From the July 2009 issue of Investment Advisor • Subscribe!

Lessons From Down Under

What our Australian brethren can teach us about transparency, regulation, and serving a broader range of the population.

The United States and Australia share many similarities. Both nations began their histories as colonial possessions of the British Empire and despite attracting immigrants from around the world speak English. Both nations were initially settled by people who saw little opportunity in their native lands and both had mid-19th century gold rushes, leading to national cultures of rugged individualism. Both have currencies based on the dollar.

Australians and Americans fought side by side in both World Wars, not to mention in Korea, Vietnam, the first Gulf war, Iraq, and Afghanistan. We've accepted Australians as our own in the popular cultures of music (Bee Gees, AC/DC, Keith Urban, et al.) and movies (Nicole Kidman, Russell Crowe, Mel Gibson).

The two nations' unique historical and social circumstances have led to different outcomes, however. One such area is financial planning. Access to financial planning is more widespread in Australia, with one recent survey noting that 34% of respondents indicated they had consulted a financial advisor. Australia's poplulation of about 21 million places it demographically between the states of California and Florida, yet the Financial Planning Association of Australia boasts a membership of more than 14,500 compared to the U.S.'s FPA with total membership of some 28,000.

At a time when the new Administration has floated a White Paper that would institute massive changes in how financial services is regulated in the United States, a review of how the Australians have come to regulate advice givers could he helpful. At a time when retirement income planning is being rethought as the boomers approach retirement age it could be instructive to consider another nationwide approach to the issue, though it's important to acknowledge the differences as well.

"The big mistake that people make is that the U.S. and Australia are two countries separated by a common language," quips Mark Tibergien, the internationally recognized practice management guru and CEO of Pershing Advisor Solutions, in a variation on Shaw's famous line about the U.S. and England.

"Australians have been doing planning longer and for more people than in the U.S.," points out Dennis Gallant, president of GDC Research in Sherborn, Massachusetts, who has consulted in that part of the world. "What I found in Australia was a very unique market, for two reasons. One is that they have compulsory retirement [savings]. Then you have what goes beyond just suitability for most reps. They have a 'Know your customer' or 'Know your client' rule. It provides a foundation for a deeper relationship with your client."

Eliza De Pardo has a unique perspective on the discussion. She's a native Australian who served as a senior business consultant in practice management for MLC, the wealth management division of National Australia Bank Group, before moving to the States to serve in a similar capacity with Moss Adams in Seattle. Earlier this year she teamed with another Moss Adams vet, Dan Inveen, to launch FA Insight in Tacoma, Washington, where she serves as director of consulting.

"I did notice some significant differences when I first started working in the U.S.," she says. Chief among these was the way advisors in the two countries present their value proposition to clients. In Australia, meetings between advisors and clients are more likely to focus on broader advice needs and how the entire relationship is enhancing the client's financial situation than on investment management. "The view is that the product the firms are selling is in fact the advice, and the investment return is a small part of the complete advice picture. They're charging for the advice that they're giving across multiple areas of need."

In the U.S., De Pardo found advisors concentrating much more on investment performance. "A lot of them really do believe that is where they add value. That's what they want to charge for and how they want to be compensated," she says. "That works when the market is doing well, but what the recent downturn has showed us is that as the markets hit rock bottom, advisors are working a whole lot harder for their clients."

Superannuated Savings

One of the biggest differences between the two countries, and one that has had a significant impact on the planning profession, is the approach to retirement. Under Australia's "superannuation" law, introduced in 1992, individuals are supposed to self-fund their retirement. At age 60, they can choose to either withdraw their savings as a lump sum or as a steady income stream. By law it's mandatory for the employer to contribute a minimum amount (currently 9%) of the employee's salary to superannuation. Individuals can also make voluntary contributions to their "super fund" and are given tax incentives to do so. Some people also get some Age Pension assistance once they reach 65, if they can satisfy means and assets tests, which provides a government safety net of sorts. The maximum age pension today is about $15,000 a year for singles and $25,000 a year for a couple.

Geoff Davey is CEO and founder of FinaMetrica, a Sydney-based firm that helps advisors in 12 different countries and five different languages gauge the risk tolerance of their clients. The firm provides consulting on risk-related matters but from 1972 until 1989, when he sold his interest in the business to his partners, he was one of the pioneers of the Australian planning profession.

When he first launched his practice, Davey says that what he was providing clients was life planning. "The more mainstream-type planning, largely investment based, got underway in 1983 because of a change in government legislation. Essentially the government started to make people responsible for their own retirement," he recalled during a phone conversation from his office in Sydney.

This initial legislation was in the form of a tax incentive for people who made long-term investments to fund their own retirements. "This created demand amongst moms and pops--a much more mainstream community than just the high-net-worth individual," says Davey. "So we've always been further down the socioeconomic scale in terms of our client base."

A few years later the superannuation legislation went into effect and the floodgates for advisors opened. "It started off at a compulsory 3% contribution, a few years later it went to 6%, and now its 9%," Davey explains. "It means that for the size of the country, we have a very large investment market."

