Adviser Ratings ongoing research into the financial advice industry continues to shed light on trends within the sphere. Specifically, we have observed an increase in the number of AFSL licenses granted by ASIC that far outweighs the growth in adviser numbers; a migration away from institutionally aligned licensee’s; and a rapid growth in the use of managed accounts.
Shift to Own AFSLs and Leaving Institutions
In just the last two years, there has been a jump towards the non-aligned space (what was previously termed “independent”). Two years ago we saw 40% of advisers migrating to or entering at licensee’s that were not owned by or aligned to a major institution. Our latest data shows that the move is on, 70% of advisers are joining or switching to licensee’s in the non-aligned space.
Fig.1 Adviser growth for Licensee “Type”
There has been an increase in the number of AFS licenses from ASIC of 32% (1,333 to 1,752) or over 400 new licenses granted in 2 years, yet adviser numbers have only grown 10% (22,612 to 24,777).
Fig. 2 New advisers to industry – Licensee destination
These numbers can be attributed in part to the addition of accountants entering the market, but Adviser Ratings has also been tracking the mass migration from the institutionally aligned space. Young advisers are spending a couple of years in large firms before joining much younger firms or setting up their own AFSLs, as evidenced by the average years of experience of new AFSL holders being 2 years or less.
Fig. 3 Advisers switching within the industry – Licensee destination
In analysing these movements and other data, Mark Hoven, Adviser Ratings CEO Wealth says that although a motivation for many advisers to switch out of the institutionally aligned groups is due to overly restrictive APLs, we are seeing rapid growth in the use of managed accounts. While managed accounts are proving to be popular with consumers who want professionally managed portfolios while retaining beneficial ownership of the assets, these vehicles are also generally designed to deliver greater margin to the adviser over other investment vehicles and at the expense of the fund managers running the portfolios. On balance it remains to be seen whether an over-reliance on managed accounts to the exclusion of the other investment choices on a wider APL raises any concerns under the best interest’s test.
Trend to Continue
We expect the trend of adviser movements away from institutions to continue, given the current pressure on consumer’s best interest duties and whether confined Approved Product Lists serve this duty.
It could also be said that the FOFA remuneration model is starting to take effect as new advisers adapt to the new regime of a fixed fee for service model.
Adviser Ratings CEO, Angus Woods said “our search indicators suggest more consumers are seeking advice from a non-aligned adviser, so whilst larger firms or aligned firms may be able to deliver new clients to new advisers, the growth of (for example) online leads means it is becoming easier to search for leads without the support of banks. It may also be a result of the impact of the negative media coverage surrounding banks with respect to advice”.
What Does This Mean for The Consumer?
This shift is potentially a mixed blessing for the consumer. Broadly speaking, the adviser will have a far greater choice of investment and insurance products on their APL to deliver to clients. However, the safety net of a "big institution" from a compliance and oversight perspective is no longer there, especially in the instance an adviser delivers inappropriate advice. It is important for clients to understand the governance model underpinning their adviser's practice and check an adviser's history, credentials and whether they adhere to any association's code of ethics.
Institutions are also becoming aware that a more fragmented market is what is playing out, especially as accountants come into the market and bring their fixed fee model in. Generally, this should bode well for the end consumer as institutions are forced to provide a service offering that competes on both price and a broader investment offering. However, it will take time for advisers in general to regain trust across the board.
Further Trends in 2018
- The Banking Royal Commission is likely to broaden the cloud over the industry. It will be looking at past behaviours and, despite the mea culpa of many participants and the fact many organisations have started to implement more robust advice monitoring procedures, consumers will generally only be hearing about scandalous/suspect behaviour in the main.
- It is conceivable that the Royal Commission may exacerbate current adviser movement trends and result in even more advisers leaving the banks.
- Adviser Ratings has also seen a huge pickup of practices wanting to sell or smaller firms looking to merge. Our recent analysis suggests 20% of practice owners would entertain selling their practice in the next year (based on a survey conducted in December 2017).
- Older practice owners are starting to look to merge with younger practices for two reasons - succession planning and to help position their firms as we start to see a migration of wealth from baby boomers to the Gen X and Gen Y children.
- Accountants are looking "to buy" quality practices
- “Robo” and technology will deliver significantly better outcomes for both consumers and advisers in 2018. Platforms are looking to integrate artificial intelligence solutions or looking to partner with robust smart tools to deliver price and productivity efficiencies to advisers.
Interested in the final 300 page report? Contact Mark Hoven on firstname.lastname@example.org