Research both within Australia and overseas shows clearly that professional financial advice can make a world of difference emotionally, behaviourally, and financially.
Recent research suggests that financial advice can add as much as 5.2 per cent to an investor’s bottom line.[i] Yet the most recent ASIC report on consumer financial advice found that only 27 per cent of Australians had received financial advice, with 41 per cent advising they intended to get it in the future.[ii]
Those numbers spell opportunity, given the consistent findings that receiving financial advice can have a big impact on overall wellbeing and financial security – that is, both intangible and tangible benefits can accrue.
Yet there is no doubt that financial advice in Australia has challenges. The number of financial advisers has fallen in the past three years, while the costs of quality advice for retail clients have increased.
In SAFAA’s opinion, the reforms, however, took a “one-size-fits-all” approach, which did not take account of specialisations in financial advice geared to consumer needs.
The financial advice industry is comprised of those who provide advice on securities and derivatives, options and warrants, managed funds, portfolio management, cash management solutions, insurance, superannuation, and retirement planning, tax-effective strategies, wealth transfer, and estate planning, debt management, and aged care. The exam and education standards introduced by the Financial Standards and Ethics Authority took no account of specialist skills.
We are seeing an exodus of experience, knowledge, and capability having an impact on clients and the next generation of advisers who will lack the mentors so intrinsic to the profession. And we are yet to see evidence of whether these regulatory changes have improved outcomes for clients, while the flow-on of costs to consumers has seen financial advice becoming increasingly only affordable to the wealthy.
That leaves the unadvised unaware of how best to structure their financial affairs and DIY investing to generate wealth. Without human intervention, it is not clear that investors will remain disciplined through challenging periods.
An ecosystem using technology
Rapid changes in stockbroking, wealth management and financial planning are being driven by shifting expectations across generations, the evolution of traditional business models and a shift towards low-cost passive products.
Financial advice is increasingly about offering access to an ecosystem of financial services. For example, many stockbroking firms have morphed into wealth management firms, combining high-quality investment implementation capability with assistance with superannuation, insurance, estate planning, pre and post-retirement advice and portfolio diversification.
As clients look to consolidate all their financial relationships in one place, a team structure reassures them that there is bench strength, diverse skill sets, and backup coverage. Providing holistic advice within the firm will see more amalgamations and consolidation, as scale provides profitability, capacity to invest in technology and access to capital, as well as diversified revenue.
There has also been a move to smaller, independent firms, both in boutique wealth management and financial planning. But the investment in technology and capital adequacy that will be required over the next decade highlights the need for partnerships.
Businesses are being forced to confront legacy technology systems and invest in integrated front-to-back office solutions to manage regulatory, compliance and operational complexity and to ensure advisers can focus on their client proposition.
Client interaction also requires significant investment to meet the expectations of consumers accustomed to a seamless digital experience. With global players and their huge technology budgets interested in capturing the next generation, fintech start-ups are well placed to meet niche markets and benefit from white label offerings or acquisition or equity investment.
Segmentation and personalisation will increase. This builds on existing strength in client relationships by capturing data-driven insights and forming actionable plans to respond to evolving client needs and reduce the work clients must do to get the solution they are looking for.
Segmentation allows both large, diversified and small, independent firms to target clients who are looking for a tailored experience. That can be a tiered offering, or where they are able to choose human or digital interaction as it suits them.
While robo advice will attract new generations, clients will seek to move to hybrid human/digital services as their needs evolve. Segmentation could also see the banks re-enter the market, targeting a mass customer base via digital offerings.
In SAFAA's opinion, policy has sought to embed holistic advice within each adviser, a “shrinking to sameness” that hinders consumer access to a wider ecosystem of financial services - either within the firm or through partnerships. Nuance is required, with recognition of the specialist financial advice services on offer, so that client needs are met.
The industry as a whole is calling for policymakers to step back and acknowledge what is not working rather than tinkering at the margins of the current framework when the 2022 Quality of Advice Review is conducted. The question remains whether there is the political will to undertake significant reform.
Optimism for the future
As household wealth continues to grow and trillions of dollars transfer between generations with baby boomers retiring, the opportunity exists for a thriving financial advice sector. Regulatory challenges remain, but the potential for economic sustainability and growth is significant. Advisers and firms that harness strengths in client relationships to the flexible use of digital tools and data will reap the rewards. As will their clients.
[i] Russell Investments, Value of an adviser, 2020
[ii] ASIC, Report 627: Financial advice: What consumers really think, August 2019