The reinvention of financial advice
« back to media
25 June 2018
by
InvestSMART
Article link:
https://www.eurekareport.com.au/
The reinvention of financial advice
Don’t trust your adviser? The robo revolution is well underway.
If you think about the segments of Australia’s financial services industry that are set to undergo the most rapid and massive change over the near term, then top of your list should be the financial advice space.
Within a few years from now, the number of licensed practitioners in this area is likely to be half of the current total. So, if you’re a planner, maybe it’s time to start planning a career change?
A new series of regulatory reforms are set to come into force, including new competency standards for financial advisers set by the Federal Government’s Financial Adviser Standards and Ethics Authority (FASEA).
Essentially, all financial advisers will need to hold recognised and relevant educational qualifications as determined by FASEA in order to provide personal advice on financial products to retail clients. And they will need to do ongoing professional development.
So, expect a large exodus, because there are many advisers out there who will decide this is just all too hard. Financial adviser search and ratings service, Adviser Ratings, estimates that more than 14,000 financial advisers will exit the financial advice industry over the next five years.
That’s huge. Keep in mind that there were roughly 25,000 registered advisers at the start of April this year, so we’re talking about the industry being more than halved. And almost 7000 advisers have already jumped ship since 2015, with the bulk of those leaving between the second half of last year and over the first part of 2018.
Introducing a code of ethics
Those that do decide to stay in the industry will be forced to adhere to a new FASEA regulatory code of ethics from January 1, 2020, designed to encourage higher standards of behaviour and professionalism in the financial services industry.
A draft code was released for consultation on March 15 (with comments due back by June 1), which you can read in full by clicking here. It includes 12 standards of conduct, covering ethical behaviour, client care, quality process, and professional commitment. Failures to comply with the code will be referred to the Australian Securities and Investments Commission (ASIC).
“Raising the professional standards of financial advisers will play a significant role in improving consumer trust in the financial advice industry, which has had repeated instances of inappropriate behaviour,” said Revenue and Financial Services Minister, Kelly O’Dwyer.
Separately, ASIC has just released its Consultation Paper 300, which sets out a framework for the approval and oversight of compliance schemes for financial advisers. Financial advice peak bodies will play a key role in that process, but when I googled “financial advice peak body” I found five different peak organisations. The industry is hopelessly fractured.
Personally, and I think many would agree with me, it’s high time the whole financial advice industry was turned on its head. It needs to be cleaned up and reinvented.
Out of interest, I just took a look at the ASIC website to see what sort of actions against advisers it has been taking in recent weeks. The list is long, including multiple cancellations of financial services licences, the banning of advisers for improper conduct and fraud, including the embezzlement of clients’ funds and submitting false applications to receive commissions.
As the banking and finance Royal Commission has demonstrated in spades, the industry is still very conflicted. We’ve heard many stories of outright fraud committed by representatives of the major banks and other institutions, all the way down to individual advisers providing conflicted advice designed to enrich themselves, not their clients. Hardly surprising.
The chart below was contained in a Royal Commission background paper entitled Some Features of the Australian Financial Industry. It shows that 15 per cent of all complaints revolved around conflicts of interest, while 39 per cent were for inappropriate advice.
The complaints around conflicts of interest were despite the banning of conflicted remuneration structures under the Future of Financial Advice (FOFA) legislation enacted in 2014, including commissions and volume-based payments on retail investment products.
Conflicts of interest remain
Essentially, the major financial institutions have been laggards in introducing the “best interests test” outlined in the FOFA legislation, and their corporate governance processes around the implementation of FOFA have been inept at best.
A scathing report from ASIC released earlier this year found that a high percentage of bank-aligned advisers were steering clients into their employers’ products over better products offered by other providers. They have been receiving volume-based incentives. So why have bank-employed advisers still been receiving commissions after the FOFA reforms were introduced?
And, this week, the Productivity Commission released a massive report into the superannuation system that, as well as tearing the current super system to shreds, also shone on a spotlight on the provision of questionable financial advice to fund members.
“The quality of financial advice provided to some members — including those with SMSFs — is questionable,” the Productivity Commission said. “In future, as members retire with higher balances and the diversity of options available expands, the need for tailored advice will grow.”
