Category: Wealth Management

Consumers Confusing Different Types of Financial Advice – ASIC

ASIC has released new research revealing many consumers confuse ‘general’ and ‘personal’ advice exposing them to greater risk of poor financial decisions. 

The ASIC report, Financial advice: Mind the gap (REP 614), presents new independent research on consumer awareness and understanding of general and personal financial advice, identifying substantial gaps in consumer comprehension.

“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,” said ASIC Deputy Chair, Karen Chester.

Millions of Australians will likely seek financial advice at some stage in their lives. When they do, it is critical they understand whether that advice is personal, whether it is tailored to their circumstances and does the adviser have a legal obligation to act in their interest. 

“The survey not only revealed consumers are not familiar with the concepts of general and personal advice, but only 53 per cent of those surveyed correctly identified ‘general’ advice.  And even when provided the general advice warning, nearly 40 per cent of those surveyed wrongly believed the adviser had an obligation to take their personal circumstances into account,” Ms Chester said.

The report highlights the importance of consumer awareness and understanding of the distinction between personal and general advice with the Future of Financial Advice (FOFA) protections only applying when personal advice is provided. These include obligations for advisers to act in their client’s best interests, to provide advice that is appropriate to their client’s personal circumstances and to prioritise their client’s interests. These obligations do not apply when general advice is provided.

“The survey also revealed that the responsibilities of financial advisers, when providing general advice, is not well understood. Nearly 40 per cent of those surveyed were unaware that advisers were not required by law to act in their clients’ best interests,” Ms Chester said.

ASIC anticipates the need for financial advice to grow, reflecting an ageing population and many financial products, especially retirement products, becoming more complex. ASIC reports that much of the advice is likely to be general advice, and while appropriate in some circumstances, it is inevitably of limited use.

“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. And whilst the Financial Services Royal Commission, and the Government’s response, dealt with the most egregious risks of hawking of complex financial products, consumer confusion about what is personal and general advice needs to be addressed,” Ms Chester said.  

The report’s findings reinforce those of the Murray Financial System Inquiry and the Productivity Commission reports on the financial and superannuation systems. Those reports made recommendations about the use of the term ‘general advice’, which is likely to lead to false consumer expectations as to the value of and protections afforded advice received. 

Ms Chester said, “This consumer research is timely. It comes as the Government is considering policy recommendations on financial advice from the Productivity Commission’s twin reports on Australia’s financial and superannuation systems. And at a time when the financial system itself undergoes much change, following the intense scrutiny of the Financial Services Royal Commission, including considering new financial advice and distribution business models”.

The report includes quantitative and qualitative research commissioned by ASIC and undertaken by independent market research agency, Whereto Research. The research used hypothetical advice scenarios to test consumer recognition of when general and personal advice was being provided, and awareness of adviser responsibilities when being given each type of advice.

Report 614 Financial advice: Mind the gap is the first stage in ASIC’s broader research project into consumer experiences with and perceptions of the financial advice sector. Additional research by ASIC will get underway in 2019 to identify a more appropriate label for general advice and consumer-test the effectiveness of different versions of the general advice warning.

Westpac should ‘expect ongoing challenges’

Westpac Group’s wealth revenues will fall by around $300 million over the next two years, according to Morgan Stanley, following the bank’s restructure and exit from financial advice, via InvestorDaily.

Westpac is still retaining its private wealth, platforms, superannuation and insurance operations, with the new report estimating that wealth will account for less than 10 per cent of revenue in the bank’s consumer division and around 20 per cent in the business division after the restructure.

Morgan Stanley has forecast that Westpac’s wealth revenues will fall from more than $2 billion in FY18 to less than $1.7 billion in FY20, due largely to the non-recurrence of the $144 million Hastings exit fee and the loss of advice revenues.

The report downgraded the bank’s FY19 cash profit by around 2.5 per cent, due to exit and restructuring costs and a $100 million loss from wealth advice.

It has, however, upgraded its prediction for earnings per share by 0.5 per cent in FY20, citing the exit of the loss-making advice business.

