General advice is no advice at all

(Money and Life)

Are all types of advice about financial products in your best interests? According to a recent ASIC report, the ‘general’ and ‘personal’ labels make it hard to know what type of financial advice you’re getting.

Thanks to a new research report from ASIC, we may be seeing a much needed change in how different types of financial advice are understood by consumers. For many years, anyone working in the financial services industry has been required to describe advice services as ‘general advice’ or ‘personal financial advice’.

But according to the ASIC findings, these terms are confusing to say the least. Their research shows that while 53% of customers could correctly identify general advice, only 19% could identify personal advice.

What’s the difference?

As well as signalling the need for clearer communication on different types of advice, the research also throws up even bigger warnings concerning customer expectations of advice they’re receiving.

So what are the differences between these two advice categories?

General advice does not take personal financial circumstances into account and you must be provided with a warning to this effect. So when recommending a product or service under a general advice arrangement, a financial services provider is not required by law to make a recommendation that best serves your interests.

Personal advice on the other hand must be based on a careful review of your financial position and goals and consider your best interests at all times. There are in place to make sure personal advice meets these requirements. These same regulations don’t apply to general advice.

What needs to change

ASIC’s Mind the Gap report highlights just how alarming customer confusion about different types of advice is. When acting on general advice, they might expect to benefit from consumer protections that simply don’t apply.

“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.

The report also notes the increasing number of complex financial products provided under a general advice arrangement, leading to greater potential for customers to make choices that put their finances at risk. “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,” says Chester.

This confusion about different types of advice was also flagged in a recent Productivity Commission report on competition in the financial services industry. In a submission to the Productivity Commission, the Financial Planning Association (FPA), included a number of recommendations designed to ensure clients can be clear about whether they’re receiving the best advice for their circumstances.

The most important of these recommendations included:

  • Only using the term ‘advice’ when the financial service and recommendations provided take into consideration personal circumstances.
  • Renaming general advice to remove the confusion. The FPA suggested ‘general product information’ or ‘financial product information’ as alternative phrases.
  • All licenses and regulations that currently apply to general advice should remain in place, regardless of the name change.
  • The renamed ‘general advice’ services should continue to carry a clear warning that information provided is not financial advice.
  • A product recommendation without understanding your goals, objectives and financial situation is not personal advice.

What to look for

There are all sorts of life stages and events we go through and the right financial advice can have a significant impact on how we experience these changes.

“Australians are looking for support with things like debt management, cash flow and budgeting,” says Dante De Gori, CEO for the FPA. “It’s essential that more people seek the help they need with these financial challenges because getting it right can set them up for a more secure future.”

That’s why it’s so important to understand the difference between personal financial advice and general advice. A product or service recommended in a general advice context might seem to be a good option for your situation. But without knowing what the alternatives are, you may not be making the choice that’s in your best interests, now and in the longer term.

So how do you know what is and isn’t personal financial advice? Here are a few guidelines to help you understand what to expect from a personal financial advice service:

  • Personal financial advice can only be provided by an individual, not a financial institution.
  • The person providing advice must be a qualified financial planner listed on the Financial Adviser Register. All FPA members are qualified financial planners and you can use the FPA Find a Planner search to find one near you.
  • Personal financial advice will always include a Statement of Advice (SOA), with a number of recommendations tailored to your circumstances.

Qualified to the highest ethical and professional standards

For any type of financial advice, it’s worth connecting with a CERTIFIED FINANCIAL PLANNER® professional to discuss what you’re looking to achieve with your money. As FPA members with the highest designation in financial planning, their education and training standards prepare these financial planners to deliver advice to the highest standards of ethical and professional conduct.

A CERTIFIED FINANCIAL PLANNER® professional will always deliver a service that’s 100% focused on meeting your unique goals and needs. They’re also looking at your longer term plans, so they can recommend an approach that’s flexible enough to make the most of your finances when you have children, inherit wealth, buy a home, change careers or eventually retire. It’s the difference between the one-size-fits-all approach of general advice and the carefully tailored, flexible approach of personal financial advice, delivered by a CFP® professional committed to doing the right thing on your behalf.

Want to make sure the financial advice you’re getting is right for your situation? Here are five questions to ask a financial planner to make sure they’re qualified to provide the advice you’re looking for.

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