A fence at the top of the hill: changing how we think about “compliance”

Conrad Travers, Principal Consultant, Tangelo Advice Consulting

Perspective is a powerful thing. Ask a financial adviser about “compliance” and you’re likely to get a grimace, a shrug or some kind of grunt. This is largely because compliance as we know it has been built and framed the wrong way.

How do we think of compliance?

Compliance was built as a check and balance to ensure advice is of a high quality and that all key elements have been met. It usually manifests in a set of policies and standards with an annual audit and required training to support it.

For an adviser, an annual audit can be hugely emotional - someone is coming in, reviewing their files and the advice they give and “reducing” it all down to a score. A score which can affect their business value - an adverse rating can be a permanent record considering the ABA protocol and it can have BOLR implications.

On the flipside, auditors are often working remotely, on their own or in small teams. Auditors I have worked with are often on the receiving end of adviser’s frustrations. Many are nervous before audits and I know of some that have been intimidated or threatened while completing audits.

Auditors are often left to front policy changes that they may not have had a say in, to meet a regulatory deadline they did not design. They often travel all week, and many work after hours and weekends to complete their reports. Most auditors and standards officers are incredibly experienced and knowledgeable, some are even ex-advisers.

For most licensees, it’s the biggest single control regarding the quality of advice. Unfortunately, by its own design, its imperfect because it happens too late (after the advice), and we may be sampling only 3-5% of the risk.

 What could compliance be?

Let’s assume for a moment that we could step off the carousel and consider an approach that could work better for everyone. First let’s lay out some foundational principles:

• We want to encourage and assist advisers to give great advice

• There is an important difference between quality of advice and the process of advice

• We are trying to actively measure and assess advice risk. A file review is one way to do this, but not the only way

• We have a suite of controls available – paraplanning, audit, pre vet, complaints, policies and incidents and they don’t usually talk to one another (but they should)

• We don’t always have to do what we have done in the past

If we can agree that these principles are correct, then it’s time to step back and consider some alternative approaches. I suggest there are three changes we could make:

1.      Automation. Let’s invest the time and money into technology so all the systems come equipped with guard rails. If we can better reflect the actual advice process end-to-end with predictive analytics and alerts, we can help advisers to get it right first time.

Imagine that instead of discovering problems in an annual review, you are able to prompt advisers as they use financial planning software. For example, a system alert to remind advisers that a first appointment diary note must be created or “you haven’t completed a KYC form for this client” or “that fund code doesn’t match the SOA.” Surely addressing the issue contemporaneously is much easier than waiting 12 months to review a file, find an error, remediate it, record it, follow up, and report on it in your compliance committee.

2.      We separate the adviser “score” between quality of advice and process issues. I’m not sure how ASIC would feel about this (especially post 515), but it would be a good conversation to have.

3.      Let’s be smarter about the resources and controls we already have. A fence at the top of the cliff is better than an ambulance at the bottom. Right now, we have the ability to create that fence. For example, let’s say only about 10% of the advice that goes out today goes through paraplanning. That means 90% of advice could be going out without any kind of independent review or eyes on. I am happy to be corrected, but I’m not aware of major systemic inappropriate advice cases that have been through the paraplanning channel.

If we considered tools like paraplanning and pre vet as “advice gateway” tools (and could be comfortable with a slightly longer timeframe to finalise the SOA), we could pick up on potential issues before they become big issues. If it could be resourced appropriately and with strong Quality Assurance, we could get on top of the  issues early on. Let’s not rely on the ambulance at the bottom of the cliff that we have now – the complaints, the Royal Commission and the burgeoning remediation industry.

A transition from compliance to best practice

Imagine if rather than an annual audit, advisers, supervisors and licensees had a complete dashboard showing advice, the gaps and learnings. Maybe it provides a score or a rating but its focus is on creating an ongoing learning and a coaching conversation. All of a sudden, all the heat comes out of “compliance” and it becomes “best practice.”

In this scenario, because we’ve built the fence, we may even be able to deploy auditors into roles with a coaching focus to strengthen the focus on getting it right first time. I’ve been told, many auditors would appreciate this change themselves.

This can all be viewed as a bit ‘pie in the sky’ and that’s fine. But we need new thinking to work through these challenges we’re facing in the advice profession, so we can make it better for all.