Digital advice ‘clicks’ all the boxes

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By Zein El Hassan, Partner

I’m talking about personal financial product advice, regulated under financial services laws, provided through digital calculators and computer software with the promise of AI to enhance its efficiency and the user experience.  The provider of this advice needs an Australian financial services licence with a personal advice authorisation.  I’m not talking about digital general advice models.

Digital advice can be holistic or limited in scope and provided as one-off advice or ongoing advice.  The digital advice engine (the underlying advice-generating algorithms and calculation tools) can underpin a standalone digital direct-to-customer (D2C) platform offered outside or inside of super.  Alternatively, you can offer hybrid digital advice where a person is available to hold the customer’s hand in navigating the digital advice platform and implementing the advice recommendations.  Of course, a digital advice engine can also support face-to-face (F2F) advice provided by individual financial advisers, as part of a digitised advice process, and there will always be a role for F2F individual advisers.

So, why go digital? The key is three!

Better risk management, scalability and affordability!

The current political and industry focus is on providing greater access to affordable advice to better engage with super fund members and better prepare them for, and in, retirement. The regulatory focus is on protecting super fund members and their super account balances from erosion, hence ASIC Report 781.

First up, a digital advice module focusing on retirement will help trustees with their retirement income covenant (section 52) under superannuation legislation.  The covenant requires an education, advice and product strategy in combo and tailored for each member cohort.  Advice allows a personalised cohort of one.

When digital advice is offered within super, the advice fee can be directly charged to the member’s super account (other than MySuper) with the member’s consent and requires appropriate trustee oversight as highlighted in ASIC Report 781.  Alternatively, the cost of the digital advice can be collectively charged as part of an administration fee (as intra-fund advice), which can be provided to MySuper members.  It’s all in the framing of the scope of the advice and how it’s offered to super fund members and structured from a charging perspective to comply with superannuation and financial services laws.

Digital super advice using pre-set data input fields, static algorithms and calculation tools is a process that can be managed effectively from a legal risk management perspective.  Of course, it requires careful review and input throughout the lifecycle of the digital advice engine, including through the design, testing, implementation, monitoring and modification phases.  See ASIC Regulatory Guide RG 255 on providing digital financial product advice and the need to test the algorithms.

As the scope of the digital super advice is pre-set and approved before release for use by super fund members, it makes it easier for the trustee to confirm compliance with the sole purpose test (section 62) under superannuation legislation.  Likewise, if the purpose of the advice is to enhance and optimise the member’s interest in the super fund, then it’s easier to comply with the trustee’s best financial interest and other covenants (section 52) under superannuation legislation.  Of course, the digital advice process and the resulting advice recommendations also need to comply with the best interest duty and related obligations under financial services laws. However, this can be tested and signed off before release for use by fund members.

The pre-set and pre-tested characteristics of digital advice, together with in-built controls, disclosures and confirmations also mean that it should be easier for the trustee to comply with the fee charging and member consent requirements (current and proposed section 99FA), and the collective charging requirements (section 99F), under superannuation legislation.

Regardless of whether the cost of the digital advice is directly or collectively charged to member super accounts, it is scalable and, therefore, likely to be more affordable and, accordingly, less likely to inappropriately erode members’ super account balances, which is the main regulatory concern expressed in ASIC Report 781.

Importantly, all of this is available under the current legislative framework, however, the announced law reforms should make it easier to provide digital advice (without the safe harbour steps and statements of advice).

By ticking all these boxes, digital advice should be the starting point in the development and evolution of future advice models, especially if our key objective is to offer affordable advice to most Australians in a way that is user-friendly and does not compromise consumer protection.

I’m looking forward to navigating and unpacking these issues as part of an upcoming Association of Superannuation Funds of Australia (ASFA) learning session, so watch this space!  Of course, the Mills Oakley Financial Services Team is passionate about advice in super and we are here to help! Zein El Hassan, Mark Bland, Matthew Farnsworth, Stephen Putnins, Geoffrey McCarthy

For further information, please do not hesitate to contact us.

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