources of growth, and responding to regulatory requirements such as pathways at retirement.
By comparison, the Australian industry has been slower to move. Many institutions have had other priorities in recent years, or have not seen themselves as being in the business of advice provision. Some have been scarred by the Royal Commission experience, or remain wary of the subsequent regulatory uncertainty such as the Westpac general advice case.
While Ignition’s view is that digital advice can already be embraced in a fully compliant manner (see our “Compliance myths about digital advice” white paper here), it’s likely that the QoA Review will further ease concerns about risk and compliance in relation to digital advice.
There is an obvious intersection of the QoA Review with the Retirement Income Covenant (RIC). These policy initiatives are running along similar timelines but are not currently as integrated as they need to be. The draft QoA terms of reference note that the Review should have regard to the RIC, but as just one of several policy developments. Ignition’s view is that the Review is in fact a critical input to a successful implementation of the RIC, and a pre-requisite for the guidance pillar of the retirement income framework:
- The Treasury’s RIC 2021 Position Paper contemplates super funds developing complex new retirement income products (e.g. pooled longevity products) and offering appropriate guidance to fund members about retirement income (ranging from information to personal advice) to help them make decisions.
- Submissions to the RIC consultation process have highlighted the difficulty of doing so via the current scope of general or intra-fund advice, given the complexity of retirement income issues and their dependence on individual circumstances, and have suggested bringing the RIC and QoA review into alignment.
Ignition’s perspective is that the outcomes of the QoA Review will be necessary to making the RIC a reality at scale. Without it, there is a distinct risk that newly-developed sophisticated retirement income products will sit on the shelf, largely unused for lack of suitable advice.
Ignition Advice intends to actively contribute to the Review as it progresses in 2022, with a report to the Government from the yet-to-be-appointed independent reviewer due in December. We’re excited to demonstrate what is being achieved in digital advice right now (not off in the never-never), and the benefits it is already bringing to large numbers of investors in making better decisions about retirement, investment, and insurance.