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FoFA, the Failure of Financial Advice, Take 2

(Substantial parts of this article were published last week. We are running it again with feedback from Adam Curtis of Perpetual, plus readers may have missed the insights from many financial advisers in the comments section).

The Future of Financial Advice, or FoFA, reforms came into effect on 1 July 2013. They imposed a ban on conflicted remuneration and required financial advisers to act in the best interests of their clients. Existing commission arrangements were grandfathered, and looked like staying until the Financial Services Royal Commission tore them down. 

This week, the final nail was hammered into the grandfathering coffin. The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 passed in the House, banning conflicted remuneration paid to financial advisers from 1 January 2021.

However, the advice industry has not found another business model that allows average Australians to receive comprehensive financial advice. It is right that conflicted advice should be stamped out, but if most people now cannot access detailed and personal services, then we have fixed one problem and created another. 

Why is full-service advice expensive?

I recently asked a financial adviser who services older, high-end clients about her first question at an initial meeting. “Tell me about your family,” she replied. Not money or assets, but a person talking to a person about their family, life and goals. And there is the affordability dilemma. Comprehensive financial advice takes a lot of time. A full Statement of Advice (SOA) runs over 100 pages and the need to review all circumstances and develop a plan takes 10 to 15 hours and costs between $3,000 and $5,000 depending on complexity.

But focussing only on the SOA overlooks a bigger point. There is far more to a comprehensive relationship than an initial document. The Financial Planning Association (FPA) identifies six steps in the advice process:

  1. Defining the scope of the engagement
  2. Identifying the goals
  3. Assessing the financial situation
  4. Preparing the financial plan
  5. Implementing the recommendations
  6. Reviewing the plan

The first year of working with a client takes more like 35 hours which limits the number of clients a new adviser can accept. The cost of 35 hours at $300 an hour is about $10,000. A financial advice group that charges an ongoing fee of 1% of the portfolio (usually a declining percentage for large balances) requires $1 million to earn $10,000 for full-service advice. Most people do not have $1 million. Other groups are moving to a charge a percentage of income as the advice work is more labour intensive.

The recent ASIC survey results in ‘Financial advice: what consumers really think’ found:

“Perceiving financial advice as too expensive was the most commonly identified reason for not seeking advice. Overall, 64% of all the online survey participants agreed that financial advisers were too expensive.”

The most common reasons for not seeking advice were (multiple answers allowed):

Metlife recently reported it costs $5,000 for an adviser to complete a risk insurance plan, but consumers are willing to pay only about $1,200 in up-front fees. A leading boutique advice CEO told me their minimum fee is $6,000 a year, and this gives only a basic service of one meeting a year. Another CEO said high touch is now reserved for clients with over $2 million, mid touch is from $750,000 to $2 million and low touch is sub $750,000.

At the latest Association of Financial Advisers’ National Conference, EQ Wealth Director Simone Du Chesne, said:

“I find it incredibly ironic that accessing financial advice has become the privilege of the middle class and that those who may need it most or just as much as any other Australian are not able to afford to see an adviser … While I appreciate and support the need for operating in a compliant manner when providing advice, I believe the paperwork has become onerous.”

It’s one of many consequences of the Financial Services Royal Commission. It identified the problem of conflicted remuneration without providing a mass market solution.

Producing a financial plan

A 2018 FPA survey of its members found the average cost for an initial SOA was $2,435. The average ongoing fee was $3,354 per annum, taking the average cost to almost $6,000 in the first year. Of course, there was a wide range.

Some advice firms are managing compliance by treating clients as ‘wholesale’, which removes the need to provide an SOA for a 'retail' client.

Kitces Research in the US has studied how long financial planning takes. I will assume the numbers are similar in Australia because there’s little to suggest our regime is less onerous. Ask any financial adviser what they must do with a new client and their eyes will roll as they think about compliance, legal, best interests duty, conflicts, etc.

The Kitces article ‘How Financial Advisers Actually Do Financial Planning’ provides details on how long they work and what they do. Notably, only 19% of time is spent meeting clients with 17% spent on business development. The most time-consuming part is designing financial plans and preparing for meetings with clients.

The following chart on time spent to produce a financial plan shows a median of 10 hours, but an average of 15 hours with a long tail due to some complex and time-intensive plans.

Similar to the FPA model, Kitces identifies seven steps involved in the first year of a relationship, and the chart below shows how this can consume the best part of a working week. On one client. In addition to these steps, depending on the structure of the adviser business, a good chunk of extra time is taken simply running the business. It doesn’t leave much space for other new clients, which is another reason the industry believes there will be a shortage of advisers as education standards hit in coming years.

How much will technology assist?

Surely, this is where adviser technology and software come in. Here is Kitces’ most significant insight. The majority of the financial planning process involves client meetings and activities which technology has limited scope to replace. In the following chart, only the blue steps can be made more efficient with technology, and there’s a lot more red.

The steps of gathering and analysing data and developing recommendations are number-crunching processes which technology can improve. It can’t help much with client conversations, discovery of goals, a deep understanding of risk appetite beyond some simple tests, and coaching the client in how to use a new plan. This is person-to-person stuff.

ASIC 'advisertech' and 'regtech'

At a recent ASIC Regtech Financial Advice Files Symposium, providers of ‘regtech’ solutions were challenged to:

“Demonstrate how technology can be used to help in determining the level of risk and regulatory compliance of financial advice based on a sample of client files in different formats provided by ASIC and any wider sample of client files or other related client profile and transactional data obtained independently by demonstrators.”

