There are few articles that I’ve written in the course of my journalistic career that have triggered such a vigorous response from readers as last week’s column “The national scandal that is financial planning“.
There was, I argued, a huge failing with the country’s superannuation system that has resulted in Australians amassing some $3 trillion in retirement savings. And that is the lack of an adequate system by which people can access good quality, affordable financial advice when they reach retirement age.
Now, it’s clear that for financial advice to be a viable industry, it not only needs to ensure that consumers receive a high-quality service. It also has to ensure that those working in the industry are able to generate a sufficient return for the skilled advice they provide.
Frustration and anger
In the emails that flooded my inbox, some readers took umbrage at what they took to be more criticism of an industry that already has been subjected to such widespread and withering attacks.
Many more, however, expressed frustration at the lengthy and cumbersome compliance obligations they faced, which made it extremely difficult to provide reasonably priced financial advice for people with retirement savings of, say, between $400,000 and $1 million.
Some went further along this track, declaring it was impossible for financial advisers to be financially viable unless they earned some form of product income – typically from using a specific wrap platform to consolidate their clients’ investment administration and tax reporting.
This, they noted, represented yet another conflict of interest.
Still others vented their fury at the corporate regulator, the Australian Securities and Investments Commission (ASIC), for its failure to consult with the financial planning industry on what industry structure would best ensure that clients received high-quality but affordable advice.
ASIC’s deep-seated dislike of the culture of the financial adviser industry, they alleged, meant that the corporate regulator did not deign to seek its views.
Some respondents explained the difficulties that financial planners faced when they tried to use technology to provide high-quality financial advice at an affordable price.
Theoretically, of course, it should be possible to harness technology to drive down costs, without compromising quality.
But industry practitioners argue that this works only if the financial advisory process can be streamlined and systematised.
The trouble is that there are legal obligations on financial planners that require them to devote huge amounts of time conducting detailed due diligence into the particular financial circumstances of each client.
Under the “best interest duty” imposed by the Corporations Act, financial advisers are required to demonstrate they have sufficiently researched a customer’s existing financial products and based their advice on the customer’s relevant circumstances.
In addition to this “best interest duty”, financial planners also have to comply with the code of ethics outlined in the Financial Adviser Standards and Ethics Amendment Act.
One requirement of this code is that financial planners can act for a client “only with the client’s free, prior and informed consent”.
This may seem to be a fairly inoffensive requirement, but financial planners point out that it’s far from clear what evidence they need to demonstrate that they were given such consent.
According to industry players, the combination of these two legal requirements puts huge pressure on financial planners to conduct exhaustive and time-consuming investigations into the finances of prospective clients.
Indeed, some financial planners now routinely compile “fact files” that stretch to 50 pages long.
Financial planners face a similarly onerous process when it comes to preparing a fee disclosure statement for their clients.
In the past, financial planners tended to offer a standardised list of the financial services they provided – such as insurance, superannuation advice, advice on pensions – to their clients.
But industry players say ASIC has now adopted the view that this approach is no longer acceptable. The corporate regulator wants financial advisers to tailor the list of services they offer new clients so that it meets their individual requirements.
So, for instance, a 60-year-old client who would be unlikely to be interested in taking out a new insurance policy, would be offered only the superannuation and pension options.
The trouble is that every time ASIC insists that financial planners adopt a bespoke approach to client needs, the possibility of using technology to drive down costs is further reduced.
And that’s even before the financial planner gets around to preparing a detailed statement of advice – which is now a voluminous document with pages of information outlining the recommended investment products, along with risk assessments and long-term projections.
Of course, it’s the clients who have to pick up the bill for all this custom-made financial advice.
Some highly regarded financial planners estimate it takes about 25 hours to prepare a comprehensive financial statement; others say it can easily take twice as long.
Given that most top financial planners charge about $200 an hour, that means it will cost you at least $5000 to walk away with a personalised investment plan for your superannuation savings.
Not surprisingly, it’s usually only individuals with larger retirement nest eggs who are prepared to fork out so much money for advice.
Those in the middle – with super balances of between $400,000 and $1 million – often baulk at the cost.
Those with even lower balances often find it difficult to find financial advisers who are prepared to accept them as clients.
Indeed, the rising costs and risks associated with providing individual financial advice are prompting many firms to shift their focus to high-net-worth clients.
In 2018, Macquarie Group made it clear to its financial advisers that new clients had to meet thresholds of either having $1 million to invest, or bringing in $10,000 of revenue each year.
Driven to cheaper alternatives
As regulatory costs continue to rise, an increasing number of Australians heading into retirement will find themselves unable to access good-quality financial advice at what they consider to be a reasonable price.
The risk is that they’ll seek cheaper, “general” financial advice that doesn’t purport to take into account the clients’ individual financial circumstances.
It’s scarcely an outcome that ASIC boss James Shipton would be looking for.
When he appeared before a committee overseeing the regulator’s performance in Canberra last September, Shipton said the corporate regulator was “attuned to the potential misconduct and harms to consumers that may arise from the industry’s shift towards ‘general advice’ models”.
Surely, a far better response would be to look for a less cumbersome model for personal advice that would allow the greater use of technology to reduce costs.