Advice at the fee crossroads
WHEN it comes to financial advice it is not all about money.
There is the issue of accessibility – why more Australians don’t seek the services of a qualified financial adviser.
The Ripoll joint parliamentary committee that handed down its report late last year signaled the need for a structural change in the way the financial planning industry operates.
So far most of the focus has been – quite understandably – on the various payment structures that have evolved within the financial planning and platform administration services because those payments may influence adviser behavior to recommend one investment product ahead of another.
The financial planning industry knows it has a credibility problem – not, according to investor research studies, so much among existing clients but rather amidst potential clients. At the heart of the problem is the perception that common remuneration arrangements involving payments from fund managers to platforms and dealer groups and ultimately financial planners place the best interests of the investor at odds with the commercial interests of the financial planning group.
A wave of structural reform lies ahead of the financial planning industry. Much has been written in the past 12 months of the shift to fee for service advice models. So far there is little statistical evidence of a marked change in business models despite regular public announcements from major groups like MLC, AMP and AXA that they are moving to a fee for service model.
If Australian planners follow the lead of the US advisory industry it will happen – it just may take longer than critics and practitioners would like. Unwinding decades of legacy product structures will not happen overnight.
While a lot of the focus of the debate has been on fees – both the amounts and the payment methods - the level of access to financial planning services is also of long-term concern.
Around 30% of Australian investors use a financial planning service.
But the conundrum with the Australian superannuation system is twofold: one it puts a lot of emphasis on individuals to make choices and take responsibility for their retirement funding. Even though there is plenty of evidence to suggest the mandatory 9% superannuation guarantee contribution is not adequate to fund a comfortable retirement, it will still give average people a substantial nest egg to manage on their retirement.
Layer on to that a system that is complex – not least of all because of all the grandfathering of previous rules and there is a good chance following the super system review being led by Jeremy Cooper (due to report mid-year) that more changes are coming.
All of that makes access to reasonably priced financial advice an issue of growing importance.
A research study done by independent actuaries Rice Warner that was commissioned by the Industry Super Network (March 2010) has found that the reforms being proposed out of the Ripoll inquiry would almost double the number of people receiving financial advice within 15 years.
The study which considered the impact of introducing a fiduciary standard that would clarify that advisers have to act in the best interests of clients and the removal of all commissions and other incentives projected that super savings would increase significantly thanks to both the lower cost of obtaining advice and the savings that would be expected to flow from fund members accessing professional advice.
The news is not all bad for those considering a career in financial planning either. Average financial planner revenue is projected to increase from $169,000 in 2009 to $363,000 by 2024.
However, the advice industry that the report envisages would deliver significantly different services from the norm today. It sees a big increase in the advice services delivered by super funds on the basis of advice targeted (or limited) to their needs at a specific time rather than being broader, more comprehensive advice that typical financial planners provide now.
So as the financial planning industry confronts both regulatory and market pressure to change what the Rice Warner study is forecasting is a divide in the road with investors being able to source lower cost, point in time advice from their super fund or opt for a more strategic and comprehensive financial plan that covers various life stages. One size cannot fit all financial planning needs.
The critical component to unlocking the real value of advice and increasing investors’ inclination to seek it out will be for investors to clearly understand what it is they are paying for.
Listen to the audio podcast:
Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.