The six providers were Tiqk, GIRO by K&L Gates, IRESS, IBM, Flexprod and Advice Regtech.

Some impressive progress has been made in improving the efficiency of reviewing documentation for regulatory compliance, and it fits in well with Kitces’ argument that certain parts of the advice chain can be improved by technology.

My brief summary of how regtech works for client advice files is that the technology scans the words and tables in financial advice documents to check for compliance with company policies, consumer obligations and best interest duty regulations. It aims to make internal compliance more efficient by flagging shortcomings against a series of lists. For example, it flags high-risk portfolios for extra review and scans for key words. It checks every file instead of the usual sample taken for audit purposes. Risk monitoring is improved with greater efficiency than the labour-intensive and error-prone exercise of humans scanning files.

At this stage of its development, it’s only the start of a machine-learning and AI journey that makes marginal improvements in efficiencies. It is confined to checking and monitoring but this is a minority of the time spent by an adviser on a comprehensive plan. Anyone thinking regtech will fundamentally change the comprehensive advice process is in for a long wait.

As Daniel Crennan QC, Deputy Chair at ASIC, said in the introduction:

“In order to improve risk management and minimise your compliance risks, you must include the capacity to explore, test, and implement ‘compliance-by-design’ regtech solutions within your business model. Obviously, none of us know what the future holds in this space. It’s a learning exercise and none of us can doubt that technology is front-and-centre of financial services provision ... it would be ideal to witness a decrease in the number of ASIC’s compliance-related enforcement actions as a direct result of industry’s uptake of regtech.”

'Advisertech' is not limited to regtech, and other tools that might help advisers include enhanced financial planning software, the design of the investment platform, customer risk management and other office management tools.

Where is the advice industry heading?

Full-service financial advisers with high net worth clients will continue to have strong businesses. Their clients are willing to pay, and if comprehensive advice costs at least $10,000 as outlined by Kitces and the FPA, financial advice will increasingly become the domain of middle to upper income earners. At some stage, technology might offer better solutions but if regtech progress is any guide, it's in the early stages of delivering marginal efficiency improvements.

For all the criticism by the Financial Services Royal Commission, much of it deserved, the vertical integration model where advisers were allowed to use in-house products, had the potential to serve the mass market. I explained here how it could have worked, but the horse has bolted.

AMP’s decisions on the future of its financial advice business point some of the way. In the face of the devastating blows from the Royal Commission, their commission-driven model is being dismantled. They can no longer provide comprehensive advice to most Australians. AMP will develop a model similar to industry funds which provides intra-fund advice without a comprehensive SOA. At the lower asset levels, the first touch will be a call centre or digital offer that will not be detailed financial advice and not seek to understand everything about the client.

It would be a mistake to underestimate where AI and machine learning may take the advice industry. Algorithms may one day listen to conversations and recommend a portfolio. Data should be easier to collect through sophisticated online registries and aggregation portals. Investment management is falling in price. However, most of the required automation is years away at best. In the meantime, the full-service offer will be reserved for the top tiers of clients willing and able to pay.


Graham Hand is Managing Editor of Cuffelinks. The charts from Michael Kitces are used here with his permission and are taken from this article, which gives more detail on his methodology.


Additional comments on 'unintended consequences' by Adam Curtis, Head of Investment Specialists, Perpetual Investments

Hi Graham,

I wanted to write you a short note essentially to flag how I really did enjoy your recent article in Cuffelinks 11 Sept re FOFA implications for Financial Advice.

I share many common views with you on what are some unfortunate and potentially unintended consequences relating to Financial Advice post RC. I’ve been thinking and reflecting on it a fair bit of late and your recent article I thought surmised it very well.

Life is full of unintended consequences but unfortunately I lament the brand damage the industry broadly has suffered. The actions of a few can destroy the brand of many. Whilst I am proud to work at Perpetual, I am even prouder to work in financial services, an industry that I consider plays an important and vital role in securing the future for many Australians. I know and have witnessed the value that quality fiduciary advice provides and the benefits that so many people receive from these services but unfortunately, in the short term, the brand of many can suffer due to the actions of a few.

Ultimately it serves a social purpose with many community benefits yet are we potentially at risk of unintended consequences despite best intentions, stemming from the RC and/or FOFA at least in the short term?

Surely the intention of this Commission and its recommendations is to ensure advice is of a high quality, advice is available, and advice is affordable yet for many reasons, perhaps less advice will be provided. Will those that need it be able to afford it or even seek it?

I don’t know how it will all play out but I did enjoy reading the article – I’m sure good advisers will ultimately prosper and many will benefit from their advice but in the short term there is pain and risk.

I recently presented on some of these thoughts of mine, personal and professional – it was wrapped around the concept of Unintended Consequences. I always like a good story and always look for metaphors in history.

Here's an example.

As we are all very familiar with, in 1912, The Titanic sunk and the huge loss of life, spurred a number of reviews and inquires, the largest of which was conducted by a US Senate Inquiry. It concluded, entirely reasonably, that the death toll would have been substantially lower if the Titanic had set to sea with a full complement of lifeboats. New regulations were developed for the ship building industry, existing boats were retrofitted to carry more lifeboats and new ships were redesigned to accommodate more.

