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Finance is the lifeblood of the market economy. Without access to financial services individuals and businesses effectively are excluded from the economy. However, when this access is allied with sound advice on which to base financial decisions, and competition driving innovation and choice, then the stage is set for good consumer outcomes.
The Royal Commission is largely concerned with ensuring this access to financial services is ‘appropriate’, by weeding out misconduct that has caused widespread consumer detriment. But, its recommendations will have implications beyond access to financial services, including for financial advice, market structure and competition.
What has been underplayed in the debate so far is consideration of the value of good advice currently being provided.
The Government and regulators’ response to the recommendations should focus on the long game; how to ensure all Australians can be guaranteed access to better advice.
In a world where consumers are well informed and make rational financial decisions, a financially literate individual with on-line access to advice about products and their performance, and adequate time to research options could make good decisions about their financial future.
But, there will still be individuals who have low financial literacy, are time poor or unable to make good decisions who would still need an adviser. In fact, the Productivity Commission estimates a quarter of Australians do not understand basic financial concepts.
Behavioural finance has demonstrated time and again that humans often do not make the rational choice, due to ‘cognitive constraints and behavioural biases’.
Suddenly, the pool of people needing an adviser got a whole lot bigger. And, coupled with increased longevity and more self-financed retirees, the pool of people needing a helping hand is large and growing.
In this world, the value of the full range of financial advice includes advice on investment, insurance, tax, buying a house, retirement and estate planning. But, it also includes time saving, peace of mind, de-biasing individual’s financial decisions, providing financial education and enabling more choice and competition.
Good advice comes at a cost. The cost recognises the value added by the advice and a reasonable wage to compensate advisers for their effort and recoup their increasing training and compliance costs.
Robo advice can be provided at a cheaper price, but it’s not sufficient. A robo adviser may be able to suggest a package of products, but it cannot empathise with a customer going through a life-changing event, or adjust to the mental capability of the client. And it is anybody’s guess if the ethics of artificial intelligence will be better or worse than human advisers.
Separating the advice and sales roles, preventing authorised representatives recommending products sold or manufactured by their licensee, and banning trailing remuneration for advisers are amongst the potential solutions floated by the Commission.
These measures and other less dramatic interventions may be very effective in helping to address the shortcomings in advice. But, Government also needs to ask itself: “Will they adversely affect the supply of good advice, too?”
It is encouraging that Commissioner Hayne has advocated better enforcement of existing regulation over simply adding more regulation. Nonetheless, in the interest of better consumer financial outcomes, a considered appraisal of the wider ramifications of the Commissioner’s recommendations for access to financial advice should be part of Government’s response to the final report.
For more commentary from Deloitte on the Royal Commission click here.
Authors: Michael Thomas, Director Deloitte Access Economics with Dr Ric Simes – Senior Adviser to Deloitte Access Economics with extensive knowledge in public policy, governance, finance, econometrics, economic analysis and strategy. He has led numerous projects in the digital economy, financial services, climate change, energy, transport and water.
 Productivity Commission (2018) Superannuation: Assessing Efficiency and Competitiveness, Report Overview, No. 91, 21 December 2018 p21. Available at: https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment-overview.pdf
Dr Ric Simes has extensive knowledge in public policy, governance, finance, econometrics, economic analysis and strategy. Ric has led numerous projects in the digital economy, financial services, climate change, energy, transport and water.