The invisible demand for financial advice

Much is spoken about the millennial generation but less perhaps on what they value in life. It is our values that inform our behaviour and that will change as our lives change.

This is, of course, true for all generations as everyone wants to live their best lives and create wealth but it is pleasing to see some millennials are considering financial advice.

CoreData’s 2020 COVID-19 research revealed around one in four (25.7%) Australians sought advice, with demand highest from Gen Y (32.2%). Also in 2020, Investment Trends found 2.6 million Australians said they intended to seek help from a financial adviser in the next two years, an increase of half a million since 2019, and double the number reported in 2015.

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Demand is being spurred on by a number of factors. A greater interest in financial advice from younger people, who have more invested via their superannuation funds and are therefore seeking a better understanding of and an earlier interest in investments than previous generations, but also the financial impact of the pandemic and the ongoing exit of baby boomers from the workforce and into retirement. 

I suggest there is also an almost ‘invisible’ demand for personal financial advice – many people recognise they need it but do not seek it for a number of reasons: they think they can’t afford it, they don’t have enough money to invest, they don’t know what they need, they don’t know how to access it, or they don’t know who to trust. 

As a community, financial advisers are genuinely interested in the financial wellbeing of ordinary Australians and in helping them. But if everyone who needs or wants personal financial advice were to seek it, we could not possibly service them, given the onerous and expensive red tape. We simply don’t have enough advisers to meet the demand, and we won’t have for quite some time, perhaps never.

AFFORDABLE ACCESS

The reality is that although we are starting to see some regulatory concessions, such as the recent temporary freezing of the Australian Securities and Investments Commission (ASIC) adviser levy, and, according to the Association of Financial Advisers (AFA), a noticeable change in the tone of both politicians and regulators towards financial advice, the legislation and regulations are still here and won’t substantially change for at least two years.

The other reality is that not all consumers want or need, or can afford, what personal financial advisers are currently forced to give them – that is, a full needs analysis leading to a statement of advice (SoA) and financial plan. A combination of legislation, regulation and licensee/adviser caution means that the possibility and the cost of scaled advice is beyond the reach of many people. 

We might therefore need to face a further reality – that for some people guidance from their product provider, such as an industry fund, or digitally-enabled advice, is all that they can afford and that’s okay – as long as everybody (consumers, financial advisers and the providers of these services) clearly understands that this is not personal financial advice. If this is abundantly clear, then we could be collaborating rather than thinking of each other as the enemy. 

DIGITAL ADVICE

The minister for superannuation, financial services and the digital economy, Senator Jane Hume, recently described two ideas of digital advice: ‘robo-advice’ and ‘digitally augmented’ advice. The former is a robotic attempt at personal financial advice most often leading to a product recommendation, the latter helps make the delivery of personal financial advice more efficient and effective for consumers and advice businesses.

Let’s talk about digitally-augmented advice first. There is a line of thought that because digitally-augmented advice will enable advisers to deliver advice more effectively and efficiently, they may be able to cost-effectively service more clients. I’m not sure how true this is. We know that clients see personal financial advice as much more than product advice, it’s about helping them set and reach their financial and personal goals, it’s a relationship business. 

No matter how much technology improves the experience and delivery of advice, it doesn’t change the fact that personal financial advice is just that, personal. Clients want their choices validated, they need reassurance they are making the right choices and doing the right things. There is a limit to the number of people a financial adviser, or a financial advice business, can personally service and retain those relationships and there are simply not enough advisers to go round. 

Robo-advice has the potential to help meet the invisible demand for financial advice, and given that the advice community cannot fully service this demand, as Senator Hume has pointed out, it is certainly no threat. It could even provide an introduction to personal financial advice for consumers and potential clients as the needs of the people who use it become more complex. 

Robo-advice also has the potential to educate all Australians and future personal advice clients about the financial advice process, the value of personal financial advice and the cost. If it can do that, then it can help build greater trust in our community. I say potentially because although robo-advice is improving, unfortunately, at the moment, most solutions result in specific product recommendations – that is, they are used by providers to sell particular products. 

If we as a community can collaborate with providers to improve robo-advice, it does have the power to make consumers more comfortable about seeking personal financial advice as their needs and, let’s not forget, their values change. They will also be better educated about their own financial situation and needs. 

All of which will only fuel more demand for personal financial advice.