One of the first ships to sail after this new regulation was the SS Eastland. On July 1915, just yards from her moorings on the Chicago River, she tilted alarmingly, took on water, and rolled over in just twenty-feet of water. While some lucky survivors were able to literally step from the upturned hull onto dry land, many less fortunate individuals were trapped below decks or thrown into the water. More than 800 people lost their lives. While the poor design of the ship and the owners’ failure to carry out tests were also to blame, it was the extra weight of the lifeboats that ultimately caused the Eastland to sink.

Despite the best intentions of the senators and regulators, at least in the short term, they created an industry with unfortunate and definitely unintended consequences

This story resonated with me. When I saw the article I did want to get in touch.

Regards, Adam Curtis

Richard Brannelly
September 19, 2019

Thanks to Graham and all the contributors for at least starting a long overdue debate. To give consumers an idea of the over regulation of financial advice here is a list of all the agencies and other bodies that as a financial planner I have to answer too and also pay a fee too;
ASIC - compulsory
My AFS licensee - compulsory
My PI insurer - compulsory
The Tax Practitioners Board (TPB) - compulsory
AFCA - compulsory
The Financial Planning Assoc (FPA) - compulsory condition of my AFSL
The SMSF Association - voluntary
From Jan 1st I also have to subscribe and be regulated by a new Code Monitoring Body that will monitor and enforce the new FASEA Code of Ethics - compulsory
No less than 8 separate bodies that all charge a fee and in different ways all largely duplicate the same role. Imagine the outcry if we subjected any other vocation or profession to this sort of regulation?
In 2005 ASIC under Jeremy Coopers leadership issued a sample SOA that was both comprehensive and only 12 pages long. ASIC latest effort at a sample SOA was in Dec 2017 when they issued a far less comprehensive insurance only sample SOA - guess what 23 pages long. So if advice costs are going up perhaps now consumers can really start to understand why.
We are in this mess because some in the profession put personal gain at the heart of their business and operating model and gave no consideration to consumers. We are also in this mess because multiple product failures got dumped in the laps of planners, and because for many years we had a lazy regulator that failed to consistently enforce the rules that have always existed.
The victims are not just the consumers but also the many highly educated, professional, and ethical planners who now labour under this regime.

Stephen Handley
September 16, 2019

Great summary of the predictable (negative) fallout from the overreaction by our regulators. For all its imperfections, the old system made it possible for advisers to support the mass market. By its very nature a (transparent) % based revenue model (taxes anyone?) results in the rich cross-subsidising the poor. It is alarming to see how many advisers are dumping their C & D clients because they are not profitable and (now) pose a compliance risk. So we now have the classic innovators dilemma. A blue ocean of customers who the traditional Industry has been forced to abandon. Tech enabled advisers who can figure out how to profitably serve this market are in for good times.

September 15, 2019

We were unfortunately forced to disengage 25% of the households in our client base, many of whom we serviced for almost 20 years. Grandfathered commission was not a part of our business either. Not a single one wanted to leave. "Sorry Mr and mrs client you can't afford my fees, the code of ethics will make my fee illegal even if you want to pay it, don't like it? Call your local MP". "Can you recommend where I go i don't know who to trust?" "Would love to but ill need to charge you $2000 to meet my best interests duty, here's some keywords you can type into google". At the end of the day I do not run a pro bono service and I need to put food on my table and pay off my own loans. I will unashamedly not be servicing anyone who cannot pay at least $8,000 per annum (this will be the low end) and I have no qualms about it. I will only be servicing the wealthy and the government alone is respomsoble for this situation. I ain't working for free and will be doing what is best for me and my business with a clear conscience. If that means the mass market gets no service, then I say to the consumer, contact your local MP, we have nothing to answer for, we don't set the compliance costs.

Greg F
September 15, 2019

Brett, you have hit one very important nail on the head. The emotional impact of 'letting a lower level client go' is real for both the client and adviser, particularly when the client relationship has endured a lengthy time frame. it feels very much like the end of a personal relationship for both parties. In all of this protectionism, legislation, trying to regulate against crooks, everyone (other than advisers) has forgotten the true value of having a trusted adviser to help people navigate all the inefficiencies of the government agencies (Centrelink, ATO, super funds etc.). Yes, it is a daunting task for people and how many have given up trying to work through whatever issue it is they are trying to solve for themselves and giving up in despair.
And we can see from the research that those people who do have a relationship with an honest hard working adviser, value that relationship greatly. The rest of the people have not given that opportunity a chance so they live with the negative perceptions cast upon them by media, ASIC, friends and others that poo poo what we do - because they don't get it.
So at the end of the day I hope that the government agencies, super funds and investment houses beef up their customer service departments because, if those clients start looking to them for help, I hope they are ready to fill the void left by advisers. I also hope that the super funds and government are ready for the complaints that will arise from the automatic cancellation of insurance in super funds (Protecting your Super). there are going to be many disappointed claimants out there over the next few years, not to mention the additional reliance on welfare to fund the financial gap these people will experience.
Long live the financial planning profession for we do a lot of good in the community, even though advice will now be limited to a fraction of the people previously receiving well informed advice.

September 15, 2019

Only 1 or 2 comments so far has touched on why some of these legacy products still remain in clients portfolios, I suggest a combination of reasons.
Centrelink strategies - non or partly counted for tests.
Adviser inertia - advisers don’t want to be seen as selling a new product every time they see a client - when the current is doing ok
Client inertia - as clients age the mental position is if the $’s are working and they know where to get details why learn something new
So the other concern is the 2 tier situation different rules for different participators
1. look at the results of rg97 - a lot of in-house funds (industry funds) had to report they where charging higher fees then declared thru historical PDS..... no remediation required
2. Many product failures (westpoint, trees, movies etc) resulted from tax and commission driven sales .... and retrospective legislative changes
3. My prediction will be a significant property downturn and RE agents and Lenders will require more changes to the financial planning sector - why can RE agents get away with saying this assets is a great investment ??
And in the client looses their support network.