Westpac had estimated it would save around $73 million by dropping the advice business and division.

“The exit from wealth advice is a logical response to the changing environment, but we expect ongoing challenges in the remaining wealth business,” Morgan Stanley noted.

Challenges will include the effect of the royal commission’s recommendations on the cross-selling of insurance to banking customers and reduced vertical integration benefits without advice, the report said.

The analysis also eyed other potential impacts such as pricing cuts in the platform market, new technology platform players winning an outsized share of flows and industry super funds growing in both personal and corporate super.

The retained businesses accounted for around 9 per cent of group revenue in FY18, excluding one-off items.

The analysis also forecast Westpac will have accumulated $775 million in customer refunds, remediation and litigation costs across banking and wealth management over FY19 and FY20.

Morgan Stanley has retained its rating of Westpac as underweight, saying it sees lower returns and rising risks in retail banking among other factors, with the analysis warning there could be risk of a further derating.

‘The business model is challenged’: AMP

Troubled wealth giant AMP has admitted it faces a long hard road to recovery. With an increasingly vigilant regulator, conduct remains its greatest risk, via InvestorDaily.

In its annual report, released on Wednesday (20 March), AMP’s new chief executive officer, Francesco De Ferrari, told shareholders that 2019 will be a transitional year for the company as it completes the sale of its wealth protection business and continues work on its hefty remediation program. 

AMP’s 2018 results included a provision of $430 million (post-tax) for potential advice remediation, inclusive of program costs, in relation to ASIC reports 499 and 515, which require an industrywide ‘look back’ of advice provided from 1 July 2008 and 1 January 2009, respectively.

“Our first priority is the separation of our wealth protection and mature businesses, which will help simplify and create the basis for a more agile AMP,” Mr De Ferrari said. 

“Our second priority is the delivery of our advice remediation program to compensate impacted clients. We are focused on doing this as quickly as possible. Lastly, AMP is focused on getting our risk, governance and control settings right. This includes placing ethics and risk at the core of our culture.”

Following the sale of the wealth protection and mature businesses, AMP will have four core operating businesses – wealth management in Australia and New Zealand, AMP Bank and AMP Capital. 

“Our wealth management business in Australia has foundational assets and strong market positions. However, the business model is challenged and we need to reshape it for the future,” the CEO said. What shape the new AMP wealth business takes remains to be seen. 

“In New Zealand, our wealth management business continues to deliver resilient earnings for the group. Our opportunity is to become an advice-led wealth management business,” Mr De Ferrari said. 

AMP Capital has a strong growth trajectory, particularly internationally. AMP Bank has performed well and can be further leveraged as part of our wealth management offer.

In its director’s report, AMP provided extensive commentary on the key risks to the company, which has faced significant challenges throughout 2018. 

“Given the nature of our business environment, we continue to face challenges that could have an adverse impact on the delivery of our strategy,” the company said, adding that the most significant business challenges include business, employee and business partner conduct.

“The conduct of financial institutions is an area of significant focus. There is a risk that business practices and management, staff or business partner behaviours may not deliver the outcomes desired by AMP or meet the expectations of regulators and customers” the company said. 

“An actual or perceived shortcoming in conduct by AMP or its business partners may undermine our reputation and draw increased attention from regulators. Our code of conduct outlines AMP’s expectations in relation to minimum standards of behaviour and decision-making, including how we treat our employees, customers, business partners and shareholders.”

Free Webinar With Martin North And Harry Dent

We often get questions about how to navigate the current choppy financial waters. DFA does not provide financial advice, but we do invite people with different views to share them with our community.

To that end, on Monday March 25th at 12pm AEDT (Sydney) I will discussing the current state of play with Harry Dent.

