What will the future of financial advice look like?
Considering a client’s values and ethical concerns in financial advice might become the new norm, according to current regulatory changes, consumer demand and global trends. There are three important drivers of change currently taking place in financial advice, that is triggering discussion among advisers, clients and investors. First, Financial Adviser Standards and Ethics Authority (FASEA)…
Considering a client’s values and ethical concerns in financial advice might become the new norm, according to current regulatory changes, consumer demand and global trends.
are three important drivers of change currently taking place in financial
advice, that is triggering discussion among advisers, clients and investors.
First, Financial Adviser Standards and Ethics Authority (FASEA) have introduced legislation from 1
January 2020 that has financial advisers asking whether they need to
incorporate ethical and responsible investments into their recommendations. Second, people
are both demanding and expecting that their investments and superannuation are
invested responsibly. Third, there is a global push toward sustainable finance
whereby capital is mobilised to create economic resilience as well as social
and environmental sustainability.
FASEA Code of
have introduced a Code of Ethics for financial advisers that extends current
obligations by providing advisers with guidelines for ethical conduct that
centres on the client’s best interests duty. In an explanatory note, FASEA writes “where your
clients indicate they only wish to invest in ethical or responsible
investments, you will need to consider whether limiting your product
recommendations in this manner is appropriate”. This has sparked debate around
whether financial advisers should be proactively asking clients about their
an explanatory guide released by the Financial
Planning Association of Australia (FPA), there is an entire section dedicated
to ethical or responsible investments.
following highlights are taken from this booklet and relate to best interest
obligations and ethical or responsible investments:
may need to consider whether product recommendations should be ethical or
responsible (pg. 12).
there any environmental, social or ethical considerations that are important to
a client (pg. 18)?
circumstances may include a client’s preferences around ethical or socially
responsible investments (pg. 27).
need to consider whether product recommendations should be limited to ethical
or responsible investments (pg. 29-30).
must clearly document how they determine whether ethical or responsible
investment options meet a client’s broader long-term goals (pg. 31-32).
should be noted that the guidelines from the FPA are only a guide and
interpretation of what has been legislated in the FASEA Code of Ethics. The
Code of Ethics was not designed to provide step-by-step instructions, rather to
provide overall standards that will enhance values, ethics and professionalism
in the financial planning industry.
in Australia, it may not be a legal requirement to proactively determine the
sustainability preferences of a client. Globally, however, there is a move
toward the obligation for advisers to expressly seek out the sustainability
preferences of their clients, suggesting that this may become the ‘new norm of knowing your client’.
there was an article written by Bloomberg about BlackRock called BlackRock Has Green Plans. Larry Fink is the founder
and CEO of BlackRock and he announced that his firm will make investment
decisions with environmental sustainability as a core goal. He says that BlackRock
will begin to exit certain investments that “present a high
sustainability-related risk,” such as those in coal producers.
BlackRock is the largest asset manager in the world, with nearly US$7 trillion
under management. This move will fundamentally shift its investing policy — and
could actually pressure other large money managers to follow suit. Blackrock
have also signed up to Climate Action 100+, a group of investors managing
assets worth more than US$35 trillion that pressures fossil fuel producers and
other companies to reduce carbon dioxide pollution.
is worth noting that Fink frames the emphasis on sustainability as client
demand: “Over the past few years, more and more of our clients have focused on
the impact of sustainability on their portfolios,” he says, “Climate change is
almost invariably the top issue that clients around the world raise with
demand for ethical investments is on the rise. In a report by the Responsible
Investment Association of Australasia (RIAA), charting consumer attitudes and
demand for responsible investing in Australia, 9 in 10 Australians expect their
superannuation or other investments to be invested responsibly and ethically.
Millennials are the most likely group to prefer to invest in a responsible super fund than a fund that only considers maximising financial returns (75%). Not only that, but 88% of millennials surveyed would consider investing in ethical companies, funds or superannuation funds in the future or are already doing so.
finance generally refers to the process of taking into account environmental
and social considerations when making investment decisions, leading to
increased investment in longer-term and sustainable activities.
in 2015, most governments across the world agreed that we need to meet the
Sustainable Development Goals; 17 globally accepted goals made up of 169
targets to create a sustainable planet by 2030. The goals include no poverty,
enough food, health and well-being for all, clean water and energy, peace and
justice. It is estimated that we need US$5-7 trillion of investment each year
to achieve them. Although the goals are gaining traction, the financing gap at the end of 2019 was
US$2.5 trillion/yr. Poverty is falling too slowly, global hunger is on the
rise, we’re losing biodiversity rapidly, greenhouse gases are still increasing
and we are now faced with the possibility of global temperatures rising to 3 or
even 5 degrees Celsius.
number of initiatives have been developed to enable the finance industry to
mobilise capital toward sustainability and effectively close this financing gap.
sustainable finance adopted by the European Commission in March 2018 has 3 main
capital flows towards sustainable investment, in order to achieve sustainable
and inclusive growth.
financial risks stemming from climate change, environmental degradation and
transparency and long-termism in financial and economic activity.
this ten-point guide for the European Union (EU), action four proposes that sustainability
preferences are taken into account when providing financial advice.
2019, the University of Technology Sydney (UTS) conducted analysis that compared the EU
and Australian transition to sustainable finance. Their research report states:
financial system lies at the heart of the economy and is therefore integral to
reducing short-term systemic risks and enabling the long-term sustainability.
Sustainable finance refers to any form of financial service, including
investment, insurance, banking, accounting, trading and financial advice, that
integrates environmental, social and governance (ESG) considerations into
financial decision-making. Sustainable finance is often understood both as
‘doing good and doing well’.”
financial system that focuses on sustainable finance will ultimately enhance
the resilience and global competitiveness of the financial sector in Australia.
In their recommendations toward different stakeholders in the finance system,
UTS specifically mention sustainability in investment advice and that the progressive
interpretation of existing law increasingly suggests sustainability preferences
should be sought and considered.
March 2019, the Australian Sustainable Finance Initiative (ASFI) was launched to develop
a sustainable finance roadmap, in consultation with diverse sectors and
is a collaboration that brings together leaders from Australia’s major
banks, superannuation funds, insurance companies, financial sector peak bodies
and academia. The roadmap, to be launched in 2020, will recommend pathways,
policies and frameworks to enable the financial services sector to contribute
more systematically to the transition to a more resilient, sustainable and
prosperous economy, society and environment, consistent with global goals such
as the UN Sustainable Development Goals and the Paris Agreement on climate
In a recent progress
report, ASFI have highlighted the complexity and
system-wide challenges required to achieve this goal and acknowledge the importance of
the financial services sector. They state that a core purpose of the financial
system is to allocate capital to productive purposes for the benefit of all. It
will be interesting to see what this report determines regarding the future of
debate surrounding how much an adviser needs to discuss with their client
regarding ethical considerations, it is clear that this area of advice is a
growing interest. Regulation, consumer demand and global trends are driving an
increase in ethics and ESG considerations within investments.
Advisers like Paul Garner already see the importance of incorporating
values and sustainability in financial advice. In fact, Paul specialises in
ethical and responsible investments and naturally asks clients about their
ethical, environmental and social concerns. Paul has been supporting responsible
investing for many years and believes that ethical advice makes good advice.
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to me about how responsible funds may work in conjunction with your overall
IMPORANT; This information is general in
nature only it does not take into account your individual circumstances. We
recommend that you seek professional advice before making any investment