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The latest costs and strategies in financial advice

The financial advice landscape is influenced by the priorities of the government of the day, legislative changes, pressure from regulators, and the ever-increasing licensee and compliance standards. Most recently, following the release of the final recommendations to the Quality of Advice Review (QAR), the industry is waiting the Government’s response, long past the expected timing.

These influences have impacted the way advisers provide advice to Australians who are seeking to improve their financial position over the course of their life.

Adviser numbers down

Against this backdrop is a significant decrease in adviser numbers in Australia over the past few years. From a high of 27,929 in 2018, only 15,860 qualified, financial advisers are listed on the Australian Securities and Investment Commission (ASIC) register, a decrease of 43%.


Source: WealthData

In contrast to the decline in existing adviser numbers is the growth in provisional and new advisers joining the industry. This has contributed to the slight increase in adviser numbers between December 2022 and now.

The reasons for the decline are many and varied and include increasing education requirements, regulatory pressures and rising compliance burdens, and the difficulties of operating in an ever changing environment.

Australians need more advice

Despite this reduction in the number of financial advisers, Australians need advice more than ever and they are seeking financial advice in increasing numbers. A recent ASIC report noted that 2.6 million Australians are currently paying for financial advice however 10.25 million Australians would like to receive financial advice at some time in the future.

There are some barriers to Australians paying for and receiving financial advice including that the cost of advice is too high and that too few Australians trust financial advisers.

Thankfully for those of us working in the financial services industry, the level of trust has increased in recent years. In 2020, the CFA Institute’s Investor Trust Study showed that only 24% of Australians trusted the financial services industry. The latest report, released last year, shows that trust levels have risen to 45%. Although still below the global average of 60%, the significant increase is consistent with that experienced across the globe, with the report citing trust levels are at an all-time high.

The cost of advice?

How much does financial advice cost? Our data is sourced from our work producing thousands of advice documents (called Statements of Advice) each year, across multiple licensees and adviser practices. We can capture the upfront fees and ongoing fees charged by financial advisers.

Upfront fees are charged when a client initially receives advice and may include capturing the client’s existing situation, researching the potential options that may add value to the client’s position, determining the most appropriate strategy and product recommendations, the cost of producing the Statement of Advice document itself and the cost of implementing the advice.

Ongoing fees are quoted as an annual figure but are normally charged monthly over the course of a year. They can be paid directly by the client or deducted from the client’s portfolio as a flat dollar or percentage-based fee. Ongoing fees are charged by the adviser to provide continuous advice which includes reviewing the client’s portfolio and performance on a systematic basis, providing regular updates to the client, making small changes to the client's portfolio (e.g. rebalancing back to the client’s risk tolerance level), and maintaining the client’s records.

There are many different ways that advisers can charge fees, including:

1. A set annual fee based on the type of client and services required.

  • A pre-negotiated fixed fee is the most common. Payment frequency varies but is often monthly. It can be deducted from a bank account or product, if the product allows. There may also be caps on how much can be deducted from a product.
  • A pre-negotiated fee based on asset levels, which is less common. This is a rate that is usually collected via a product and is based on an average balance over a defined period, such as a month. Not all products facilitate this. Some product providers will exclude the cash hub balance when determining the fee and others will not.
  • A combination of a fixed fee and an asset-based fee. With an asset-based fee, the adviser needs to provide a reasonable estimate of what the fee is likely to be and outline the assumptions used to work this out.

2. A percentage of Funds Under Management (FUM).

  • Some advisers charge a percentage of FUM but care is needed to define what is included.
  • It is possible to charge based on non-platform asset values, but it can be difficult to manage. For example, the family home is not in the mix as a financial adviser does not provide advice or service in relation to that asset, but what happens with an investment property?

3. An hourly rate.

  • Some advisers charge by the hour. It creates transparency but there are challenges, for example, if an adviser has invested heavily in processes and technology to improve the efficiency of delivering the advice. It may take them less time to complete but the adviser still needs to receive a fair compensation for their time as well as the costs of building and maintaining their processes and systems. 

Licensees may impose restrictions on minimum and maximum fees charged as may product providers. On the latter, such restrictions will not limit how much an adviser can charge, but it can limit how much can be deducted via the product.

The adviser must always charge what is fair and reasonable. This is a requirement under the Code of Ethics and the regulations. The adviser must be able to defend the charges, agree the amounts with the client in advance, and document them in the Statement of Advice to ensure there are no surprises for clients.

The following diagram captures the average upfront and ongoing fees that were charged by financial advisers using our software for the 2021 and 2022 financial years.

There has been a significant increase in advice fees charged by financial advisers over the past two years, particularly the level of ongoing fees. This trend is set to continue as we are seeing further increases in advice fees this financial year. 