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 During this one-off LIVE broadcast, you will discover:

  • Harry Dent’s latest research and what it reveals about our economic future, and why it’s SHOCKING! 
  • Harry Dent’s 2 major predictions that could begin to take place as early as the next few months 
  • How to shield yourself from financially devastating stock market and real estate losses by preparing before the carnage begins, so you can feel safe knowing your future  
  • How to profit from specific “decline-related” investments year after year, over the next several years, so you won’t just survive a market crash, you’ll prosper from it…  
  • How to create a “legacy of wealth” by snapping up nearly every investment you can think of, at fire sale prices, allowing you to make more money by spending less…  
  • How to set yourself up for the next long-term “boom cycle” 
  • And much, much more!

Hope to see you at the event!

Westpac Restructures Wealth Advice

Westpac has announced changes to the way it addresses customers’ wealth and insurance needs, which includes a significant move to a referral model for financial advice by utilising a panel of advisers or adviser firms. Clearly a reaction to the Royal Commission.

Westpac chief executive, Brian Hartzer, said: “We are committed to supporting our customers’ insurance, investment and superannuation needs as part of our service strategy. The changes we’re announcing today are about focusing our investment where we have genuine competitive advantage and growth opportunities.”

The group says the changes reflect its commitment to supporting customers through their financial lives, while responding to the changing external environment.

In summary the Group is:

• Realigning its major BT Financial Group (BTFG) businesses into the Consumer and Business divisions

• Exiting the provision of personal financial advice by Westpac Group salaried financial advisers and authorised representatives

• Moving to a referral model for financial advice by utilising a panel of advisers or adviser firms

• Entering into a sale agreement as part of the exit with Viridian Advisory, which will see many BT Financial Advice ongoing advice customers offered an opportunity to transfer to Viridian. A number of the Group’s salaried financial advisers and support staff will transition to Viridian from the anticipated completion date of 30 June 2019. Some authorised representatives may also move to Viridian by 30 September 2019

• Simplifying the Group’s structure and re-organising Group Executive responsibilities

• Continuing to invest in the BT brand, reflecting its strength and market position, although BTFG will no longer be a standalone division

• Unlocking value by exiting a high cost, loss-making business. We expect the costs associated with exiting and restructuring will be offset by future cost savings.

The announcement comes with a re-organisation of group executive responsibilities. 

The consumer division will be led by the current business bank chief executive, David Lindberg.

GM commercial banking, Alastair Welsh, will lead the business division on an acting basis, while a global executive search is conducted for Lindberg’s replacement.

Consumer bank chief executive, George Frazis, will leave Westpac to pursue other leadership opportunities.

Brad Cooper will stay on to ensure the successful transition of BT’s businesses into their new divisions, following which Cooper has indicated that he will leave to seek a new leadership role outside the group.

ASIC requires Commonwealth Financial Planning Limited to stop charging fees for ongoing services

ASIC says Commonwealth Financial Planning Limited (CFPL) has failed to provide ASIC with an attestation and with an acceptable Final Report from the independent expert, both of which were required under a Court Enforceable Undertaking (EU) entered into with ASIC in April 2018 in relation to CFPL’s fees for no service conduct.

As a result, CFPL is now required under the EU to immediately take all necessary steps to:

  • stop charging or receiving ongoing service fees from its customers; and
  • not enter into any new ongoing service arrangements with customers.

The EU, which commenced on 9 April 2018 and was varied on 20 December 2018, required CFPL to provide to ASIC by 31 January 2019:

  • a Final Report by the independent expert, Ernst & Young, on whether CFPL had taken reasonable steps to remediate customers impacted by CFPL’s fees for no service conduct and on the adequacy of CFPL’s systems, processes and controls; and
  • to provide an attestation from a Commonwealth Bank ‘accountable person’ under the Banking Executive Accountability Regime as to CFPL’s remediation program, and the adequacy of CFPL’s systems, processes and controls.

On 31 January 2019, Ernst & Young issued its second report under the EU, identifying further concerns regarding CFPL’s remediation program and its compliance systems and processes – including that there remains ‘a heavy reliance’on manual controls, which ‘have a higher inherent risk of failure due to human error or being overridden’.  Ernst & Young recommended CFPL address these issues within a further 120 days. 

