Will this new system shine a light on the naughty and nice?

A new ratings model for advisers and licensees aims to deliver greater transparency and restore trust in the industry – but what does it entail and how will it make use of your data?

Adviser Ratings, working with University of New South Wales Professor of Finance Jerry Parwada, is submitting a new ratings system for industry consideration. It focuses on the idea that there are factors in the way licensees operate that can predict the likelihood of adviser misconduct.

As Parwada puts it, "The focal point of our methodology is to predict actions within a licensee that are detrimental to client’s interests.”

Adviser Ratings wealth chief executive Mark Hoven adds that the "destruction of trust in the financial advice industry" necessitates an "evidence-based, scientifically validated service" for consumers to access. But how would it work, and what does it mean for the industry as a whole?

A two-pronged process

The proposed ratings system has two key components. The first is an "unsolicited rating" which is based on publicly available and commercially procured data from licensees and an assessment using consistent qualitative and quantitative analysis. Employing this data, Adviser Ratings will consider factors such as the licensee's business model, ownership structure, past behaviours and misconduct, and the "degree of opacity and complexity."

The second component is a "solicited rating," which (as the name suggests) will involve Adviser Ratings asking licensees to provide their own proprietary information which they use internally, such as compliance records, licensee-reported breaches, internal adviser reviews and licensee-specific compensation schemes.

This component will also allow advisers to participate in the process, Parwada says, "in our attempts to open up the black box of fees and remuneration practices and their relation to adviser misconduct."

Client interest over performance

Adviser Ratings notes that the proposed system doesn't incorporate investment value provided by advisers. This is because, they say, performance outcomes are subject to market conditions and other factors not directly under advisers' or licensees' control.

"As such," the report says, "we allow performance to be subsumed by all the other factors outlined below that proxy for the quality of the licensee."

A focus on culture

Parwada suggests that misconduct within licensees acts as a kind of contagion for the decline in consumer trust. In fact, he says that even "indirect exposure" to misconduct - through media coverage, say - erodes trust and reduces the likelihood of Australian households getting their advice needs met.

The system is founded on the argument that the licensee is responsible for the development of a culture that will lead to high-quality advice, and that at the moment, licensees aren't adequately identifying ethical risks associated with the provision of advice. Even if they are, Parwada says, many aren't appropriately managing, monitoring and supervising them.

Adviser Ratings suggests that a high-quality licensee will focus on protecting advisers' reputations, facilitate transitions to new professional standards frameworks and employ "state-of-the-art technology" to improve customer interaction, both in terms of efficiency and risk management.

Have your say

The proposed system is open to industry consultation. Hoven says the goal is to determine whether licensees are "creating and nurturing a culture and operating environment that allows financial advisers to deliver high-quality professional advice in the best interests of their customers."

If you have some feedback as to how Adviser Ratings can achieve that goal, you can read the full report here.


The opinions expressed in this content are those of the author shown, and do not necessarily represent those of No More Practice Education Pty Ltd or its related entities. All content is intended for a professional financial adviser audience only and does not constitute financial advice. To view our full terms and conditions, click here.

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