"They have a culture of savings that's being promoted by the government, but that's not bad," observes Tibergien. "It looks like the superannuation program has been a big boom to [the advisory profession] and has certainly created a legitimate career path for many people who choose to go into the financial profession. There's an increase in both the number of people who are accumulating wealth as well as the amount of wealth that people are accumulating, the market cataclysm notwithstanding."

Transparency and Disclosure

Regulations in Australia demand a much greater degree of transparency than is currently required in the U.S., much of it centered around two types of documents--the financial services guide and the statement of advice. "It isn't 'If requested,' it's when you begin the conversation with the client," notes Tibergien, with approval in his voice.

Every potential client must be provided with a Financial Services Guide (FSG) which outlines what services are being offered, how the firm operates, how the advisor gets paid (including commissions), the compensation arrangements, any potential conflicts of interest, and how customer complaints are resolved.

For every investment product that a client purchases, including insurance, the advisor must provide a Product Disclosure Statement (PDS), that gives the features of the product, any fees that apply, the benefits and risks of investing, commissions that may affect returns, information about complaint handling, and any other information that is material to the decision to invest.

Personal advice must be given in a written document called a statement of advice (SOA). The SOA must be personalized for each client and must explain the basis for the advice that's being given, such as how the individual client's objectives, financial situation, and needs have been taken into account in creating the financial plan. The document outlines how the advisor will be getting paid, including any commissions, and reveals any potential conflicts of interest.

As is the case with the PDS, all fees, charges, benefits, and interests must be stated in dollar amounts.

"Typically advisors are required to disclose the types of services that they're going to provide for a 12-month period and exactly how they'll be compensated for that advice," explains De Pardo about the SOA.

The document allows the client to know exactly what to expect out of the relationship over the next year. De Pardo explains that it has also forced financial services companies to put together some clearly defined service packages, which in turn has allowed them to offer those packages to clients with lower asset levels.

"It does a couple of things for the business. It helps you to become very clear on what you're delivering and probably more efficient at what you're delivering as a result, and to be able to manage your profitability per client," she continues. "But the real benefit from the client's perspective [is that] expectations can be better managed. So you don't have quite as many unhappy clients in the event they feel the business isn't necessarily meeting their servicing expectations. It's tough to meet expectations when they're not spelled out upfront."

Regulation Reform

A third area where the two nations differ and where the U.S. might be able to benefit from the Australian experience is in regulation. Although there is a regulator for consumer protection and another systemic regulator, both come under the jurisdiction of the same government ministry.

In Australia anyone who sells or advises on financial products must hold a license (or be employed by or authorized to represent someone who holds a license) from the Australian Securities and Investment Commission. The licensing requirement is a consumer protection law to ensure that advisors meet certain professional standards, comply with financial services laws, that they deal with clients efficiently, honestly, and fairly, and that there is a process for resolving complaints free of charge. License holders must also have arrangements in place to provide compensation if the firm breaks the law and as a result the client loses money.

"I think the fact that they have a simpler regulatory structure, and don't have as many different entities that are involved in the regulation of the business, certainly changes things," notes Tibergien. He points out that much of how the profession evolved in the U.S. has its roots in the Investment Advisers Act of 1940, which has no counterpart in other countries.

"Probably one of the things that makes it a little bit different there is their regulations tend to be more rules-based for advisors, where ours tend to be more guideline based," he continues. "You'll generally find compliance people describing the regulation of RIAs as being a series of no action letters, rather than specific rules of behavior. In Australia they tend to be more specific about what you can and can't do. There's less room for interpretation, that's for certain, and that tends to give more confidence to investors."

Tibergien thinks that the regulatory structure in Australia is similar to what some have envisioned for the U.S. "Many people in this country talk about the twin peaks form of regulation, to have a systematic regulator and a consumer protection regulator, and they have that," he says. "They have the APRA (Australian Prudential Regulation Authority), which is the systemic regulator, and they have the Australian Securities and Investment Commission, which is more focused on client protection."

Tibergien thinks there are requirements for Australian planners that American planners should adopt just because they're good ideas. "From a practice standpoint, the protocols around disclosure and transparency and providing a mandatory guide to their clients as to rights and responsibilities is something that individual practices could adopt and industry associations could make fundamental to their protocols," he says.

"While everybody complains about the regulator, I think our regulatory system is a lot better than yours," says Davey, pointing out that in Australaia there's only one regulator rather than the "complicated federal and state and multiple operations at the federal level that you've got over there."

Lessons Learned

"Australians are interesting in that they both create good ideas and they take good ideas and they make them better," says Tibergien. "In the case of financial planning, some of what they've done around stricter protocols for planning and enforcement such as the financial services guide that's given to every client, the statement of advice, the fee disclosure statement, has made them a leading-edge profession there."

One area where the profession in both countries shares a similar focus is in trying to come to grips with just what is the role of the planner. "The challenge that they, and we, still have is defining what a financial planner is," observes Tibergien. "That is a term that still doesn't have complete and clear definition. There's a lot we can probably both learn from each other as we go through this process."

"I think the problem with financial planning generally, and this is a simplification, is that it serves rich people," concludes Davey. "That's significantly more so in the United States than Australia. We're a little better at serving the middle market, but it's a challenge everywhere."

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