Trevor Geffin
September 14, 2019

Great article Graham. I think what is often not pointed out is that robo advice in its current form is not advice at all and is really a return to the product driven sales "advice" that the government is so desperately trying to eliminate. If the current breed is touted as the solution, then we are just going to land straight back where we are with the robos at the centre of the maelstrom next time. Why? A robo adviser is a product salesman, they are ETF and MDA salesman to be exact. There is no advice given at all (Don't care point to a five question survey as advice) and the whole business model is designed to pump as many people into as many ETFs and MDAs as possible. No suitability tests are performed, no links to client goals are made and they clip healthy asset based fees on accounts. At the end of the day their businesses are all about product and not about advice, so the name is a misnomer. Without the product they have absolutely nothing to sell. People are coming to robos believing it is advice, but the only thing they can get from them is an ETF MDA managed by the robo themselves, they are not advisers, they are asset managers, they are just asset allocators, which has become so commoditised it should be close to free. The reality is that the entire robo advice business model can currently be obtained in a single vanguard diversified etf for 0.27% pa ALL UP, which includes all the ongoing services robos apparently provide including rebalancing, asset allocation, diversification etc. It's a matter of time before vanguard give a free online tool to people to choose one of their models at a quarter the price of our robos and I will be interested to see what all the robos do then, there is no barrier to entry with a 5 question risk survey. It stands to reason why anyone would pay another 0.60% to a robo just for access to a pretty website and a survey when the entire service could be obtained for a quarter of the price in a $9.50 trade. Heres a novel idea, how about they ditch the product and try give digital advice for a fee? Product is way easier and all they have done is automate the implementation to pick up a product trail. The current state of robo advice is not a mass market panacea.

Andrew Varlamos
September 15, 2019

Trevor, I think all of your comments are valid, but the tone is unfair. Yes, the term "robo advice" is a misnomer, but I don't think any of the "personal advice online managed portfolio" solutions available in Australia today thought up the name: the press applied it to them because that became the accepted term in the US. So, it has stuck. But you're right, they are regulated as personal advice solutions, even though anyone logging on to their sites can see clearly there's no real advice involved. And I don't think the robo advice businesses in Australia - Sixpark, Clover and Stockspot - have ever tried to promote themselves as something they're not. We did not believe a simple questionnaire was the right way to determine someone's portfolio category, and hence, we set up OpenInvest as a general advice solution, and never use the term "robo advice" to describe ourselves: we allow the investor to select the portfolio (risk/return) category and the asset manager, they think is right for them.

Here's why I think your tone is unfair: all such offerings I refer to above are nearly always preferable to people doing their own investing via trading shares and not properly addressing portfolio diversification. True, none of them is as cheap as a single Vanguard diversified ETF, but users get more engagement and transparency, so they can weigh up what's most important to them in that cost/value trade-off. OpenInvest also offer tax benefits in that investors own the underlying shares in their portfolio. We never say we are a better option than seeing a personal adviser, and I don't think the robo advice services do either. But not everyone wants a personal adviser, and clearly not everyone can afford one. And perhaps more significantly, as we are not offering "advice", just access to professional portfolio management, we actually free up an adviser's time to allow them to offer true financial advice, not having to worry about the portfolio management. And, therefore, they can charge just for advice, not for portfolio management, or acting as a gate-keeper to outsourced portfolio management.

And, yes, I agree 100% that a day will come when a Vanguard (or Google/Amazon) will offer an online ETF portfolio solution for close to zero fees (as Schwab does in the US).

Cheers, Andrew

Jeff Oughton
September 17, 2019

the sooner the better for most, investors are offered a very low cost vanguard or similar mult sector fund - and unbundled disinterested fee based advice - yes its a product + independent advice service!!! And the advice is simple and often set and forget, until the facts change!

Peter S
September 13, 2019

That is a great article Graham. All the best, Peter

Andrew Varlamos
September 13, 2019

Graham, another excellent article. However, I think you miss one important point in dismissing digital solutions so quickly. A digital solution doesn't have to solve everything for it to add immense value and go a long to solving our current predicament: improving efficiencies, reducing time/costs and therefore, freeing up advisers to serve more people on the real people+advice stuff you referenced, more cheaply. That is, a content-rich, online, managed portfolio solution (disclaimer: I am co-founder/CEO of one: brings the world of credible asset management to the mass market of investors. The adviser doesn't need to make a recommendation, doesn't need to justify why Asset Manager A is better than Asset Manager B, with all of the time/costs that such a recommendation would require via research, compliance, let alone the probability of disclaimers (and therefore, risk) around conflicts of interest. The adviser focuses on the stuff that's hard to systemise/digitise, leaving portfolio management to the true experts, the asset management industry via digital.

September 13, 2019

Hi Andrew, fair comment but I do not dismiss digital solutions such as OpenInvest as having a role. I am pointing out that it's not comprehensive financial advice. I say: "There is a role for digital advice with inexpensive model portfolios matched to some measure of risk, that are easy to implement for certain clients. In fact, it’s not dissimilar to the default option in a retail or industry superannuation fund, and costs about the same." By the same argument, it could be matched to a solution provided by an asset manager, as OpenInvest provides.

