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, 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 the current total. 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 to provide personal advice on financial products to retail clients, and will need to undertake ongoing professional development to stay in the industry.
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 changed substantially. Almost 7000 advisers have already jumped ship since 2015, with the bulk of those leaving between the second half of last year and this year.
Those advisers who 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 has been released that 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 & Investments Commission.
ASIC is on a mission to clean up the advice industry, having already banned more than 800 advisers and, in some cases, achieved criminal convictions.
The regulator 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.
Where to from here?
Few would argue that it’s high time the whole financial advice industry is cleaned up and reinvented.
Adviser Ratings last week unveiled a scheme to rebuild trust in the industry through the introduction of a quality of advice ratings system for 1800 financial advice licensees.
The ratings system, which follows consultation with government, regulators and industry, will discriminate across advice providers based on quality and risk, enhancing the clarity and consistency of information used by consumers in selecting a financial adviser.
“The destruction of trust in the financial advice industry is deeply concerning”, Adviser Ratings CEO wealth Mark Hoven says. “Our mission is to increase the penetration of advice among consumers, yet the trend is strongly reversed.”
ASIC’s website is a good barometer of the state of the advice sector. In the past few weeks it has cancelled multiple financial services licences, and banned 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, 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 advisers providing conflicted advice designed to enrich themselves, not their clients.
And keep in mind that is despite the banning of conflicted remuneration structures under the Future of Financial Advice legislation enacted in 2014, including commissions and volume-based payments on retail investment products.
A recent scathing report from ASIC found a high percentage of bank-aligned advisers were steering clients into their employers’ products over better products offered by other providers.
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 Australians will be using low-cost automated online applications to obtain impartial, general investment advice. These digital platforms will dispense unbiased statements of advice, based on all the information that an 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. 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 tailored financial advice they can see a licensed adviser to make more specific decisions.
There is already a generational shift in the advice sector. Many older advisers are looking to retire, and younger investors are looking for other solutions. They don’t necessarily want to see, or trust, older advisers. Websites and smartphones are much easier for the basics.
Australia’s financial advice industry is being totally transformed. And most will agree it’s long overdue, because there are few areas in the financial system that are more tainted.
Unfortunately, no one will ever completely stamp out 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!
Tony Kaye is the editor of Eureka Report, which is owned by listed financial services group InvestSMART.