Financial advice in Australia has a poor reputation. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry caused trust in the sector to plummet, but even before that it was beset with issues of incompetent advice, charging fees for no service, and other disreputable practices.
Also predating the royal commission, but central to rehabilitating the reputation of the sector and its practitioners, was the establishment of the Financial Adviser Standards and Ethics Authority (FASEA), an entity charged with setting new education, professional and ethical standards for all existing advisers, and for all new entrants to the profession.
On August 30 the government announced a two-year extension, to January 1, 2026, of the deadline for all existing financial advisers to upgrade their qualifications to university degree or equivalent, or higher; and a one-year extension, to January 1, 2022, of the deadline for advisers to sit and pass an industry-wide exam. In so doing, it may have taken the first steps towards addressing a growing and worrying “advice gap” in Australia.
It has been observed in Australian that demand for financial advice will grow over coming decades, driven by an aging population transitioning into retirement, a complex retirement system requiring expert guidance and navigation, and an unprecedented – estimated at $3.9 trillion – intergenerational transfer of wealth from older generations to younger generations.
An advice gap is created when demand for advice remains constant or grows, but advice capacity reduces. This happened in the UK in the wake of the Retail Distribution Review (RDR), in 2013. Consumer demand for advice didn’t decline, but advice capacity reduced as advisers quit the industry. Something similar is now happening in Australia and it’s significant enough that Australians’ “unmet advice needs” have been nominated by ASIC as one of five new financial advice focal points in its 2019-23 corporate plan.
The adviser outflow
The new FASEA-developed education standards have been a catalyst for significant numbers of existing advisers opting to quit the industry rather than upgrade their qualifications. In the second quarter of 2019 alone, CoreData estimates that around 1800 financial advisers, or about 6.5 per cent of the total number, quit the industry. “Quit” here is defined as having their name removed from the ASIC financial adviser register. And major banks, including Commonwealth and Westpac, have closed down financial planning operations, reducing capacity and leaving clients adviser-less. CoreData estimates the number of so-called “orphaned” clients may already number around 300,000.
The higher education standards have also raised the bar for new entrants to the financial advice profession. Since the start of this year, all new entrants have had to hold a FASEA-approved degree. However, Grad Mentor, a firm that specialises in placing financial planning graduates with employers, estimates there are only about 500 students currently enrolled in financial planning degree courses nationwide – a mere drop in the ocean.
If the government’s deadline extension serves to encourage more advisers to stay in the profession then it will have begun to address the reduction in capacity; but clearly the supply of new advice capacity also needs to be considered. And in this context, eyes have turned to the accounting profession.
Advice attractive to accountants?
New research by CoreData into how accountants perceive financial advice has found that it may be becoming a more attractive service for accountants to offer to clients. Accountants who say they plan to offer financial advice generally hold more optimistic expectations on measures such as revenue and profit margins than those actually experienced by accountants who already offer financial advice.
Incoming accountants are more likely than those already offering advice to meet clients’ needs by setting up referral arrangements with existing financial advice firms. And their advice offers are likely to be much broader than the SMSF-focused offers that typify many accountants’ offers.
The concept of “convergence” between financial advice and accounting is not new, and there remain barriers – not least of which is the attitude that financial advice is a sales-based industry and incompatible with the professional standards of accountants, and also subject to constant regulatory changes and uncertainty.
ASIC’s 2019-23 corporate plan says it will start new work on analysing Australians’ unmet advice needs and, specifically, examine “the demand and supply of advice, the gaps (if any) between them, and potential solutions to reducing those gaps”.
The potential solutions are clear: stem the withdrawal of advice capacity, which the government may already have started to do; and increase the supply of new advice capacity. The latter issue requires not only a wider understanding of the implications of new education, professional and ethical standards, but also for more students to choose financial planning as a future career, and for related professionals to recognise the value that offering financial advice can bring to their clients and to their practices.