The Australian financial advice and wealth management sector has been hit pretty hard by challenges that are very familiar to professionals around the globe.
These range from decreasing numbers of advisers to the rising cost of professional indemnity (PI) insurance.
But the frequent and rapid regulatory changes over the past couple of years have given Aussie financial planners and wealth managers reason to worry about their place in the sector.
The recent Royal Commission into misconduct in the banking, supperannuation and financial services industry was the cherry on top of a series of reforms bound to drastically transform the country’s financial services landscape.
Good and bad apples alike
“Changes to the compliance regime would stand out as one of the largest challenges that Australian advisers face today,” Brett Evans, managing director, Emea at Atlas Wealth Management, told International Adviser.
“Since the introduction of the Future of Financial Advice (Fofa) reforms in 2012 and with the release of the findings from the Royal Commission, the spotlight has been shone very brightly not only on those advisers who weren’t doing the right thing but all financial advisers in general.
“Advisers are now spending a lot more time on their compliance requirements, which has resulted in a rapid increase in the cost of delivering financial advice.”
Cuts left and right
The increase in compliance costs has even hit the big players in the country, with financial services firm AMP undergoing a drastic restructuring to its businesses.
Michael Ohanessian, chief executive of Praemium Australia, told IA: “AMP announced a significant cut to the number of advisers under its umbrella and is reducing what it pays to retiring planners to buy back their client books by 38%, from four times down to 2.5 times earnings.”
Andrew Waddell, principal at consultancy firm Lahinch Partners, agrees that this is the case for many others as well.
“We have seen a number of the larger and more established players exit or wind back their advice operations and growing provisions for customer remediation,” he told IA.
Back to school
And with industry professionals averaging 57 years of age, even more advisers could be exiting the sector stage left, according to Paul Harding-Davis, chief executive at PHD Management Consulting.
The introduction of higher education requirements by the Financial Adviser Standards and Ethics Authority (Fasea) would see advisers who have been working in the industry for decades have to nearly start from step one to make sure they have the right qualifications in place.
Under the reformed rules, advisers would need to pass three exams and reach increased education standards.
“Older advisers, [aged] 60+, are mostly deciding to pass the exams, not do the additional study and find a succession solution for their practice,” Harding-Davis said.
Separate ways
What does this mean for clients?
Most believe it will lead to higher fees.
“Australian advisers will now be more reluctant to accept smaller clients and will focus their attention on larger clients to make their time more efficient,” Atlas’ Evans said.
But many are hitting the road on their own.
“The Royal Commission caused a seismic shift in the financial services industry,” Evans added.
“You now have the major banks exiting the financial advice industry, and the largest dealer groups are either downscaling their offering or increasing the compliance requirements for the advisers that are working under their license.
“For those advisers and wealth managers who were working for one of the larger banks they are now considering setting up their own financial planning practice.
“The larger firms are now amending their internal rules and regulations to ensure that there are no question marks pertaining to the advice that is being provided under their license, but unfortunately that is being done to the detriment of the practicality of delivering financial advice,” he added.
Next steps
Sadly, not everyone is managing to cope, with many struggling under the pressure.
“The professional associations and some product providers and licensees are putting in place support services and training in mental health,” Harding-Davis revealed.
Praemium’s Ohanessian, however, believes that are a few solutions to the current problems the sector is facing.
“The main challenge for advisers is to increase their time with clients and reduce their time of non-value adding tasks.
“Shifting from wraps to managed accounts and outsourcing investment management is therefore becoming more popular in Australia.
“A tightly controlled selection of investment options can minimise the risk of a single adviser going ‘off piste’ to the disadvantage of a client [and] improves efficiency and scale,” he added.