Financial advice fees have risen in line with the increasing costs of providing that advice. One of the main contributors is the regulatory burden on financial advisers which has increased exponentially, requiring them to devote more time to ensuring advice documentation adheres to compliance requirements.

The exodus of advisers from the financial advice industry has only exacerbated existing concerns around the cost and accessibility of advice for all Australians.

Other advice trends

Another trend in the advice documents is the increasing number of platforms and decreasing number of strategies that advisers are recommending.

With the abolition of tied distribution and the exit of the banks and large financial institutions from the financial advice space, advisers have more freedom to recommend a larger variety of super, pension and investment platforms.

Industry super funds are becoming more adviser friendly (e.g. allowing advice fees to be deducted from a client’s super balance), and hence are also increasingly being recommended. Although they are restricted somewhat by their licensee’s approved product list (APL), advisers are taking advantage of the myriad of platforms available in the market and according to our data, recommending multitudes. This suggests that advisers are genuinely seeking the most appropriate platform that suits the needs of their individual clients and not recommending platforms based on a financial or other benefit, as they have been accused of doing in past years.

Within the investment space, we have seen a move away from traditional managed funds and a significant move to the use of managed discretionary accounts (MDAs), separately managed accounts (SMAs) or individually managed accounts (IMAs). These types of accounts offer several benefits for clients including direct ownership of the securities by the account owner, full transparency of the underlying securities, and resulting tax optimisation on an individual account basis.

Despite this platform trend, the number of strategies that advisers are recommending is narrowing and limited. Of the 650 plus strategies and all their various permutations that are available to advisers to use, advisers for the most part are restricting their recommendations to those that they know and admire. Without the assistance of sophisticated technology, advisers cannot possibly be abreast of all the advice strategies available or be able to link to a client’s demographic to check eligibility.

Most common advice strategies

According to our data, ‘rollover your super’ is the most recommended strategy used by financial advisers. This is followed by ‘retain your super’, strategies that recommend insurances, ‘review your estate planning arrangements’, ‘commence an account-based pension’ and ‘review your Centrelink entitlements’.

Strategies that recommend rolling over your pension or retaining your pension are the next most popular advisers' recommendations. Recommendations to commence an SMSF have plateaued in recent years but are more highly recommended by financial advice firms that have a connection with an accounting entity (generally due to a joint ownership structure).

Opportunities for advisers

The financial advice industry is clearly in a state of flux, but with the demand for financial advice still strong among Australians and the Government’s response to the QAR due soon, there are good opportunities for financial planners. The move to use MDAs, SMAs and IMAs shows no sign of abating, and these structures will be key to the success of advisers. Combined this with the smart use of technology to develop advice strategies, this will ensure advisers can provide tailored, cost-effective advice for the benefit of their clients.

 

Anne-Marie Esler is Co-Founder and Co-CEO of fintech firm, Padua Solutions.

 

19 Comments
Sunny
February 07, 2024

In the initial consultation, my Financial advisor memtioned that the on-time SOA fees would be ranging between 1.5k - 6k plus the implementation fees. Knowing my financial situation, he added it would be in the lower side. Now, he presented SOA and sent an invoice of $4.4K (SOA) + 1.5K (Impl fees) which is way higher than expected. I spoke to the FA but no outcome. Please advice.

Pedro
May 23, 2023

Irrespective of whether stricter compliance legislation has impacted financial advice costs, unethical conduct & behaviour by advisors brought this upon the industry. 

Colin E
May 21, 2023

Professional financial advice was appropriate when I first retired, and it was very good.
Twenty three years later, the best piece of "indirect investment advice" I have ever had was when Alan Kohler interviewed Brian McNamee on ABC, soon after CSL listed in the stock exchange. In retirement I have the time to read extensively ,and listen to less expensive advice from sources like Eureka Report and Firstlinks.

John Wilson
May 21, 2023

It's interesting that Padua Solutions fees/"head" increased between FY 2021 and 2022, even though the market dropped.
There are many questions this paper raises:
. ASIC's data for client satisfaction in Australia more-or-less doubled from 2020 to last year. Why?
. Australia remained well below the USA and other countries. How did satisfaction in the USA and other countries change from 2020?
. Why are Americans and other countries more satisfied than Australians? Better advice? Lower costs? Less demanding clients?

