Many consumers are unable to tell the difference between good and bad financial advice, even for the most simple advice, a new study has revealed.
A major study conducted by the University of Sydney found that a large proportion of Australians are unable to gauge if they are receiving trusted financial advice from a professional financial adviser, even for the most basic decisions.
“We found that people on the whole, were able to tell the difference between good and bad advice on the topics that were relatively straightforward such as paying off credit card debts,” University of Sydney Business School Professor, Susan Thorp, said.
“But when it came to more complicated decisions, like superannuation investments, far fewer people were able to tell the difference between good and bad advice.”
The study, which has led to the university calling for a tightening of regulations to protect vulnerable clients, also found that trust in financial advisors was “easily manipulated”.
“We were able to show that if an advisor gave good advice on an easy topic, that formed a good impression in the mind of the client, and they continued to trust that advisor, even when they gave them bad advice down the track,” Professor Thorp said.
“It seems that this strategy is probably quite widely used and would be influencing people’s decision making.”
The researchers involved showing groups of people videos of a number of advisors some providing good and others providing bad financial advice. The group was then asked to identify which of the advisors they would trust.
The research also measured the impact of showing clients an advisor’s qualifications.
“One of the things we were able to do in this experimental context was measure the impact of a certification and we found that displaying a qualification made people more willing to follow advice than they otherwise would be,” Professor Thorp said.
She went on to say that clients were often unable to tell the difference between genuine and fake qualifications.
The research, according to Thorpe, indicates a need for higher qualifications and standards for financial advisors. Thorpe is now calling on the advisory industry and ASIC to more rigorously enforce laws protecting consumers.
“What’s important here is that the skill gap between the client and the advisor can be large. The potential for misunderstanding or manipulation is quite high in this situation. In other words, clients are vulnerable so they need to be properly protected,” she said.