On the same day, CBA’s accountable person provided a written update to ASIC on the remediation program and work being done in relation to CFPL’s systems, processes and controls. Having regard to the concerns raised by the independent expert and the contents of CBA’s written update, ASIC considered that the notification did not meet ASIC’s requirements under the EU for an acceptable attestation.

As a result, ASIC’s requirement under the EU that CFPL stop charging or receiving ongoing service fees and not enter into any new ongoing service arrangements, has been triggered. ASIC included this requirement in the EU to ensure that if CFPL were not able to satisfy ASIC that the fees for no service conduct would not be repeated, CFPL would have to stop charging ongoing service fees so as to significantly reduce any further risk to clients. Existing clients will continue to receive services under their ongoing service agreements but will not be charged by CFPL.

ASIC has received CFPL’s confirmation that it is complying with this requirement to stop entering into new ongoing service agreements and to cease charging existing clients fees under these agreements. This requirement will continue until CFPL is able to satisfy ASIC that all of the outstanding issues have been remedied. ASIC will be monitoring CFPL’s compliance with this obligation.

ASIC has also been informed by CFPL that it is now in the process of transitioning its ongoing service model to one whereby customers are only charged fees after the relevant services have been provided. ASIC will monitor CFPL’s transition to the new model.

Background

Under CFPL’s remediation program overseen by ASIC, CFPL has to date reported to ASIC that it has paid approximately $119 million to customers impacted by its fees for no service conduct.

NZ Life Insurance Sector Found Wanting

The Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) have completed their joint review of 16 New Zealand life insurers. This review follows the regulators’ bank review published in November 2018.

The findings appear to mirror the Australian Royal Commission, with a focus on shareholders rather than customers – sounds familiar? In addition commissions are extremely high in New Zealand.

Rob Everett, FMA Chief Executive said: “Overall the report shows the life insurance sector in a poor light. Life insurers have been complacent about considering conduct risk, too slow to make changes following previous FMA reviews and not sufficiently focused on developing a culture that balances the interests of shareholders with those of customers.”

The regulators found extensive weaknesses in life insurers’ systems and controls, with weak governance and management of conduct risks across the sector and a lack of focus on good customer outcomes.

Adrian Orr, Reserve Bank Governor said: “The industry must act urgently and undergo major change to address these weaknesses, as their services are vulnerable to misconduct and the escalation of issues that have been seen in other countries. Public trust in life insurers could be eroded unless boards and senior management transform their approach to conduct risk and achieve a customer-focused culture. Ultimately insurers need to take responsibility for whether customers are experiencing good outcomes from their products, regardless of how they are sold.”

Other key findings:

  • Limited evidence of products being designed and sold with good customer outcomes in mind.
  • Some insurers did little or nothing to assess a product’s ongoing suitability for customers.
  • Sales incentives structures risk sales being prioritised over good customer outcomes.
  • Where sales were through an intermediary, there was a serious lack of insurer oversight and responsibility for the sales and advice, and customer outcomes.
  • Remediation of conduct issues is generally very poor, with insurers slow to respond to issues and in some cases not sufficiently remediating them.

The review did not find widespread cases of misconduct on the part of life insurance companies.  However, there were several instances of poor conduct. There were also a small number of cases of potential misconduct (i.e.: breaches of the law) that are now subject to investigations by the appropriate regulator.

Some of the issues and themes are similar to those highlighted in the Australia Royal Commission, albeit on a smaller scale.  The FMA and RBNZ are not confident that insurers themselves are aware of all the current issues. This creates a serious risk of further conduct issues arising.

Next steps

All 16 life insurers will receive individual feedback. By 30 June 2019, each insurer will need to report back to the regulators. They will need to provide an action plan that the regulators will review, including how they will address incentives based on sales volumes for internal staff and commissions for intermediaries.  Regular reporting on progress and implementation will be required.

Concerns for consumers

Purchasing life insurance is one of the most important financial decisions people will make.  Customers should be able to have confidence their insurance will do what the insurance company or their financial adviser has told them. Many customers do experience the benefits of their insurance policies every year.

