Few would argue that access to advice is crucial. The value of advice for individuals and their families has been demonstrated recently by both the Financial Planning Association’s ‘Value of Advice’ report and case studies submitted for Financial Wisdom’s Value of Advice awards.
One client that stays in my mind went to their long-term adviser, instructing them to place a significant proportion of their net wealth into a ‘fixed interest investment’. The adviser refused. The client was initially upset, but is now incredibly relieved her funds were placed in a diversified portfolio rather than in Fincorp.
The need for advice in our community is clear.
I’ve argued in the past that the financial planning community needs to articulate its cause.
I suggest that the cause of financial planning in 2008 is to ensure that Australians have adequate savings and are appropriately insured.
The need for advice regarding savings has increased in a time of market volatility and record levels of private debt.
Meanwhile, the value of advice is not well understood.
A report by the Institute of Actuaries estimates that 17 per cent of Australians have sought financial advice.
It also points out that, “people can find it difficult to understand what value they are getting from an adviser. Even after getting advice and implementing a plan, the value of that plan can only be compared to some hypothetical alternative course of action. One of the problems that the financial advice industry faces is convincing prospective clients of the value of their product.”
A key issue is that the benefits of advice are derived over the long term, with little instant gratification.
Furthermore, the former Governor of the Reserve Bank, Ian Macfarlane, observes that sectors of the economy have been able to shift risk onto the household sector.
An example is the practice of governments distributing resources to households in the form of tax cuts rather than pooling resources, which creates savings that can be invested.
Consequently, the decisions that individuals make have a greater impact on the economy and the community.
In this environment, the wealth management industry has a significant role in leading discussion and advising clients regarding the most appropriate courses of action. It has, however, become preoccupied with individual consequences and the mechanics of advice.
Rather than focusing time and resources on the issue of access to advice, there has been an inward focus on the structure of the industry.
Industry funds, for example, have spent money attacking the financial planning industry for accepting commissions rather than addressing the need to save for retirement through superannuation.
If a debate about the mechanics of advice has to be had, consideration needs to be given to the cost of providing advice.
Colonial First State has commissioned an investigation into the cost of advice to enable a more informed discussion.
The report will be released in the coming weeks, but the preliminary findings provide many valuable insights. It shows that compliance and ongoing training absorb significant amounts of productive time. It shows that personalised advice is expensive to provide. So much so, in fact, that it is unlikely that advisers can recoup the necessary return for initial advice on an hourly or set fee basis.
These findings support the Citi Wealth Management Insights report, which concluded the mass market has insufficient assets to pay for a plan and that planning practices that choose to predominantly target mainstream Australia must do so with a business model that is extremely efficient and low cost.
If that is the case, what is in the best interests of clients and the community?
Currently, a level of subsidisation exists to ensure advice is sought and provided. Subsidisation can take many forms. The planner may choose to subsidise upfront advice by securing an ongoing advice relationship.
Alternatively, subsidies provided by institutions enable advice.
Examples are the funding of adviser salaries by manufacturers or companies such as Industry Funds Financial Planning that are supported in order to provide financial planning services to industry fund members.
The debate regarding subsidisation too often merely considers commission. Many assume that subsidisation of advice is a bad thing. The priority should be that clients have access to advice that considers their personal circumstances, objectives and needs, and they have the legislative protection that comes with receiving personal advice.
The most important debate is one that seeks to build an advice model that provides quality advice to all Australians.
Paul Barrett is the general manager distribution at Colonial First State.
