From overworked advisers to orphaned or underserved clients, it’s no secret the profession’s mass exodus has affected hundreds of thousands of Australians.
While we often talk about the effects on advisers, clients and prospective customers who cannot afford advice, research has found a link between adviser departures and a more sinister phenomenon: societal fraud.
Researchers from the University of New South Wales Business School used intel from Adviser Ratings, IDCARE and the Australian Financial Complaints Authority (AFCA) to investigate fraud patterns. They found Local Government Areas (LGAs) with higher adviser exits in 2018 and 2019 also had an 8.8 per cent increase in fraud rates.
On the other hand, LGAs with sustained adviser populations (and high memberships in professional associations) had lower fraud rates, on average.
The authors found no correlation between adviser education levels and the pervasiveness of financial crime or complaints; however, they noted that may change, as it’s still early in the industry’s transition to professional standards.
What may explain this phenomenon
The research shows advisers can reduce fraud in multiple ways. For example, avoiding high-risk investment products in favour of safer options is second nature to many advisers (Eriksen and Kvaloy 2008). Their advised clients can pick up an understanding of how risk works and tend to mimic professional patterns.
The research also provides evidence that advisers’ role may well extend beyond their client base to serving the community at large. They may be protecting their neighbourhood and broader region from fraudulent schemes and products.
The authors said digital or robo-advice could not address fraud or replace advisers’ role in this respect. Similarly, they did not believe the fraud patterns would improve until adviser numbers recovered.
More exits on the horizon
Since hitting its peak of more than 28,000 in 2018, the advice profession has lost more than 10,000 advisers. Unfortunately, Adviser Ratings’ analysis suggests there will be many more exits before the industry stabilises. Our latest indications show the workforce could hit 12,000 advisers in 2026 if we continue on the current path. In other words, more than 5,000 additional advisers may depart the industry, which would obviously have significant consequences for remaining advisers and consumers alike.
In fact, this year is expected to be another big one for adviser departures, given it’s the final chance to pass the benchmark for those who have twice failed the exam. With only a few months until the September deadline and a pass rate in February of 32 per cent, we expect the final quarter of this year could see another exit rush. We now know that could have societal implications, too.
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Comments9
"The big bright light is that soon Josh Frydenberg and Jane Hume will no longer be the Ministers trying to destroy the financial services industry."
Chris 12:00 on 13 May 22
"Going at end of June."
Birmie 11:03 on 12 May 22
"Was there a calculation of the societal impact of fraud prevention in the research? I know many advisers would list this as a benefit of having an adviser and many clients value it. However ASIC ignores these benefits that advisers knew about and instead focus on what ASIC thinks the adviser/client relationship is all about. Sadly it's too late for the many fraud victims who have already been dudded. I thought it was difficult to quantify how much we saved clients by way of fraud prevention, but credit to the researchers for finding a way. "
Michael Chalmers 09:26 on 12 May 22
"I fully agree with Les. I think Dealer Groups of the past have a lot to answer for as to where our industry is today."
Peter 09:08 on 12 May 22
"This wasn't in Haynes report? Is anyone ever going to bring him forward and say that he was supposed to be protecting clients and lowering cost for them? All that has happened is they have become more vulnerable and fees have increased? If he were an advisor, he would be the equivalent of a fee for no service one. Made a bunch of changes that helped no one, increased the wealth gap for advice in Australia and is not accountable. I want my FDS and result's report Hayne. I'll wait."
Alex 09:08 on 12 May 22
"Over the 34 years advising clients, I had thousands of conversations letting them know of the risks and scams out there. As Michael said, we did this so our clients would be protected and that is what trust is built upon, which costs us time and resources, though is part of what we do. Financial Planning is not a commoditized purchase that must be costed and timed to the minute. It is about Australians being able to sleep at night, knowing that someone is looking out for them and yet those unseen things we do, it appears are not important to the time keepers who have never looked after clients. "
Jeremy Wright 16:42 on 11 May 22
"I have a barrister tell me he is getting investment advice from another solicitor because I would be too expensive. I think I've heard it all now."
Rex Whitford 16:17 on 11 May 22
"Fee for no service highlighted in the RC was charged by Dealer groups and Banks and not by Advisers. The Media has twisted this and trotted out that Lie ever since. Fee for no service was precisely because there was no adviser and the Dealer Group kept collecting the fees. The above article is no surprise either. Client call often to discuss what is clearly a scam to an Adviser. There is never a fee for stopping from being ripped off. Who will save them in the future ?"
Michael 16:00 on 11 May 22
"Ironic that it was not all that long ago that the media were painting advisers as fraudsters! Defrauding clients out of fees for no service. Whilst the clean out may have been justified the focus perhaps, in hindsight should have been more centred on dealer groups."
Les 15:12 on 11 May 22