Making the financial advice industry sustainable
Hakan Ozyon | 4 June 2021
Regulatory pressure following the Hayne Royal Commission has led to an increase in quality and transparency in the financial advice sector – a crucial step in rebuilding trust in financial advice.
The financial services industry was never going to be sustainable while advisers were heavily incentivised to be product sellers, rather than professionals who advise clients on improving their financial situation.
In no other profession do we find practitioners receiving an ongoing commission during the lifetime of products and services that they recommend.
Take, for example, a salesman at a car dealership – the salesman does not receive a commission for every service that the driver brings the vehicle in for. Nor does an accountant get paid for benefits received by their client through implementation of tax strategies. Both the accountant and car salesman charge fees for services rendered, and only as required.
It is unjustifiable for financial advisers to lock in a trail commission that reoccurs for decades, for investment product advice. In many instances, trailing commissions eclipse the fees charged by the product issuer, who ultimately has the arduous task of generating investment returns for the adviser’s clients. This is exacerbated by the hefty upfront fees charged by the adviser.
New rules prohibiting such practices were badly needed to repair the sector’s reputation. However, they have also had the effect of reducing the pool of registered financial advisers: the number of professionals in the sector is predicted to reduce to 13,000 by the end of 2023, down from 25,386 in 2018.
Consequently, the cost of advice has surged – as the quality of advice has gone up, so too has it become less accessible for everyday Australians. A return to trail commissions cannot be the answer, so how can the sector adapt to strike the right balance between quality and affordability?
Specialisation is key to striking the balance
A possible solution to this predicament could be for advisers to split themselves between offering advice on one vendor’s products, or specialising in one demographic, in order to increase accessibility.
At the other end of the spectrum, professionals advising on the broadest range of products could charge higher fees to those who could afford it.
To ensure affordable advice, product issuers and insurers could employ financial advisers to offer advice to retail customers who seek it. This happens now but is more the exception rather than the rule.
As these advisers are responsible for offering financial information only on their vendor’s products, the costs are often less. In this model, it is critical that there are no volume-based incentives that could induce advisers to act contrary to the best interests of their client.
At the other end of the market, holistic financial advice could then be offered by a select few specialist, boutique advisory firms on a fee-for-service model. This advice would be objective in nature and offered to clients who have sophisticated financial needs and require more than simple assistance with product selection.
Between these two poles there needs to be room for advisers that serve very specific demographics. Here, cost of entry and fees could be lowered because of the efficiencies derived from the adviser’s specialist knowledge.
Hejaz Financial Services for instance, has recently launched a dealer group to provide Islamic Australians access to world-class advice, helping them to grow their wealth, build their super, or buy a home in a Sharia-compliant way. As these dealers are experts in the needs of their Muslim customers, they provide more effective customer outcomes. This was entirely the objective of the Hayne Commission.
Some could argue that this approach will have a detrimental effect on the financial advice industry. In my view, it is more likely that some advisers will seize the opportunity to transform their business practices by upskilling and targeting clients who are willing to pay a higher fee for holistic advice. Thus, the financial advice profession becomes aligned more closely with other professions in terms of costs.
The financial advice industry has been tarnished by the unscrupulous practices of some advisers and a lack of customer-centricity. In my view, these practices can be traced directly to incentive structures and sales strategies which put the adviser’s interests above those of their clients.
Consumers need sound financial advice. Perhaps it is time for a tiered industry that allows product issuers to provide advice free of charge through in-house financial advisers, and specialist advisers to service more sophisticated clients on a fee-for-service basis.