September 13, 2019

Decades back I invested in some managed funds. From then a trailing fee was deducted for some advisers, none of who I had ever had anything to do with. When I complained to the fund managers I was basically told that's how it works. When I complained to the advisers I received no response.

Obviously some, maybe most, advisers provided a valuable service, but the fact remains that virtually the whole industry chose to turn a blind eye on the fee for no service rip off. Maybe if they had taken action then they wouldn't have been hauled before the Royal Commission and wouldn't be complaining now about the outcome. You reap what you sow.

September 14, 2019

A classic example of the hate speech template... "Some members of group A did something wrong in the past. Therefore all members of group A are inherently bad. Well.., maybe not all of them.., perhaps sure of them are OK. But the good ones should have done more to stop the bad ones. So it's OK to indiscriminately vilify and persecute all of them."

September 15, 2019

Nothing about hate, vilification or persecution. Simply a comment that none seemed to have a problem with the fee system, or if they did they didn't appear to do much about it, hence shouldn't be surprised at the outcome.

Brett Withy
September 19, 2019

Graeme, I don't usually get involved in these discussions as often they don't seem very constructive. I do need to comment on what you have said, you said: "Simply a comment that none seemed to have a problem with the fee system, or if they did they didn't appear to do much about it, hence shouldn't be surprised at the outcome". You are right in that nobody should be surprised there has been changes. The point being made is the side effects of these changes look like cutting off people from getting advice. The fact this point is being made here suggests the people making it are social conscious. In my case my comments regarding the flaws within the industry date back to the year 2000 (as soon as I had enough knowledge to make an informed comment). My doing something about it included leaving 3 employers and each time taking a real pay cut to do it. Then when I despaired of being able to find somewhere to operate as I felt a Financial Planner should, I started my own Financial Planning business. This involved starting with zero income and living off of my mortgage. You may say I am unique but I could list many people (usually self employed but not always) with similar views who put their money where their mouth was and did a very similar thing to what I did. Maybe you'll say we should have done more to make change but as small business people every moment needs to be devoted to running the business, especially if you are providing services at the lower end of the range cost wise (in my experience, where many socially responsible planners operate). At the end of the day I still have kids to put through school and a mortgage to pay off and getting that done keeps you busy. I was rewarded by having a fantastic and loyal client base and the terms we operated on were acceptable to them and me but I find myself now ceasing the service for around 33% of those wonderful people because the current changes force me to (ie; because the clients can't afford what I now need to charge because I spend most of my time documenting absolutely everything and every cost has significantly escalated). My campaign to change the industry from within was modest but ongoing and a significant effort for my means. I'm sorry in your eyes we are all deserving of what is happening now because of what happened to you decades ago and it was wrong but the fact most people within this discussion are bemoaning the loss of our services to lower value clients probably suggests most of the people commenting here are socially conscious and not deserving of the tone of your comment.

September 12, 2019

A lot of these comments and the article itself seems to come from self indulgent advisors or ex advisors moaning about their loss of a cushy little earner at the expense of the general public
The sooner the financial advise industry wakes up to itself the sooner the general public just might start to trust them.

September 12, 2019

It is of course total nonsense that "advice" should run to 100 pages to be compliant. Client does not understand it and when it all goes pear shaped, Advisor is not protected by it! The real challenge for advice is to simplify it! I cannot give numbers as that would be advice, however I believe you can get all the fundamentals on one page:

Objective At Retirement:
- Own your home debt free
- Have sufficient Capital to maintain lifestyle avoiding Centrelink till you depart this earth
What are the variables?
- Life Expectancy
- Cost of Living
- “Investment Assets” inside AND outside Superannuation
- “Lifestyle Assets”, housing etc
- Asset “windfalls” via bonuses/Inheritance/downsizing etc
- Estimated earning rate
- Estimated Inflation
- Costs associated with Advice/Funds Mgt/Tax
- Govt mandated drawdown of Superannuation, that changes as you age
What are the realities?
- Your life expectancy is [hopefully!], a guess – be conservative rather than outlive your $’s
- Your cost of living is “yours alone” – figure it out and ignore experts
- Inflation is your enemy
- Investment markets are volatile – if your retirement budget is tight, volatility is your enemy
- Volatility ranking High to Low - Equities/Property/Bonds/Cash
- Liquidity is important, ranking High to Low – Cash/Bonds/Equities……../Property
- The Govt rules and tax breaks on Super “are designed” so that you consume your Capital
- Costs of managing your retirement, REALLY matter
How much Capital “is enough” to retire at Age 65 and meet the objective?
- There is no “correct” answer! Advice to the contrary is a lie
- A “range” that would be reasonably robust:
o “X times” your Cost of Living [my formula!]
o “Y times” your Cost of Living [an Actuary mate’s formula!]
- Somewhere between x/y times, your plan has credibility
- As you age and get closer to the departure lounge, your Capital required diminishes, but your health costs will likely accelerate
Lastly, if you do not care, nobody else will!

