Cutting through the advice red tape

THE amount of paperwork you have to wade through before buying a financial product could soon be drastically reduced.

Red tape /Derek Moore

Cutting through the advice red tape

BUYING a financial product is a bit like buying a car: you get one because your mate said it was a good thing or because the performance figures looked pretty impressive, like zero to a hundred thousand dollars in a few months.

Or the advertisement in the newspaper looked pretty good, or you heard the bloke on the radio saying it was well worth buying.

The trouble with financial products, however, is that you can't take a spanner to it if things go wrong, and if they do, it can be seriously threatening to your wealth.

How much should you be told and how much should a mug be left to lose his money is the essential dilemma, and it's one about to be faced by the Rudd Government and its efforts to cut the red tape in our lives.

Next week a committee will meet to start the first leg of this process, which while well-meaning could become painful. We may even have to take more responsibility for ourselves, and pull back on any nanny-state ethos, contrary to traditional Labor Party thinking.

In its drive to cut red tape, the Government has created the Disclosure Working Group in financial services.

Simplifying disclosure

It will look across from product-disclosure statements, which are about products and pricing, to the financial services guide, which is how the Australian financial services licensees conduct their business, and then the statement of advice, which is the document that passes between a financial planner and a client.

Spruikers in the industry talk of the Government taking a chainsaw to red tape. It sounds great but not so easily done when much of the paperwork is required by law.

A list of bullet points on one piece of paper would be nice, but financial affairs are more complicated than that. Striking the balance between bumph and boredom will be the challenge.

The financial planning industry has already done its homework. The industry association put seven planners in a room and asked them to answer one question: what would you want a client to have and understand when they walked out the door, and in the future?

FPA chief executive Jo-Anne Bloch says it strikes the right balance on the contents of a statement of advice - the document you walk away with from a planner.

Planners spend an enormous amount of time on it and in doing so create an expensive document.

"We want a middle ground that says what is appropriate disclosure that the client can understand and also make sure the information is available somewhere, if not in the statement of advice,'' Ms Bloch says.

Much has been achieved by signposts known as incorporation by reference, a legal change last year that allows a provider to point to documents or sources of information.

As Ms Bloch says, this has helped a lot. "A client could spend the whole time looking up other documents and websites: there has to be some substance in the documents.

"We focus on what the document is really about and put the other material elsewhere, which a client can refer to if and when they like.''

Other slimming was easy: "We cut the documentation by two-thirds, just by tipping out the duplication.

"In a statement of advice, we want a document that carries a more personal fee analysis rather than the high-level fee basis captured in a product disclosure statement.''

A statement of advice will highlight your objectives, drawing from a fact-find process. It might show your proposed asset allocation, and explain why a product is being recommended, such as a balanced fund, or cash and fixed interest.

On the value of advice, there is not much argument: a good steer early in life can be enormously rewarding. The debate lately is more about how such advice should be paid for, perhaps as a trailing commission on a product or as an upfront fee.

The value of advice

Equally important can be the non-financial benefits of advice, ranging from more savings due to better planning and debt management, to a more settled life, free of financial anxieties.

A study last month by prominent actuary Michael Rice on behalf of the FPA, which looked at eight case studies, found that $1.7 million had been unlocked in collective financial value by obtaining and acting on financial advice.

Sooner rather than later

The Financial Planning Association Committee wants to table its short-form statement of advice with the Government's Financial Services Working Group at its earliest chance.

"We have made huge progress,'' Ms Bloch says. "With consultation with everyone else - ASIC, ASFA IFSA FICS and other stakeholders - we will have a document that complies with the law, that clients understand and that doesn't take years to produce at great cost and winds up being meaningless.

"A client will know how much it will cost, how it might affect them and anything that might influence their investment decision, such as whether your financial planner's licensee is going to get remunerated for providing various services, and whether it matters.''

The Government is keen to deliver on its promise of a simpler financial life.

The planning industry agrees but at the same time does not want to be locked into a straitjacket -- a legislated three-page document of obligations that would be its worst nightmare.

"It would be inflexible and prevent any competitive differentiation,'' Ms Bloch says.

"Different firms and planners will want to present information that best presents their advice to their client. We are happy to have more guidance, yet retain the leeway to focus on intention of the document in the first place, without cutting corners.''