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Is advice the next mis-selling scandal?

Is advice the next mis-selling scandal?

Research from the australian market research specialists Investment Trends shows that there is a huge diaparity between the value people put on advice from financial planners and the cost financial planners actually want to charge.

In their survey, Investment Trends found that the actual amount consumers felt they should pay for investment advice was $300.  Financial planners claim that even simple advice costs $1,200 and a full financial plan costs a minimum of $2,700.

The problem is that consumers don’t understand how much they are currently paying for advice.  Although disclosure requirements mean that key documents contain the planner comission information, most consumers seem unable to relate it to the amount of advice they have received.

This gap in expectations means that there is likely to be quite a few shocks when the Future of Financial Advice (FoFA) regulations come into force in July 2012 and planners are forced to move to a fee basis with their customers.

This will lead to a reduction in people seeking advice as the upfront charges deter them from using financial planners.  The likelihood of this drop in demand has lead to a call for the extension to all financial products of the limited advice process currently offered by super funds.

In the UK’s version of FoFA, the Retail Distribution Review, the idea of simplified advice or basic advice is built into the regulations.  But is this really the answer to the problem of the cost of advice on complex financial products?

The intent of regulators is to turn financial planning into a more professional operation.  But in other professions, fees have to be paid and are usually non negotiable.  The concept of a simplified defence by a lawyer is completley alien.  And how would we feel about a doctor who charged 10% of his normal fee to hear two of your symptoms and then picked your diagnoses from a limited range of diseases?

Simplified advice assumes a greater risk-taking on the part of the consumer as they are deliberatly choosing to have a minimal assessment of the suitability of the product for their need.  Even mandating simpler products for this sales approach doesn’t help as essentially consumers are taking a ‘two or three sizes fit all’ approach, which is only true in general and never in the specific.

A move to a limited advice structure is storing up trouble for the future.  And if the products sold under it are unsuitable, from whom will consumers seek redress?  Will they be in a position to complain at all, as they deliberately chose to have products recommended based on what was essentially a vague assement of their needs?

This is a dangerous path for the regulators to go down – deliberate vague advice to overcome the resistance of consumers to pay the full going rate; this resistence being initiated by the regulators insistence of making advice charges too in-your-face.

Simplified advice will lead to mis-sold products.  It is an accident waiting to happen - anyone out there prepared to insure against it?

Tom Murray

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