John Bone
October 07, 2019

Makes perfect sense to me.
I've seen 3 financial advisors and have paid for 2 SOA which weren't worth much but should have been bearing in mind the costs. I won't be engaging the services of an advisor as you have summarised it beautifully.
I must admit however that the 3 advisors all said that they would be happy to charge me 1%p.a of my investable assets for their "advice".
It's a pity one cannot sit down and discuss on a general basis the ramifications of decisions one could make chargeable at a reasonable hourly rate ($500ph) rather than have a SOA summarising and representing information provided to them by the client coupled with recommendations to invest in a few Vanguard products. The latter may indeed be sound advice but do I need the SOA fees coupled with the yearly "management" fee for that advice. Sorry I can't wear that situation.
I think too many advisers participating in this "blog" are seeing their profession through rose coloured glasses with reality a long second.

Phil K
September 12, 2019

It always puzzled me that people pretended (or even more puzzlingly, actually believed) that FOFA would do anything other than lead to the death of the mass market advice industry. Perhaps the politicians and bureaucrats could plead ignorance but the industry itself seemed to just close its eyes and hope for the best. When I occasionally suggested that the business I was a part of might not survive the new avalanche of regulation without jettisoning all but the high net worth customers, all I got was the familiar "you can't say that" look. Another classic case of sweeping regulations and "reform" hurting the very customers it was designed to protect. Those most needing advice now can't get it. Perhaps the next trending segments of the industry will be advice operations operating as charitable organisations or governments running their own publically-funded advice businesses for lower income earners.

September 12, 2019

Overall these have been positive changes. (for me). 15 years ago I provided advice to people about paying off the mortgage, saving for a deposit, I'd go to hospitals and help cancer patients with Centrelink forms. I'd help the widow claim a Centrelink payment. I had a about 300 clients and worked 7 days a week. It was a lot of satisfaction but hard work. I recieved a trailing commission from BT of 0.6%, or Colonial of 0.60% or IOOF of 0.60% or AMP of 0.6% or MLC of 0.60% or Onepath of 0.60%, I used industry funds even and told people to come back when it grows. I'd tell clients to pay off the mortgage and come back and see me in a few years and we'd talk in depth as to how to pay it off quicker. Now I have only about 60 clients and they all pay a flat fee and when that orphan Widow who is blind and need of Centrelink assistance and paying off the mortgage still, I tell her what my fee is and she starts crying but that's life. Overall it's a good outcome for me but for Australians well there is mygov after all and the age pension eventually.

Daryl La' Brooy
September 12, 2019

Great article Graham. When I commenced work as an adviser back in 1998 I was able to take on clients who were receiving a full Age Pension because regulations were light. Since that date we have had Financial Services Reform (brought in by Joe Hockey - remember him) in 2002, Future of Financial Advice (brought in by Bill Shorten) in 2013 and now all the changes out of the Royal Commission. The regulatory burden has become a mountain. So I can no longer afford to take on clients who receive a full Age Pension, they can't afford to pay the cost. Over the last 21 years those full Age Pension clients have received great value from our office as we have worked to preserve their life savings for as long as possible. In the UK they introduced the Retail Distribution Review on 1 January 2013 (their version of FoFA) and the number of advisers fell by 278,000 over 6 years from 300,000 to 22,000. The remaining 22,000 advisers have a levy imposed on them to fund National Retirement Information Centres to provide information to help those who can't afford to pay the remaining advisers. Once the retiree receives the information from these Centres they have to go off and implement things themselves. We could be headed in that direction in Australia. Currently there are 800 people retiring per day in this country. They have to contend with complex Centrelink rules, especially if on a part Age Pension, complex superannuation rules, tax laws and investment markets (putting the money in cash and term deposits isn't a viable investment option for the foreseeable future). To correct some of the problems of the last 2 decades, politicians and regulators are of the view that they need to set world's best practice for Australia's advisers no matter what the cost as they do not want anymore financial planning disasters. They will achieve this by raising education standards to the best in the world (by 2026) which will mean fewer entrants and many who can't mean the standards exiting. It will also be achieved through tougher compliance standards. The regulators and politicians are more concerned about eliminating bad news stories and believe if the price is unaffordable advice to the masses that is what has to be paid. Hopefully by the middle of the 20's this strategy would have played out successfully and trust in advice would have been restored.

Chris Benson
September 15, 2019

You are spot on Daryl. Arguably those who most need the valuable advice a planner can give are those who can least afford it.
The system before was imperfect and sometimes subject to abuse by both advisers and the institutions but at least it was a system open to almost everyone. Now it is basically a system for the HNW's. Who can now help the accumulator and those needing basic insurance advice?

Jeff Oughton
September 12, 2019

1. agree with most of the conclusion - the full-service offer will be bought by (not reserved for) the (minority of) top tiers of clients (that need the service) willing and able to pay (and negotiate and monitor the service)

put another way, most people need little financial advice....and even then many do need advice do not get full-service or ongoing value!

Some buts -
1. most financial advisers do not have a tax license, cannot give tax advice etc while their client's objective is an after tax income in retirement, financial risk management etc related to health, aged care and estate planning???!!!!
2 the "median" Australian - especially with middle incomes and limited financial investments - need very simple low cost financial advice - definitely not mis-sold conflicted advice from private
3 the vast majority of Australians are pooled in industry/retail investment funds/trusts - still paying too much for asset management in the accumulation stage of life; and still very limited service during decumulation phase - indeed, most members exit and head for Centrelink advice or no advice; or set and forget at minimum drawdowns on super managed funds...and in the end, die with 90% of their assets (including their home).
4. When will trustees in super funds/trusts act in the interest of members and provide retirement income, estate planning etc advice to their members - noting that these much needed services will of course come with a fee ???!!!!

