Surviving the great abandonment
Steve Thaxter- Senior Partner and Principal Adviser
Learn why financial advisers are leaving the industry and, for those who’ve been abandoned, here’s what you can do to survive it.
It’s terrific to welcome new clients when you’re running a small business. But its disconcerting that the last three clients to engage us were prompted to do so because their former adviser had “moved on”. One adviser retired early and the other two were working with businesses that shut down. Each of these clients were offered the name of an alternative adviser but took the opportunity to look around.
And when you do look around, it’s not a pretty sight. The financial advice profession is shrinking fast and clearly struggling to meet the expectations of regulators and clients.
If your adviser has moved on or been impacted by the sweeping changes to the industry, this article provides the background to the transition. It’ll also put you back on the front foot in getting yourself world class wealth advice.
In the last two and a half years, the number of registered financial advisers in Australia has fallen by over 30%. The number is still falling and by some estimates may trough out at 50% next year. Over 9,000 advisers have left the industry, abandoning a vast number of clients. No one knows how many clients exactly, but by our estimates that’s over a million fractured advice relationships.
On top of these exits, over 6,000 advisers have switched advice firms. That means that more than half of Australia’s financial advisers and each of their clients have had to cope with significant disruption in the last three years. Meanwhile, Australia’s population gradually increases and the underservicing continues.
So what’s happening?
During 2018, the Hayne Royal Commission started to examine unsavoury practices in the Australian Financial Services industry, investigating all too real case histories of greed, conflicted interests, inappropriate service and inappropriate fee charging. This culminated in a final report containing 76 recommendations for change and 24 cases of recommended legal proceedings.
One of the most glaring of the scandals laid bare in evidence provided to the commission was the practice of charging advice fees without genuine service. The mind-boggling revelations claimed many high-profile scalps including chairmen, directors and CEOs of Australia’s biggest financial institutions. The resulting remediation costs suffered by the big four banks and AMP have been estimated at $10bn.
The upshot of the Royal Commission for the advice industry was much tighter regulation, a new ethical standards regime with legal backing, new minimum professional education standards for financial advisers and a clampdown on conflicts of interest. This is making it very difficult for anyone providing financial advice to preference any “in-house” manufactured product. This last item was the tipping point leading to the bank and insurance companies retreating from providing advice services. In fact, almost every bank and insurance brand in Australia has retrenched or sold off its adviser network. The nature of these institutions is fundamentally unable to preference clients’ best interests over and above their main business, which was and always will be the profitable manufacture and sale of financial services and products.
So today, the financial advice industry is learning to stand on its own two feet with its own professional value proposition. It’s not about product sales, it’s about fiduciary responsibility. It’s about what needs to be done to put the client in a better place in the context of their own financial situation. It’s about every registered adviser having to pass common practitioner exams and hold a relevant finance degree. It’s about increasingly prescriptive rules around service engagement, consent to fees and the content of advice documents.
As the adviser numbers show, the new environment is proving to be a challenge. Lifting the bar will result in many of the ‘bad apple’ advisers leaving the industry and that is a good thing. Although sadly, some great advisers in the final years of their career are leaving the industry early. They may have the knowledge and experience, but they don’t have a relevant degree and don’t wish to formally study again.
Those who remain are gravitating to smaller specialist advice practices. The challenge for them is to reach scale, adapt to increasing regulation and harness the benefits of technological innovation. Direct costs are increasing too – ASIC charges a supervisory levy to each adviser which has doubled in the last three years. Similarly, professional indemnity insurance is compulsory in the advice industry but is hard to lock down, with the number of insurers decreasing and premiums doubling over the last two years. Inevitably these factors combine to drive up the cost of providing advice, making it unaffordable for many.
Thankfully though, there are advisers who are comfortably operating and adding value under the new regime. So, if you’re feeling abandoned, now is the time to look around and take control.
How to choose a new adviser
1. Ask around – of your friends and family, who has an adviser who understands them, is trustworthy and adds a lot of value?
2. Check each adviser’s credentials on the public register here. It is illegal for people to provide financial advice in Australia unless their licencing, education and experience are current and shown on this register. This is so important. For example, most of the notorious financial scammers in recent years were not registered as financial advisers even if they said they were. If only their victims had checked!
3. Interview several potential advisers. You will find a different resonance with each in terms of personal style, shared values, areas of expertise and the establishment of trust. Whatever the outcome, you will gain valuable insight from each. Do not decide until you have had a wide-ranging discussion on what is important to you and the wealth areas that you need help with. You may have overlooked some areas completely, so use our checklist of the key wealth areas here. We have written extensively on how to get the best out of your adviser, so use the links here, here, here, and here. Remember many advisers are specialists who don’t have expertise in every wealth management area. Ask them how they charge, how the industry changes are impacting them and how long they expect to be advising for. Don’t hold back, ask them if they have passed the industry practitioner exam and are holding a relevant finance degree. Ask for a private conversation with a longstanding client of their practice who has a similar service requirement to your own.
4. Before making a commitment, make sure that you understand how the fee relates to the agreed scope of the work. This should be clearly documented by the adviser in the form of a proposal. If the advice relationship is ongoing, it will be subject to a formal renewal each year.
5. Consider us on your list! Becoming a client of Sovereign Wealth Partners won’t suit everyone, but our initial meeting is complimentary and if we’re not a perfect match we can put you in contact with other good advisers who we know in the Sydney area
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