What does it mean to be a financial adviser?

18 October 2014

I’m a financial services lawyer. I’ve provided advice to a number of financial services organisations in relation to the financial services laws. So what I’m about to say may surprise you. 

I think the way financial services are regulated has too much influence on many financial advisers. I think it unnecessarily restricts the service offerings many advisers make available to their clients.

I think this is to the detriment of these advisers’ clients, and to the advisers themselves. 

To be clear, I am not saying that financial advisers should pay less attention to complying with the financial services laws. I regularly see evidence that they should pay more attention to these laws.

For example, it amazes me how much more efficiently many practices could run, if only advisers had a clear understanding of what constitutes “financial product advice” and the distinction between general and personal financial product advice. 

What I’m saying is that the focus on “financial product advice” as defined by the Corporations Act can create a blindness with respect to other aspects of a client’s financial situation that can be addressed, and should be addressed, in light of the tremendous value it can provide to a client. 

For this reason, I’m somewhat ambivalent about enshrining the terms “financial planner” and “financial adviser” so that they can only be used by persons who can provide personal advice in relation to financial products. Even if these terms are enshrined, any two people who legitimately call themselves “financial advisers” can each provide a client with a radically different  range of services.

To clarify, “financial product advice” relates to statements of opinion or recommendations that relate to financial products. Only this form of advice is regulated by Chapter 7 of the Corporations Act (which requires such advice to be provided under the authority of an Australian Financial Services Licence (AFSL), and triggers the need for disclosure documents such as SOAs).

Advice in relation to other things, such as direct property, isn’t “financial product advice”, and is not captured by the financial services regulatory regime, unless the advice also touches on financial products (such as managed investments schemes or superannuation, in the case of direct property).

However, just because direct property isn’t regulated by the financial services regulatory regime, doesn’t mean that an adviser can’t discuss it. 

My view is that in many cases this is an area that advisers should discuss with clients. Yet I very rarely see advisers providing solid advice to clients with respect to property. 

I’m not talking about providing guidance to clients in relation to specific properties, or acting as property advocates. I’m talking about general advice regarding investing in property versus investing in other asset classes, including a discussion of the risks of being invested in property. Direct property, after all, has a number of characteristics which would raise alarm bells if they were an investment asset class that was a “financial product”. It is illiquid, has high transaction costs, is undiversified, and generally requires gearing.

I’m also talking about helping clients who are thinking of buying a new home understand the impact that spending an additional $100,000 or $200,000 can have on their long-term financial outcomes. The cumulative effect of paying an extra $5,000 or $10,000 per year (whether in terms of the interest on the loan, or the returns they would be foregoing on their equity) can have a tremendous impact over time. 

(For that matter, the difference between a client driving a late model Toyota rather than a Lexus can have a similar impact over time. It’s absolutely fine for a client to make this choice. But a well-informed choice is generally a better one than an uninformed choice. I think there’s a lot of truth to the maxim that two of the biggest financial mistakes you can make is having more house than you need and having more car than you need.)

The focus on “financial product advice” can also make it seem that assisting clients with the steps that lead up to this advice do not in themselves add value to the client.

To my mind, that could not be further from the truth.  Working with a client to clearly elicit their financial circumstances, needs, and objectives might be the most important thing you do with that person.

How many clients, for example, walk into your office with a clear understanding of how much it will cost to fund their desired retirement lifestyle, and have an idea of how much capital they should aim to accumulate to finance this? How many clients have clearly modeled the likely cost of their children’s education and other support they want to provide to their young ones? How many clients have really scrutinised the cost of their lifestyle, and balanced how much they are spending against their medium- to long-term goals? 

A discussion that covers whether their financial and lifestyle objectives are realistic might be a difficult conversation to have, but it might be the most valuable and powerful thing that you do for a client.

Other services, such as providing strategic guidance as to how a client could more effectively budget or manage their debt, can also be valuable. It isn’t only clients who are close to the breadline who can benefit from help with budgeting. Some of the clients I’ve seen who were most in need of good, clear, budgeting advice, were medical specialists earning many hundreds of thousands of dollars. 

Another way that financial advisers can help clients is to act as objective sounding boards when clients are planning on making important financial decisions, such as entering into a new business venture. Although an adviser might not be positioned to provide concrete advice, they might be able to ask pointed questions that the client might not be asking themselves, which they should be doing, given the personal capital and opportunity costs resulting from foregone income, that they are putting on the table. 

When I think about a client who is considering whether to engage a financial adviser, I don’t think they will make that decision based on the idea that the adviser will restrict their services to advice which fits the definition of “financial product advice” under section 766B of the Corporations Act.

To my mind, a client would expect a financial adviser to advise clients in relation to aspects of their financial circumstances, needs, and objectives which will have a significant impact on their lifestyle and medium- to long-term financial outcomes. Not the narrow, legislative definition of “financial product advice”.


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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