September 12, 2019

Actually Jeff, most licensed financial advisers are licensed to provide strategic tax advice. They are just not licensed to do tax returns or deal with the ATO on clients' behalf. Most are also trained and licensed to advise on risk management, aged care and estate planning. At its core, superannuation is a tax structure, not an investment product. It is just one structure amongst many that advisers use to optimise after tax returns for clients throughout their lives. Also, many super funds do now offer advice to their members via inhouse advisers. However it is debatable whether that advice is in the members best interest, given those advisers are ultimately conflicted, product company employees. A better model is referral to vetted independent advisers where there is no commercial relationship. Some industry funds have arrangements like this via the FPA.

September 12, 2019

Most Most ...trained....experts??? Only the better advisors! Agree - structuring is critical for after tax returns & risk mitigation; big impact on long run returns and big differences between direct ownership, family trust and super trust. In-house advisors - does not have to involve conflicts - if governance is good and in members/client interest.Members In any member-owned super fund (be it an industry or self managed fund) need advice and it costs. At the moment, advice in many industry super funds is a subsidy from one member to another...and not full-service.

September 12, 2019

PS - I trust industry fund trustees provide members with proper governance and guidance to members wrt to FPA related advisors. The FPA has not done a great job to date of accrediting its "members".

Michael O’Hara
September 12, 2019

The arguments are now cemented into public perceptions, and myth plays a bigger role than evidence.

I am a biased, dinosaur adviser who is repelled by the manner in which legacy and loyalty is discounted as out-of-date attitudes, inappropriate to a cleaner, tidier modern age. Advisers have been told to act and charge like lawyers and accountants - which we are not. We are being held to ‘professional’ standards, with none of the professional protections. Here’s a simple rule for adviser change - all implementation dates should be aligned with a single date when advisers have their liability limited by legislation. It won’t happen in this time of mob mentality, but it arguably should.

My business approached clients in 2002/3 to offer a move to direct fee payments instead of product related commissions or fees. This meant that we retained a proportion of commission clients. We’ve never shrunk from that outcome, and are proud to have provided services to those people regardless of their account balance or what we might earn from their accounts.

We have offered non-product advice and services for decades, but it is not a model that suits the bulk of the population. Many advisers are like myself - they are struggling with the difficulties of continuing to provide cost-effective services to the ‘average’ person. It’s a genuine worry and concern that my clients might be forced to deal with faceless service centres or dumbed-down ‘robo advice’.

Direct marketers have generally provided higher cost, lower benefit products to the community. This weird outcome continues to exist, and I fail to understand how ASIC or legislators see this as less important than bringing in new rules that make it even harder for the average person to access a personal adviser.

My impression is that ASIC sees advisers as only for the wealthy. I know the arguments, and the continual referral to misconduct of one sort or another as a reason for reducing the perceptions of benefits from having a personal adviser. Misconduct is real, yet much of it is an outcome of legislation and structure. Much like the philosophical thought experiment of good people trying to remain good in a bad system.

The AFSL system is massively faulted. It brings about bias and hidden benefits/costs. ASIC want it as it reduces their compliance burden but in the end, it creates a gatekeeper whose best interests are not aligned with the client.

The APL system creates another gatekeeper that distorts advice and strategy, in the name of ‘best practise’.

The lack of clarity around general advice/personal financial advice creates a gap in the provision of cheap, honest and simple advice for the average person. That gap can only currently be filled by biased, in-house advice. That’s ridiculous, and allows foolishness such as “compare the pair” to flourish.

The pendulum must swing too far to balance the inequities of past wrongs, but when the pendulum swings back, i do not think the average person would be shown to be better off for the current approach of assuming advisers are inherently evil and devoid of being able to hold a client’s best interest at heart when going about their day to day duties.

My points will be lost in a storm of reactions along preconceived paths and interpretations. I do not expect to change anyone’s opinions, but merely to say out aloud what will one day be seen to be true. The world of lawyer-advisers might be better, but a part of me remains doubtful.

Brett Withy
September 12, 2019

David and Frank's comments appear to reflect the current "can't be trusted" perception. I apologise if I have misunderstood the context David and Frank. David's comment appears to suggest one of our comments is attempting to defend the status quo. Perhaps a thought to consider is this, what if there were financial planners out there doing all the right things for decades. I mean ethically and morally rather than just meeting the letter of the law? No doubt there were/ are and they would be feeling the impact of previous licensee and regulator failings and while agreeing the previous reality could not continue are also seeing the limitations of what is happening right now. One clear impact is costs are increasing significantly and less people will be able to access financial advice. Maybe that is worth while collateral damage but it is a clear effect to be recognised and hopefully addressed in some way. The idea all planners are easily conflicted is reasonable but the idea all planners have never acted in the best interest of their clients is over the top. There has been plenty of Planners talking of the flawed industry for many years and they were ignored. Some sort of action has been required for decades but reducing access to advice I would suggest is not a good outcome.

