Article 5: Ethics in retirement advice
By Marshall Ross, Acenda Life Partner Education Manager
Australians spend decades planning and working towards retirement. Financial advice is the key ingredient in many Australians achieving their financial objectives and experiencing a financially secure retirement. While the benefits of advice in accumulating, managing, and protecting assets are important, the complex time of retirement years creates challenges that great advice can help manage.
The Financial Planners and Advisers Code of Ethics 2019 (code of ethics) provides a framework for professionalism in managing this complexity and within its standards exists the right clues for how to construct a framework for effective and ethical retirement advice.
Standard 3: Conflicts of duty or interest
Conflicts may arise through either duty or interest. For example, potential financial benefits an adviser may receive for referrals to other providers, such as accounting or legal professionals, which may be seen to influence the referral decision. To navigate this, it may be appropriate to consider having more than one option for referrals, or clear and transparent referral arrangements that document there is no financial benefit and the focus is on client service.
Conflicts of duty may arise when the client’s interpersonal relationships create financial conflicts with the best interest of the client themselves. For example, with spouses who subsequently divorce, when the financial interests of children and grandchildren may conflict with the client’s interests, or when the financial adviser is nominated as executor of a deceased client’s estate. Sometimes these conflicts can be resolved by taking steps to communicate directly, in a different setting, with the client and drawing advice back to their best interests. However, where multiple clients are involved, there may not be a clear path to resolve the conflict and maintain all clients so one or more parties may have to cease as a client to enable conflict-free advice.
Standard 4: Informed consent
Acting only with informed consent is paramount to ethical retirement advice. For some clients, advice sought at retirement may be their first interaction with professional financial advice and, as such, before proceeding with the advice process it’s important to clarify the following with the client:
- What the advice process will look like
- What will be required from them
- How long the advice process is likely to take, and
- What will the end outcome look like.
Once a client understands the full picture, they can truly provide informed consent to proceed with advice and implement recommendations. To further create an environment where informed consent is at the forefront, providing regular opportunities for clients to raise concerns and questions allows for consistent alignment between adviser and client throughout the advice process.
Standard 5: Appropriateness to individual circumstances and client understanding
When assessing the appropriateness of the recommendations, the most important measure is always to consider the individual at hand and their concerns and priorities. In retirement, appropriateness is based less in objectivity, where it is not necessarily about the largest balance, the best returns, or the least tax. What’s important is delivering a recommendation that provides comfort and confidence for a retiree that they will be able to navigate retirement in the manner they envisage.
Essential to delivering this confidence, as well as the code of ethics, is the ability for advisers to be confident that the client understands the advice, and the benefits and risks associated with that advice. The challenge with understanding is that clients come with varying degrees of financial literacy, potential embarrassment concerns, and shame attached to limited financial understanding. These may result in clients being hesitant to speak up and questions areas they don’t understand. To combat this, it is important to aim for simplicity in delivery and communication through:
- Removing jargon and acronyms as much as possible
- Presenting concepts using visuals such as maps, charts, animations, and
- Providing educational resources on foundational concepts to all clients to help uplift understanding to more easily understand advice concepts.
Standard 6: Likely long-term interests and circumstances
Retirement is a significant life stage that brings complex financial, emotional, and social challenges for the retiree. While advice may be primarily focused on planning for retirement, other areas of concern are likely to arise during the advice process and their impact should be considered. Areas such as:
- Longevity of income
- Aged care
- Estate planning
- Centrelink and social security, and
- Intergenerational wealth transfer and financial assistance for children.
Often these areas sit on the periphery of the planning process and can introduce uncertainty. While not all of these may be solved by the advice at hand, an ethical approach requires that they are brought into the advice conversation in a manner that alerts the retiree to potential negative consequences. Whether this in turn leads to subsequent advice addressing the relevant area, or a referral to external specialists, including it in the conversation holistically enables a client to be better informed and more completely understand their retirement.
The importance of considering these broader factors can be illustrated through a hypothetical example. Consider a client who invests all their retirement savings into an account-based pension. Over time, the balance is fully depleted, leaving the client reliant solely on the Age Pension. The client later raises concerns that longevity risk was never discussed or addressed.
Scenarios like this highlight the need for advisers to actively consider a client’s long-term interests and circumstances, clearly communicate key risks, and document these discussions thoroughly as part of the advice process.
Standard 7: Fees and benefits
While the law around ongoing fee arrangements is quite prescriptive, when it comes to how these fees must be paid and renewed the code of ethics adds an additional standard that requires all remuneration to be paid with the client’s free, prior, and informed consent, and it must represent fair and reasonable value for money. Fees may vary, but the most important elements are transparency in how and why a fee is charged and value on what is delivered. This extends beyond just the annual review meeting or the statement of advice to the broader perception of value - considering the level of engagement provided, outcomes delivered for clients, ongoing education and materials, and access to the adviser’s knowledge and expertise.
Standard 9: Product recommendations
While the true value of retirement advice is the strategy delivered and the feeling of confidence it gives clients, products will often form part of the holistic recommendation provided. When this is the case, the code of ethics requires these recommendations to be based in good faith and be neither misleading nor deceptive. To deliver on this, advisers must be transparent and ensure:
- Why a particular kind of product is required (e.g. a managed fund, cash hub, term deposit, or retirement income product)
- The client understands how the product works, in simple terms
- The client understands the costs that come with the product both today and ongoing
- The client understands who receives any remuneration attached to the product
- The client understands any of the limitations and trade-offs that come with purchasing the product, and
- No modelling or projections are used without appropriate disclosures that may influence a client’s decision to purchase a product.
Key principles for advice
To deliver high-quality, ethical retirement advice, it is essential that all ethical standards are considered and applied throughout the advice process. This involves maintaining a clear focus on the client’s individual needs and circumstances, ensuring transparency in both the advice process and adviser remuneration, and presenting strategies and concepts in a simple and accessible way, with regular opportunities to confirm understanding. Above all, the client’s best interests should remain at the centre of every decision and recommendation.