The financial services industry is no stranger to controversy. In Australia, the public inquiry which assessed misconduct in the banking, superannuation and financial services sector highlighted large-scale customer mistreatment.
But, following the righteous uproar, the 2019 Royal Commission has sparked the greatest transformation of the Australian financial advice industry.
The Hayne Report, which highlighted the findings from the inquiry, made 76 recommendations – most of which have been implemented.
They include:
- A more active role for clients in agreeing fees with their adviser and greater detail on what is being paid for;
- A better system for reporting adviser misconduct; and
- The abolition of grandfathered commissions.
However, one outcome – which some might argue was necessary – has been an exodus of advisers.
Numbers have dropped by 7,000, leaving fewer than 18,000 to advise Australia’s population of nearly 26 million.
Changes from day one
The Royal Commission not only put the cat among the pigeons when it came to consumers – it also triggered changes to business models at the big banks, as well as smaller financial advice firms.
Paul Brady, principal at Brady & Associates, said: “A challenge has been to meet needs for mass market advice where high cost to serve has become less commercial.
“Greater focus on serving client needs for those that can afford and need high value service has resulted in many businesses seeking to move upmarket to target high net worth clients with complexity, and profit margins that support higher service levels profitably.
“The focus on cost, compliance and business risk management has seen many leave the sector, a shortage of quality experiences advisers, with a gap between market expectations at consumer level compared to what sector can deliver profitably.”
Craig Keary, chief executive of Asia Pacific at fintech firm Ignition Advice, said: “The cost of advice for consumers has increased due to increasing compliance overheads. Big banks are making strategic decisions to exit wealth management.
“Licensees are reviewing their proposition with a preference for more substantial and sustainable advice businesses.”
Too much?
One change at a time is enough to deal with, and industry has been handed 76.
As many advisers know, ensuring regulatory compliance comes with higher expenditure and less time with clients.
Brett Evans, managing director of Emea at Atlas Wealth Management, said: “The rapid escalation in regulation and abiding by the recommended changes from the Royal Commission has resulted in a 28% increase in the cost of delivering financial advice, according to industry sources.”
Something that surely can’t be good for market.
Russell Harrower, Australia managing director at BDH Sterling, said that there appears to be substantial duplication in relation to disclosure, which includes:
- Product issuers as well as advisers providing notifications in relation to fees being deducted from accounts;
- Disclosure undertaken at the time of advice; and
- As part of the fee disclosure statement (FDS) process, if consent is not sought at the time of the FDS anniversary – then another disclosure is needed.
He added: “In practice, this duplication is likely to result in clients lacking clarity.”
Brady & Brady Associates’ Brady added: “There has been excessive regulation, this often occurs after market problems and poor consumer outcomes, as regulators and government seeking to address this. This can be counter- productive, many now seek to service the high net worth market and avoid retail advice and the level of regulation.
“The need to address consumer needs while adopting a pragmatic approach is needed, recent initiatives by key market participants seeking changes to more suitable and practical regulation are welcome and would assist both advisers and those they seek to serve.”
Best practice
The whole point of the Royal Commission was to improve adviser practices and client outcomes.
Over the last few years, the Aussie government’s intention has been to make financial planning a profession, on the same level as lawyers or doctors.
For existing planners, they must hold a bachelor or greater qualification in financial planning, as well as having completed the Financial Adviser Standard & Ethics Authority (Fasea) exam and coursework.
For future financial planners, as well as holding a relevant aforementioned qualification, they must also complete a professional year to obtain suitable training and experience.
Scott Heathwood, director at Lifestyle Asset Management, said: “Most surviving actors in the game who are at or near trying to achieve best practice to make sure they survive. But there are still a lot of ‘B’ grade advisers who simply don’t have the education, intelligence, experience or wit to practice in the advice sector.
“Those would be better suited to product sales, however that is now problematic.”
M&A boom
The damaging Hayne Report and Royal Commission sparked a financial planning exodus for the major banks in Australia.
They have been selling off their wealth arms – or just shutting operations down like Commonwealth Bank of Australia did recently.
As regulation started to take effect in the UK, financial advice M&A became talk of the town. But Aussie firms are split on whether the country has the same appetite for deals.
Heathwood said: “There is no real M&A boom, more natural commercial friction amongst those leaving and wanting to sell their devalued businesses. Advice businesses have dropped in value and this will take a few years to sort through, as those remaining recalibrate their service offers and the market gets a handle on how to price them.”
Brady said: “There has been a significant exit of advisers and a shortage has arisen, many institutions have exited the advice space as, for some, it’s become uneconomic. The M&A area opportunity also has grown, many businesses are looking to increase scale, many advisory business have owners looking to retire given demographics, many see scope to expand services and benefit from those exiting the market.”
A spokesperson for Blacktower added: “Many banks and institutions have left the financial advice space as a response to the Royal Commission. This has meant that, previously, this sector which was dominated by the banks and institutions has fragmented with advisers setting up smaller shops.
“The trend towards self-licencing has grown rapidly which means that many financial advisers are now taking on the added responsibility of running Australian Financial Services Licences (AFSL).”
Future
Despite the (necessarily) disruptive last few years, there seems to be light at the end of the tunnel for what the future holds for the Australian financial advice sector, including a financial planning regulator.
Ignition’s Keary said: “We are at a tipping point in Australia where the regulator, the government and the industry are all aligned in achieving a healthy well-regulated financial sector in Australia. We know that the current level of advisers can in no way satisfy the amount of people who want or need access to advice.
“We also know the consumption of advice is changing and consumers prefer piece-by-piece advice and this is driving a demonstrable change in the market and community.”
Pep Perry, chief executive and partner of Escala Partners, said: “The Royal Commission has made the industry harder to enter as a business or an individual. The effect of these decisions to improve the industry will not be known for a number of years.
“What is clear is that there will be less people providing financial advice and it will cost the end customer more to get that advice than before the Royal Commission. Whether this is good or bad for advice in Australia will be seen down the track.”
