Rising regulatory pressure is weighing down advisers and dealer groups. Fortunately, there’s a better way to manage risk, says Midwinter’s Catalina Lopez.
The advice industry is a challenging business. Make a mistake and the repercussions can be life changing. At best, reputations are shattered. At worst, businesses are closed.
Monitoring the quality of advice while maintaining a profitable business is the tight rope that advice professionals must walk.
In 2017, ASIC, the corporate regulator backed the rising use of key risk indicators (KRIs) to fulfill that goal. Many larger institutions had already begun implementing KRIs by combining technology and data analytics to pinpoint areas of weakness in their advice.
“We think that the development and use of KRIs, and enhanced records and data management, appropriate to the licensee’s business, can assist in identifying high-risk advisers and affected customers,” the corporate regulator wrote in Report 515.
Yet four years later, many dealer groups and practices are still not using KRIs efficiently to manage their compliance obligations.
The KRI challenge
Even back in 2017, ASIC recognised that developing and implementing KRIs was challenging. Institutions were dealing with old and often unreliable data, paper-based records, legacy IT systems that made data extraction difficult, and different data-recording methods.
Since then, the landscape has become even more challenging. The industry has endured a Royal Commission that has led to even more red tape and scrutiny.
Many of the largest institutions have assessed the ongoing risks as too high and have left the advice space.
Total adviser numbers across the industry have fallen by about one-quarter while many of those remaining are switching to smaller dealer groups or obtaining their own AFSL.
While this has freed many advisers to take greater control of their day-to-day practices, it also places greater responsibility on them to manage their compliance responsibilities. Get it wrong and potentially large remediation costs can send a practice or dealer group under.
Building the right KRIs
Some organisations fall at the first hurdle – choosing the KRIs they will monitor and setting thresholds. A simple starting point is to split potential KRIs into four broad categories:
- Product or advice type. Are advisers delivering a high level of product replacement, recommending ‘one-size-fits all’ advice to clients, or recording a high ratio of records of advice to statements of advice?
- Adviser profile. Do advisers have an adverse complaints history and adviser audit outcome, high level of recorded incidents, or poor training history?
- Customer profile. Are advisers delivering a high percentage of advice to elderly or vulnerable customers, or those approaching retirement who have an aggressive risk profile?
- Other types. Have there been any judgements against the adviser or is there negative or concerning feedback from the business, para-planners and compliance teams?
The type of KRIs chosen need to match the nature, scale, and complexity of each business, and will also be reliant on the type of data available (more examples are contained in Appendix 4 of ASIC’s report 515).
Creating a strong compliance foundation with technology
Good digital data, combined with new technology, is clearly essential to build effective KRIs and audits. It is the only way to truly demonstrate compliance with the best interests duty.
Many software providers and fintech start-ups are attempting to answer this challenge but fail because they don’t really understand the needs of advisers, or their solutions are too expensive and hard to implement.
Some solutions are costly to implement and need extensive tailoring. Others don’t work because they must draw in client data from a separate application.
Midwinter’s Key Risk Indicator Solution (KRIS), which forms part of our AdviceOS advice platform, avoids these issues.
It has a simple, pre-configured dashboard that can be set for an adviser, practice or dealer group. It clearly shows KRIs, such as overdue fee disclosure statements, which link to the action which can solve the issue, such as generating the statement. You can see a demonstration of the system here.
It is not just possible to implement KRIs effectively – it is best practice for businesses that want to future-proof themselves against regulatory risk – but it takes the right software provider and deep industry knowledge to make it happen.
This article originally appeared in the IFA.