A positive finding in the report showed that, in general, frontline claims teams were focused on good outcomes with a strong desire to do the right thing for their customers.

The purpose of the thematic review and the report’s recommendations are to ensure the industry responds with urgency to the issues identified.

Further information and guidance for consumers can be found on the FMA website, here fma.govt.nz/investors/life/

Regulatory issues

Insurer conduct is currently only regulated indirectly through the FMA’s regulation of financial advice, which is generally provided by intermediaries. No one regulator has oversight of insurers’ and intermediaries’ conduct over the entire insurance policy lifecycle.

The report sets out some areas where the regulators recommend that the Government consider addressing regulatory gaps, similar to those put forward in our review of banks. The regulators acknowledge further policy work will be required and that any additional regulation will need to drive better outcomes for customers.

Super Reform On The Cards, Perhaps

The Productive Commission released their latest report today. We discuss the findings and consider the implications. Many people are not getting the maximum returns from their savings, thanks to poor fund choice, high fees, multiple accounts and insurance premiums.

In addition, APRA and ASIC have been asleep at the wheel, with more of a focus on the institutions compared with the interests of members.

Finally, industry funds often out perform retail funds.

The Productive Commission summary says:

  • Australia’s super system needs to adapt to better meet the needs of a modern workforce and a growing pool of retirees. Structural flaws — unintended multiple accounts and entrenched underperformers — are harming millions of members, and regressively so.
  • Fixing these twin problems could benefit members to the tune of $3.8 billion each year. Even a 55 year old today could gain $79 000 by retirement. A new job entrant today would have $533 000 more when they retire in 2064.
  • Our unique assessment of the super system reveals mixed performance.
    • While some funds consistently achieve high net returns, a significant number of products underperform, even after adjusting for differences in investment strategy. Underperformers span both default and choice, and most (but not all) affected members are in retail funds.
    • Evidence abounds of excessive and unwarranted fees in the super system. Reported fees have trended down but a tail of high‑fee products remains entrenched, mostly in retail funds.
    • Compelling cost savings from realised scale have not been systematically passed on to members as lower fees or higher returns. Much scale remains elusive with too few mergers.
    • A third of accounts (about 10 million) are unintended multiple accounts. These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.
    • The system offers products that meet most members’ needs, but members lack simple and salient information and impartial advice to help them find the best products.
    • Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50 000 — by duplicate or unsuitable (even ‘zombie’) policies.
  • Inadequate competition, governance and regulation have led to these outcomes.
    • Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including product proliferation). Many funds lack scale, with 93 APRA‑regulated funds — half the total — having assets under $1 billion.
    • The default segment outperforms the system on average, but the way members are allocated to default products has meant many (at least 1.6 million member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement.
    • Regulations (and regulators) focus too much on the interests of funds and not members. Subpar data and disclosure inhibit accountability to members and government.
  • Policy initiatives have chipped away at some problems, but architectural change is needed.
    • Default should be the system exemplar. Members should only be defaulted once, and move to a new fund only when they choose. Members should also be empowered to choose their own super product from a ‘best in show’ shortlist, set by a competitive and independent process. This will bring benefits above and beyond simply removing underperformers.
    • All MySuper and choice products should have to earn the ‘right to remain’ in the system under elevated outcomes tests. Weeding out persistent underperformers will make choosing a product safer for members.
    • All trustee boards need to steadfastly appoint skilled board members, better manage unavoidable conflicts of interest, and promote member outcomes without fear or favour.
    • Regulators need clearer roles, accountability and powers to confidently monitor trustee conduct and enforce the law when it is transgressed. A strong member voice is also needed.
  • Implementation can start now, carefully phased to protect member (not fund) interests.

More From The Investment Manager’s Front Line

In another in our series talking with those in the front line of finance and property, I caught up again with Tony Locantro from Alto Capital in Perth.

We discussed the property market and broader investment strategies. What to do?

Tony is also active on Twitter.

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