Stephen Bray
September 12, 2019

My sister in law runs as an accountancy business from her home and a couple of months ago we compared the cost of her business compared to mine (I run a sole financial planning business for my home office). She was astounded that I was paying close to $45K (her cost was $5,500) which for me includes authorisation through a licensee company, PI insurance, financial planning software, ASIC levy, FPA membership etc. So, when it boils down to it, I needed around 30 – 40 ongoing clients just to pay for operation costs.
If you wanted to reduce the cost to the consumer than a simple solution is to reduce the operation cost for the adviser.
That is to change the current structure. Currently an adviser needs to be authorised through a corporate structure which needs to have a licence through ASIC. An adviser can effectively self-license at a set up cost of approximately $70K or go through a third-party licensee (Most currently owned by the banks). The licence conditions require that the corporate have in place their own staffing or outsourcing for things such as compliance and insurance. A complication is that ASIC provide guidance of what to do which each corporate will then have their own interpretation.
To further meet requirements to practice, advisers also need to be a voting member of an organisation, such as the FPA, and be registered as a Tax (Financial) Adviser with the Tax Practitioners Board. And don’t forget need to pay an annual levy to ASIC.
What is needed is to remove the multi-layered current structure and introduce something like what solicitors have. This is where an adviser has to qualify for a practising certificate through the one organisation. This organisation can oversee regulation (including disciplinary actions), maintain standards, ensure adviser meet compliance requirements, provide uniform guidelines, assess specialisation areas and provide access to PI insurance.
In the long term this would substantially reduce costs for the adviser, which can be passed on to the consumer and help eliminate conflicts of interest.

September 12, 2019

From elsewhere in the media today:

"Perceptions of distrust and low value continue to exist among SMSF clients when it comes to comprehensive financial advice, fuelling concerns among accountants that their trustee clients may be missing out on key information relevant to running their SMSF, according to new BGL research.

The SMSF software provider conducted research with actuarial certificate provider ASAP Actuarial and found that one-third of new SMSFs and half of new SMSF pensions were set up with no statement of advice (SOA).

Over two-thirds of accountants surveyed in the research said the main reason for their client not getting an SOA was because they were reluctant to pay."

September 12, 2019

Another reason for their clients not seeking advice is because accountants often steer clients one way or the other. More often than not they say things (with the benefit of knowing the clients personal circumstances) that definitely fall into the 'personal advice' category - advice that they are not legally allowed to give. Nevertheless, the client feels reassured because they trust their accountant, thus don't see need for financial advice. The accountant is their adviser according to them. The accountant gets tax, accounting and audit gig worth thousands of dollars a year. Magic! But apparently that's OK....

September 12, 2019

So you'd rather have fin advisors keeping/putting people into products that aren't fit for purpose because it will get them more pay? What a great way to sell your industry
Should be pretty simple to have to legally act in the best interests of clients

September 12, 2019

I don't think anyone was arguing for higher pay for advisers. The article was about lowering advice cost for consumers. There are multiple ways to achieve this:
- Continue with the current system of commissions, which has conflict problems.
- Move to a new system of intra fund advice, which has similar conflict problems.
- Use "Roboadvice" which is really just simplistic electronic sales tools that don't provide impartial advice at all.
- Lower the cost of impartial professional advice, by reducing regulatory overhead. As you say David, it should be simple to legally act in the best interests of clients. Unfortunately the government has made it unnecessarily complex and expensive for advisers to meet all their legal obligations. The advice costs mentioned in Graham's article are not the "adviser's pay". A large proportion of it is excessive regulatory overhead.

September 12, 2019

Unfortunately much of the high cost of financial planning is due to regulatory overhead. Most financial advisers are quite supportive of the need for better regulation to improve consumer protection and industry professionalism.

But BETTER regulation is not the same as MORE regulation. The government's regulatory agenda has been driven by a desire to appease the sensationist media, not to improve consumer outcomes. They continually announce more and more regulation, without any consideration for improving or removing the layers that already exist. This approach just creates unnecessary complexity and cost, which ultimately harms consumers.

Financial advisers currently have to pay fees to, and/or follow the bureaucratic processes of, ASIC, AFCA, TPB, FASEA, Austrac, and their PI insurer. In November another "Code Monitoring Body" will be added to this list. And Treasurer Frydenberg recently announced yet another "Disciplinary Body" will be added to this list next year. This is insane. There is already incredible duplication and inconsistency in the layers already there. This is why Statements of Advice are ridiculously long and technology assistance is needed to check if they comply with all the regulators.

If Frydenberg really does need the media brownie points of introducing yet another regulator next year, then for the good of consumers he needs to get rid of some of the other layers first. Stopping the "Code Monitoring Body" before it commences operation in November would be a good start.

Brett Withy
September 12, 2019

This is the glaring hole in any government/ regulator initiative. There is no recognition of the masses of people being abandoned by advisers. That's not because advisers want to, it's because they must to survive. Is this really the world we want? Sorry Mr and Mrs Client, you want to deal with our business so you can tap into our collective expertise but you can't afford it so please deal with the centrelink, ATO and fund manager call centres, they'll sort you out. As a very significant amount of our time is spent checking and correcting errors from the abovementioned sources (for people typically ill equipped to do this for themselves) it is obvious there will be many ex clients feeling lost and abandoned. This is a big source of mental stress for advisers as nothing has been proposed to address this (ie; lower value clients being cast adrift) and we're the messenger to our often elderly and frail clients. Good job government (of all stripes) to build overly complex systems, too difficult for the average person to navigate and then to destroy the admittedly imperfect assistance source. I know our business will go from strength to strength as there is so much opportunity but a minutes silence in memory of the time when we could actually look after "ordinary" people is appropriate I believe. Whew, I feel a little better now.

David McDonald
September 12, 2019

Advisers need to convince clients they are worth the money. People understand why doctors or lawyers cost so much as they value their training and professionalism. If financial planning can upskill and be seen as a profession this might help.
The truth is clients were already paying significant amounts it was just hidden in commissions and sales rewards - which were designed to benefit the adviser not the client.


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