SOAs do little to address information asymmetry

Submissions into the Quality of Advice Review have spanned every part of the sector, with 133 individual reports coming from insurers, associations, industry bodies, fund managers and advisers themselves.

While the focus of the advice industry groups has very much been around making the day to day lives of those in the industry easier, the likes of the Australian Financial Complaints Authority (AFCA), Vanguard and several law firms have offered insight into the impact on the consumer.

As the major external dispute resolution scheme, AFCA is in a unique position to understand what the most important systematic and administration issues are within the industry. The financial advice industry may have seen the most significant change and regulatory impact from the Royal Commission, yet the sector makes up less than 6 per cent of complaints received by AFCA according to their latest report.

“SOAs are of limited value in addressing information asymmetry” explained the industry body in their submission, noting that “many retail clients do not read of comprehend SOAs in full”. They flag issues with the complexity and length of such documents, along with the templated nature that ultimately seeks to meet the requirements of compliance departments rather than the end client.

“The content requirements for SOAs and ROAs should be focused on ensuring the client makes an informed decision about the advice” and should not be classified as “effective” unless the client fully understands it. AFCA suggests clients be directed to ASIC’s Money Smart website for information sheets and appendices rather than lumping this content into already excessive SOAs.

Another area of concern for the authority is the impact and operation of limited scope advice arrangements. The challenge being that in many cases clients do not know or are not aware of having their ‘scope’ limited or alternatively, advisers misreading a request for specific advice that should actually cover a broader range of topics.

AFCA raises the example of a client seeking to establish an SMSF to invest in a property, and assuming that the adviser will consider whether the property is a suitable investment. It is easy for the adviser to have a “completely different understanding of the brief” with this example a quite common complaint received by the group.

Naturally, the treatment of and communication to wholesale or sophisticated investors is central to their experience, given the significant growth in this sector in recent years. AFCA says, “clear information should be provided to the client about the consequences of becoming a wholesale client, whichever class of wholesale being considered”.

The group also highlights a number of key issues with the tests as they currently standing, being:

1. the client is not financially literate or experienced and has recently come into a significant amount of money, such as through inheritance or retirement, and has more than $500,000 to invest
2. the accountant is part of the same business group as the adviser and certification can be provided without the client’s knowledge or
3. the adviser places the responsibility for the sophisticated investor assessment on the client to self-assess

Most importantly, AFCA suggest that advisers should be required to inform clients if and when they are being treated as a wholesale client.

Drew Meredith

Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.