Even before the Royal Commission, Australia’s wealth management industry was undergoing substantial change. HUB24’s Andrew Alcock asks what’s next?
Our industry is already in the midst of profound transformation and looking forward we expect that pace of transformation to accelerate.
While the Royal Commission is only now reaching the mid-way point, the Australian Securities and Investments Commission’s (ASIC’s) recent investigation into the big four banks’ provision of financial advice has just reported.
Government and regulators will respond to these latest findings, and then those of the Royal Commission, at some stage. But in the meantime, the industry is already shifting in anticipation of new obligations as well as seeking to meet rising community expectations.
These shifts, coupled with new technology and investment innovation, will lead to other changes – as well as offer significant opportunities and benefits for both advisers and consumers.
Looking forward we see three main transformations ahead.
1. Best interest duty challenged in the face of innovation
It’s taken a while, but the best interest duties which came into effect with the Future of Financial Advice (FOFA) are now being tested with several high profile cases being played out in the courts, resulting in a number of individual advisers being hit with enforceable undertakings by ASIC.
ASIC is reinforcing the current regulations that stipulate an adviser should believe that their client is likely to be in a better position if they follow their advice; plus the advice provided needs to take individual clients’ circumstances into account. And so they should.
On the back of ASIC’s regulations, advisers need to administer the required disclosures, record keeping and more. ASIC says advisers must identify and record the objectives, financial situation and needs of their clients; identify the subject matter of the advice sought by the client and take steps that would reasonably be regarded as being in the best interests of the client.
Similar requirements are being implemented by regulators elsewhere around the globe. For example, in the United States the Department of Labor’s ‘fiduciary rule’ was proposed by the Obama administration; but subsequently shelved by President Donald Trump in February 2017. It is now back on the table, pending review, with full implementation expected in July 2019.
The fiduciary rule, also known as the ‘conflict of interest’ rule, governs how employee benefit plans are handled and requires companies to act in the best interests of their employees when creating retirement accounts. At its core, it is intended to increase protections for individual investors by ensuring advisers are acting in their client’s best interest and address conflicts of interest. It also means that if an adviser has a conflict related to either proprietary product, forms of compensation, or limitations of access to products they offer clients, it must be disclosed.
Overall, this means that US financial advisers and their firms need to be able to demonstrate that each recommendation they make is in the best interest of the client. We are keeping an eye on how this plays out in the US.
Here in Australia, the best interest test has several components including ensuring advice is fit for purpose and believing that your advice will result in a better outcome for the client.
Interestingly, when it comes to best interests here, there is a cohort who automatically revert to price as a justification of ‘best interests’. However, the best outcome for a client over a number of years may be about a number of factors aside from price, including tax management, product structure and product choice. Similarly, enhanced capabilities from modern platforms can add value through managed portfolio functionality, tax optimisation and modelling tools, that can provide great outcomes and results for clients over the long term, offsetting the initial price/cost.
Price does not necessarily justify best interests. Total value needs to be considered in the context of investment outcomes.
So where is best interest going? Will it be tested beyond just looking at whether a client’s individual circumstances were considered in the provision of advice? Will we see ASIC take the best interests test and investigate whether the product chosen did provide the best outcome for a client or was there a better alternative in the market? Could this go further and we see innovation redefine how best interests is met? Or will technology transcend traditional portfolio construction and asset administration to provide far richer capability that drives superior outcomes?
Technology is moving the goal posts constantly when it comes to product manufacturing, the provision of advice and distribution of products and service. The rise of artificial intelligence alone is likely to be a game changer for investment management – moving the debate away from price to value and functionality to capability.
Accordingly, innovation and technology will further transform the way we think about best interests.
2. Advice separated from product distribution
Even before the Royal Commission started there was a trend towards the dismantling of the vertically integrated model: ANZ sold its wealth business and CBA is considering whether to float CFSGAM.
Vertical integration in itself is not evil; it just needs to be supported by appropriate governance, culture, KPIs and great quality products. Additionally, it needs to be transparent to the customer that they are being recommended an inhouse product. There is an argument that the industry needs a broad range of product choice and providers that can stand alone or be vertically integrated.
This transformation is not just a result of the Future of Financial Advice legislation, or the recent ASIC findings, but also because the cross-sell institutional CEOs had aimed for from their advice services has not been as significant as expected. One could argue that in many cases this is the result of product design being focused on the needs of the manufacturer rather than the needs of advisers and clients.
How the larger, vertically integrated institutions respond to these trends and challenges, and how this impacts their financial advisers and individual clients, will vary for each of them.
Regardless, many advisers are making the change. There has already been strong growth in the number of non-aligned financial advisers over the past few years – and this will increase. Recent CoreData research shows adviser movement from the large institutions to own-AFSL is accelerating and transforming the entire industry. According to Adviser Ratings, in the past two years the nonaligned sector has attracted 70 per cent of all new advisers compared with 40 per cent previously.
It is a similar story with the platforms they use. According to Strategic Insights (2017), non-insto aligned platforms are growing the fastest on a percentage basis – as well as topping the polls for client satisfaction. These platforms now account for over 40 per cent of the industry’s net inflows and have been increasing their market share steadily for years.
One reason is that non-insto aligned platforms offer a simple solution providing financial institutions with the offer of choice that investors need under the best interest requirements and separate the provision of financial advice from the distribution of product. They are designed to meet the needs of the adviser and the client, not the product manufacturer.
Just as we have seen with the choice of insurers on APLs, it is only a matter of time until most institutional licensees open their approved product lists to provide more choice and to ensure they can deliver on their best interest obligations.
Additionally, the non-insto space is fostering innovation not just through proprietary technology but also across the industry. Open architecture allows a wider range of investment choice and a more diverse range of investment managers by providing distribution through the platform and managed accounts functionality. An example of this is how HUB24 recently partnered with Prodigy to launch the Flinders Emerging Companies Fund on the HUB24 platform institutional pricing to portfolio managers - a 60 per cent discount to the retail rate.
Product manufacturing is being transformed through innovation and technology and the model of advice coupled with product distribution will be further challenged as the Royal Commission reports and other industry trends play out.
3. Data portability
Just as the lines are blurring between brokers, advisers and accountants there is increasing demand for sharing of data between product providers.
Increasingly, advisers are looking to create their own technology ecosystems whereby they are able to bring together their preferred IT for CRM, client engagement, rebalancing and reporting to enable a seamless flow of data between best-of-breed solutions.
This means, as product providers, we need to step away from thinking of ourselves as ‘owners’ of data and instead think about how we can support the flow of data and work with other providers. This also means that product providers have a responsibility to protect the data and ensure data integrity.
Additionally, consumers should be empowered to choose from multiple product providers and be able to access ‘their’ data from wherever they choose. Again, technology and innovation is driving this.
Transformation is all about empowering customers – advisers and their clients. Expect more of it in our industry.