David
May 21, 2023

My adviser had two exploratory meetings and wanted 6k for a plan and 6k p.a thereafter. All verbal, no written outline of what I might expect from their service. Just that they would manage my money. I was staggered but agreed to the initial plan but not the ongoing. They declined, so back to square one.I got better explanation from this article. I did ask about hourly rates but n/a. Interesting discussion and the markets can go down, but please tell me how your fees are appropriate if all my money is in super? What’s to manage , seems high for an asset allocation review ea year for $1m of assets. My expectation was closer to 4K for the plan which article seems to suggest is closer to market

Davo
May 19, 2023

Under the FUM model advisers are paid more if the market goes up (assuming your portfolio goes up) and are paid less if it goes down. There is not necessarily any correlation to the quality of their advice. Advisers should be paid like any other professional advisers, on an hourly or agreed fixed fee. The uncapped FUM model is in the best interest of financial advisers, not their clients. As for the "alignment of interests" argument, I think that is just marketing spin.

Sean
May 19, 2023

I would submit that the increase in average ongoing fees is not so much advisers increasing their fees but advisers no longer being able to service lower level and unprofitable clients.
I’d be interested to know how many Australians have been let go by their adviser in the last 5 years.

Brett
May 19, 2023

Initial advice is much more time-consuming than ongoing advice. The only logical conclusion to draw is that most financial advisers are providing the initial advice as a loss-leader to the much more lucrative ongoing advice.

Wildcat
May 21, 2023

100% correct Brett. If we had live off initial fees we would be out of business. They are a loss lead.

Frank Tuyl
May 18, 2023

I know a lot of (reasonably wealthy) people who just hate the whole idea of ANY fixed fees and percentages, and will only take seriously advisers charging an hourly rate, like lawyers, accountants, and car mechanics. The "challenges" described above surely apply to most professions, and should be reflected in the hourly rate.

Aussie HIFIRE
May 18, 2023

The current regulatory regime makes it quite difficult to provide advice on an hourly basis, certainly if you just want an hour long consultation and then some personal advice at the end of it.

As things currently stand advisers aren't allowed to give personal advice to new clients without providing a statement of advice taking into account all of the clients personal circumstances, and it takes a lot of time to have the initial meeting, do some research, prepare a statement of advice, and then present it, with file notes at every step of the way.

Jeff O
May 19, 2023

Scalable advice - on generic issues - largely driven and delivered digitally - has emerged and is very cheap and effective - see for example Super Ed and Otivo/Map my plan.

That said, most professions specialise - even car mechanics - since a mazada is very different to a Tesla etc etc - so paying a fee for a complex retirement/lifestyle/estate ..plan is well worth it for (wealthy) people/couples/families....and when the facts/regulations etc etc change...check up and get some more advice or your advisor should contact you. Indeed, i would not get on a plane without a pilot - even now that flying has been digitised!!!

Finally, a business/advisor needs to cover "fixed" costs to remain in business and to keep up with the ever changing marketplace....to continue to service the client. If not, the client will incur search and other costs, every time there are complex/significant change or simply and ignorantly move on until the need for a replan is apparent

geoffrey
May 21, 2023

Hourly rates do not encourage efficiency. Look at lawyers who charge every minute spent, including rework on mistakes or omissions they or others have made. And what if your adviser has to spend a great deal of time on your situation because of their own inexperience on the matters involved? Fixed fees agreed in advance are much better for clients than hourly rates.

straight shooter
May 18, 2023

Advisor fee and fundmanager fee should bebased on performance. Higher fees for higher returns and compensations for losses.

Geoff
May 18, 2023

It's not your financial advisor's fault if the world markets tank for some unforeseeable reason and you are plunged into negative territory; and it's not a loss until you sell whatever it is.

If this is the way you think, then perhaps the stock market isn't the best place for you.

I'll bet you pay your doctor even when he gives you bad news, or fails to cure you, because whatever is ailing you, it's probably not your doctor's fault.

davidy
May 19, 2023

Pretty simplistic view of advice - what about advice that stops you losing money, preserves your assets or saves you tax ?

Colin Edwards
May 18, 2023

ASIC's Target Market Determination regarding Capital Notes requires me as a "small" (non-sophisticated) investor to get a recommendation from a financial adviser before I can subscribe to the issue of a new bank hybrid capital note. The rule is applied bluntly, disregarding the fact that I already have several investments in bank hybrid securities, part of a wide portfolio of investments. At this stage of my investment life I do not need advice from an investment adviser, for a minimum fee of over $2000. My only recourse is to buy on the market after the event. Not a happy investor!

Ryan G
May 19, 2023

That's frustrating Colin, I'll suggest its because lawyers (potentially on an hourly rate) have "invested" lots of time making life difficult for advisers, and investors.

Rowan
May 25, 2023

I agree. I have a significant share portfolio and wouldn't be considered a non-sophisticated investor but will now pay a small premium to purchase my bank hybrids from the market. 

 

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