The (new) future of financial advice

I was interviewing an obstetrician for a story about the drop in the number of parents consenting to vitamin K shots for their newborn babies. This routine shot helps blood to clot and prevents an extremely rare but devastating disorder that can see babies bleeding out of their eyeballs. The obstetrician told me he says the same thing to every parent who questions the need for the shot: “If you do this or you don’t, I still get paid. There’s nothing in this for me. I’m just trying to do the right thing by your baby.”

There isn’t a financial adviser in Australia right now who could say the same thing about their own services. That’s not to say financial advisers will never prove their worth without being paid at the same time. But it won’t happen until there is a much smaller, more well-defined cohort of people who call themselves financial advisers, and who figure out a business model that sees them running a sustainable business that doesn’t involve taking a cut of the action.

The Hayne banking and financial services royal commission was tasked with triggering an overhaul of misconduct in an industry that, since its inception, has grappled with the same few issues. So far these problems have only been hacked away at the edges but remain deeply ingrained at their core. Industry watchers see advice splitting off in two very different directions: some will be very expensive, and the rest will be very cheap.

Let’s start with the expensive advice. There is a class of investor that has a lot of money. To get good financial advice they’ll need someone with experience and qualifications, possibly across several fields including tax law and superannuation, and someone who’s well across current research. Those people will spend time getting to know your situation, really listening to what you want to achieve, and they won’t push you into anything you’re not comfortable with.

Those advisers are expensive and will likely get much more expensive as the demand for their services goes up and the number of advisers in Australia goes down. You’ll likely have to pay for their services up-front. As Ben Smythe, partner and principal adviser at Minchin Moore Private Wealth, puts it: “Consumers who value advice that is personalised, unconflicted and delivered by someone they trust and respect must face the reality that this type of financial advice is not cheap.”

Those looking for more affordable options may find themselves talking to “wealth coaches”. Generally people with little to no training, they won’t be useful in terms of giving product advice but they should be able to look at your financial habits. Much like a personal trainer you might hire at the gym, the onus is entirely on the customer to get anything out of working with them. But if your number-one issue is wasting money, getting more of your money into a garden-variety savings account might be the best thing you can do.

There’s certainly a growing appetite, especially among younger consumers, to focus less on the process of saving as a primary goal and to look more closely at what’s tempting them to waste money.

‘Consumers who’ve experienced a sudden windfall or a large loss are susceptible to dodgy financial advice because they’re emotionally vulnerable’

Robo-advice is a hot topic in the industry, with the words usually spat out by advisers in disgust. In fact, there are many appealing factors related to robo-advice for people with not much to save. The thing is, for your average 20-year-old, an app on your phone that tells you when you’ve spent $100 eating out in a week will probably be a lot more useful than an adviser who wants to push your paltry savings into a managed fund.

ASIC says it’s seen a number of existing licences as well as new ones edging into robo-advice, which is regulated in the same way as human advisers. If you’re sceptical that this is really where the field is headed, one interesting character who has found himself in the robo-advice field is the father of the Future of Financial Advice reforms, Bernie Ripoll, with a new company called Map My Plan. If you can’t see the writing on the wall with this one, maybe listen to the guy holding the marker.

Between these two extremes there are the consumers who’ve experienced a significant change in their life which has involved a sudden windfall, like an inheritance, or a large loss like a death or a divorce.

These customers often find themselves susceptible to dodgy financial advice because they’re emotionally vulnerable and probably not in a position to be thinking about the long-term ramifications of their actions. It’s pretty easy to see how customers who are panicked by the degree of change in their lives can be easily parted from their money. Rather than looking at this line of advice as a depressing proposition, however, many see the opportunity here.

In the United States there are financial planners who specialise in transitioning clients through a divorce.

The Financial Planning Association has picked this as a growth area, because it also generally comes with a more transactional payment model that they believe will take off. CEO Dante De Gori says: “People want to pay for services they want and need. People don’t necessarily want to pay for a full holistic financial plan of their situation. People will actually say, ‘Look this is my issue today, this is what I need advice on’ and move on. It’s going to become more — and this is a dirty word sometimes in the industry — but financial advice will become more transactional. It doesn’t mean you don’t take into account the client’s circumstances and their financial situation, but the reality is that you’re giving them advice on a specific need or want at a point in time.” Of course, “transaction” is a dirty word because it’s a lot harder to make money on many individual single transactions than by holding on to someone’s money and taking little bits of it on a regular basis.

While we wait to see if our political leaders have the wherewithal to force real change in the sector, we can be sure we are going to see much more sceptical consumers. Websites like Adviser Ratings, which posts reviews of financial advisers by members of the public, will help keep rogue operators accountable, perhaps more than an ASIC register could.

Everyone has an opinion about the best way for you to handle your finances. The unfortunate truth is that there’s been an obvious advantage for financial advisers to making everything as complicated as possible. The solutions they offer will, by any logic, have some benefit for them. When you can’t be sure whether that cloak of confusion is because the subject matter is complicated or being made complicated, there’s not much you can trust but your own research and gut feeling.

Scott Pape, the Barefoot Investor, has some advice: “Empower yourself to ask good questions. It’s just like being on a first date. You want to know what the motivation is of this person that I’m sitting down with.” It’s good advice, because like a date, advisers might just take the clothes off your back.

The true test will be whether the regulator steps up. For those naysayers who say over-regulation will be the death of the industry, remember that according to ASIC, in 2009 there were approximately 18,000 financial advisers in Australia. As at April 2018, there were 25,386. That’s a 40 per cent growth in the industry. Right in the middle of that period the Future of Financial Advice reforms came in, which were supposedly going to cripple the industry.

The last word goes to former senator John “Wacka” Williams, who leaves a legacy greater than most politicians can aspire to. His focus is squarely on the regulators. “I don’t think we need any more laws, I think we need more severe punishment as a deterrent,” he says. “If they don’t do their job properly: sack them. Simple as that. If in three years we’re seeing an inquiry into ASIC in parliament and they’ve been hopeless again, then put the bloody spear through them, sack them.” Time will tell.

Annelise Nielsen is a political reporter for Sky News. Extracted from Money Spinners: How Australians were fed lies, sold spin and charged money for nothing by banks and financial advisers (Penguin, $32.99)

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