PROFESSIONALISM AND TRUST

We have certainly moved along the road towards professionalism in the past 10 years. The best interests duty has long been at the heart of the work financial advisers do. 
With the adoption of the Financial Adviser Standards and Ethics Authority’s (FASEA’s) code of ethics, the FASEA national exam, and the requirement for financial advisers to become degree qualified by 2025, both ethical and educational standards have lifted. 

One positive thing the COVID-19 crisis has done for financial advice is inspire greater respect for what advisers do and how their advice improves client outcomes and adds value. A number of industry reports confirm that trust in financial advice is being restored. People who had financial advisers, who were encouraged not to panic, to stay the course and perhaps if they were in a position to, take up opportunities, fared much better than those who didn’t. 

The '2021 Russell Investments Value of an Adviser Report’ has even put a number on it. The report indicates that since the beginning of the pandemic in 2020, advisers have added around 5.2% to client portfolios by helping clients to avoid bad investment decisions and, presumably, make better ones. 
Greater levels of professionalism and restored trust will also increase demand for advice.

ADVISER EXITS 

The forced exit of highly experienced and skilled financial advisers from the industry in this environment is therefore nothing short of a tragedy – both for consumers and for those affected advisers. 

One of reasons for exit is the educational requirements. And here we must ask, what other new profession has required existing incumbents with extensive experience to study at this level? To undergo exams on topics they are expert in just to be able to continue to take care of their clients? I personally know of two advisers who are aged in their 70s, with 50 or so years of experience, who have completed the FASEA exam and are now studying for a degree so they can continue to look after their clients.
But others are unable to meet the requirements despite being compliant and extremely efficient and respected advisers.

And so widens the gap between the supply and demand of financial advice services. We need to find a way to increase the number of advisers so that we can meet demand – but we are genuinely up against it. 

The number of people entering the profession is dismally low – an industry that had its reputation sullied, however unfairly, that had remuneration restraints put on it, that introduced legislative and regulative constraints that made the task of delivering personal advice more time-consuming, expensive and difficult, that demanded more in terms of education and training and that made slow progress towards professionalism could hardly persuade many people to consider it as a career.

But according to some reports, there is a small increase in the number of new entrants. FASEA chief executive, Stephen Glenfield, is on record saying there was a three-fold increase in the number of units being studied in FASEA-approved degrees between 2019 and 2020. How many of those who are studying these degrees will ultimately venture into the world as financial advisers is, however, anyone’s guess. 

We also need to overcome one of the other significant barriers to entry – the professional year (PY). The PY puts even greater demands on the small pool of existing advisers who are already under pressure to adapt to the new world of advice. 

The AFA recently reported that since 2019, more than 550 provisional advisers have enrolled in the PY and another 260 are expected to start this quarter. We can only hope that this is the beginning of a trend but we urgently need to discover ways to bolster it. We need to collaborate with universities and senior secondary schools to encourage people to consider a career as a personal financial adviser.

We need to work out how to provide advice in an accessible and cost-effective way, while ensuring we have a viable economy and appropriate consumer protection.  

As we journey along this road and the demand for personal financial advice gathers momentum, the need for genuine collaboration by all key stakeholders becomes much more apparent.   

Neil Macdonald is chief executive of The Advisers Association.




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Neil, an excellent and balanced commentary. Pleasure to read. This is the kind of material I would like to see more of. Thank you.

I thought that was what Tik Tok and YouTube were for.

Most of the recent losses of financial planner numbers were from the big licensees decimating their planner force, to deflect blame following the RC. Government didn't step in then to stop it, why expect anyone to do anything now. We seem to have a culture of government getting it wrong over and over, bandaiding one mistake with another. Don't be misled, aren't we heading back to vertical integration again? Thankfully the product providers will be able to hide algorithms in the 'robo-advice' so the next time around they can point the finger at their code programmers instead....

Yep, the big banks may have retreated from vertically integrated product and advice, but the vertically integrated model is being ramped up by dealer groups developing their own products to sell through their advisers. Particularly SMAs and SMSFs.

Overall a well written article Neil. My only word of caution would be your comment - "that for some people guidance from their product provider, such as an industry fund, or digitally-enabled advice, is all that they can afford and that’s okay".
If we, as qualified planner, were allowed to offer "guidance" we could also do it in a very cost effective manner. The problem is, we are not, as it is considered implied advice. I'm all for industry funds having capable people to give members guidance, but if they can, then we should be allowed to as well, without fear of being belted by ASIC for breaking the law. We need one set of rules for everyone and if we had practical and realistic laws, we could help a hell of a lot more people.

Here here. No general advice, no bifurcated compliance landscape.

so true Jack!

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