p>by Stephen Huppert
There are about 24,000 financial advisers in Australia, 15% less than at the start of 2019. What are the factors driving them out of the industry?
To answer that question, we need to go back to the end of the twentieth century when mergers and acquisitions in Australia's banking industry resulted in the sector being dominated by four major banks. The Australian Government adopted a four pillars policy to maintain the separation of these banks by rejecting any further merger activity between them.
The first few years of the twenty-first century saw the banks look to the wealth management industry for growth and all four banks acquired significant life insurance and wealth management businesses. The terms bancassurance and allfinanz appeared frequently in corporate strategy documents.
The aim was to leverage client relationships from the various businesses to sell products from across the company's vertical business silos. This included owning the financial advisers that serviced these clients. By the early 2000s, big banks and financial institutions owned the majority of financial advisers in Australia. The conflicts arising from these arrangements resulted in misselling and misconduct scandals throughout the 2000s.
The Federal Government finally relented to community pressure and launched a Royal Commission into Misconduct in the Baking, Superannuation and Financial Services Industry (Financial Services Royal Commission) in December 2017. In the Australian system of government, a royal commission is the highest form of inquiry on matters of public importance.
The Financial Services Royal Commission spent most of 2018 investigating these matters and by the time its report was released in February 2019, it had exposed a shocking litany of failings extended to organisational culture, governance and remuneration.
The provision of financial advice was a major focus of the Royal Commission and in a damning comment said, "The industry has moved from scandal to scandal, causing financial harm to clients, and damaging public confidence in the value of financial advice." (Volume I, page 120 of the report) The final report focused on three areas of concern:
It was the first of these caused the most headlines, especially when we heard that several wealth management firms had been charging dead clients fees for advice.
The Australian Securities and Investments Commission (ASIC) is the regulatory body responsible for the oversight of financial advice in Australia. In a recent update ASIC reported that as at 31 December 2019, Australia’s six largest banking and financial services institutions have paid or offered a total of ~$AUD 750 million arising from non-compliant advice or fees-for-no-service misconduct related to nearly 880,000 clients.
The Banking Royal Commission's recommendations for improving the provision of financial advice in Australia fall into three main areas:
The response from the Government and regulators is a mix of increased enforcement activity and new legislation.
The resulting escalating compliance costs help explain the dramatic decrease in financial adviser numbers in Australia with the new education standards often being cited as the main culprit.
The Federal Government established the Financial Adviser Standards and Ethics Authority (FASEA), a new body to set the education, training and ethical standards of licensed financial advisers in Australia. From 1 January 2019, new entrants wishing to commence a career in financial advice have been required to:
Existing advisers have until 1 January 2021 to pass the Financial Adviser Exam and until 1 January 2024 to reach an education standard equivalent to an Approved Degree. It is expected that many advisers will exit the industry before these dates rather go through the effort of complying.
A Code of Ethics commenced on 1 January 2020, with all Financial Advisers required to adhere to the Code from that day onwards.
One of the questions now being asked is: how will Australians access affordable quality financial advice going forward? This is a growing concern as an aging population means a growing need for financial advice services as people look towards retirement.
New financial advice models will need to be developed incorporating the use of emerging technologies to meet the needs of the population.
Stephen Huppert is an independent consultant and advisor working with institutions big and small that are committed to improving the retirement outcomes of Australians. His clients range from established entities, including some of Australia's largest superannuation funds, through to emerging businesses bringing new solutions to the industry.