Before I go on, I should make a declaration. I am a “tailored” financial advice victim. It happened over a decade ago, and the sorry venture cost me over $60,000 – the bulk of it being lost on a so-called “tax-effective investment” in Great Southern Plantations timber lots. Say no more! I’m among the many thousands of other Australians who have collectively lost billions on timber plantation schemes. And there was another $10,000 or so I lost from an investment in a “recommended” equities wrap platform.
It was several years before the GFC, when I decided it was about time I saw a licensed financial adviser to map out my wealth strategy. I don’t remember his name, but I do remember the blue Porsche he parked across the road from my house. In hindsight, that wasn’t a good sign.
Anyway, he “talked me” into these supposedly great financial products, never once disclosing the fat upfront and trail commissions he was going to grab. Now, I have a fair degree of financial knowledge. I probably should have known better. But the advice system was already stacked against me. And I think it still is for many investors.
Here’s some interesting data from the Productivity Commission on the concentration found within the Australian financial planning industry, based on the ASIC Financial Advisers Register as of last October. It’s already out of date of course, with NAB recently selling MLC, ANZ offloading most of its wealth advisory business, and Commonwealth Bank undertaking a study to float its Colonial First State Asset Management arm. The banks have largely bailed on providing wealth advice.
But, as at October 3, 2017, here’s how the advice industry looked:
- 44 per cent of advisers (both aligned and non-aligned) operated under a licence controlled by the largest 10 financial institutions;
- Six financial institutions – the four major banks, AMP and IOOF Holdings — employed over 35 per cent of advisers (including aligned and non-aligned) operating under a licence they controlled;
- About 30 per cent of the total number of financial advisers worked for one of the major banks, while about 78 per cent of advice licensees operated a firm with less than 10 financial advisers.
The technology revolution
So, where to from here? The industry is already in a high state of flux, but the biggest changes and opportunities to come for financial advice will revolve around technology.
Rather than paying out large amounts of money to human financial planners, more and more Australians will be using low-cost automated online applications to obtain impartial, general investment advice. These digital platforms will dispense unbiased Statements of Advice (SOA), based on all the financial information that the individual has entered into set fields.
Indeed, robo-advice platforms are set to become the preferred entry point for individuals and couples of all ages wanting an easy way to get good financial advice without the fear of being ripped off.
This is certainly not a far-fetched scenario, because it’s happening right now. In the interests of total transparency, I should also insert a disclaimer right here. InvestSMART already has online systems in place, via its free Portfolio Manager and HealthCheck technology, to help investors allocate their assets based on their investment time frame and risk profile. More than 100,000 investors are using these tools.
Really, it makes a lot of sense for the millions of Australians who just need some good investment advice and, if they want to get more specific financial advice, they can see a licensed financial adviser to make more specific decisions.
Mark Hoven, an ex-colleague of mine from Standard & Poor’s and now the CEO Wealth at Adviser Ratings, agrees that robo-advice technology will play a much bigger role in future.
For starters, older advisers in the Baby Boomer generation are already looking for their own exit strategies. And younger investors, in the Millennials band, are looking for other solutions. They don’t necessarily want to see, or trust, older advisers. Websites and smart phones are much easier for the basics.
“It’s the transition of wealth from the advised parents to the adult non-advised children, who are going to be more interested in smarter technology-based service providers and using tools that will keep them updated during the year so they can do things themselves,” Hoven says.
“That includes automated SOAs and online portals for clients to monitor their performance and progress and to update their adviser remotely.”
Helping yourself
Australia’s financial advice industry is being totally transformed before our eyes. And most will agree it’s long overdue, because there are few areas that are more tainted.
My humble advice. Keep a close eye on what’s happening in the advice industry, especially on the technology side, and have a look at ASIC’s name and shame list on the website link I included above from time to time, to see if all of the regulatory changes are really working. It makes for interesting reading.
If you do use a financial adviser, before making any decisions, it's definitely worth spending some time researching their recommendations before committing any capital. Don't be afraid to ask them hard questions, like: "Why have you recommended those products specifically?, "What are the fees involved?", and "What are some other alternatives?"
Unfortunately, no one will ever completely stamp out adviser fraud, but at least the authorities are trying to make a bigger dent. And remember, your best defence against poor financial, product and services advice is to educate yourself and your family about investing and finance in general. Forearmed is forewarned!
No comments added.
Add comment
Comments
Enter code:*
« back to media