Robin Powell – author, journalist, editor of the investing and personal finance blog, ‘The Evidence-Based Investor’
It’s likely to take many years yet for the financial advice profession to regain the trust of the Australian public after the damning findings of the Hayne Royal Commission. The good news, says ROBIN POWELL, is that it finally seems to be turning the corner. But, he warns, you still need to be very cautious when choosing which firm to work with.
Demand for financial advice should be booming. Australia is one of the world’s top five producers of most of the globe’s key mineral commodities. And, according to Credit Suisse, its people are the richest in the world, with median wealth per adult of just under $US240,000.
What’s more, a massive inter-generational wealth transfer is now underway. In a report released late last year, the Productivity Commission, an independent research and advisory body to the government, estimated that between 2002 and 2018 some $1.5 trillion of wealth was transferred through inheritances and gifts. This is only likely to intensify in coming years with the passing of the baby boomer generation.
Yet, for all their comparative wealth, Australians are notoriously unlikely to seek financial advice to manage intergenerational inheritances, turn lump sums into retirement income and navigate volatile financial markets.
In its 2021 Financial Advice Report, one research group estimated that 12.6 million Australians now have unmet advice needs. While nearly a third of adults have indicated they would be interested in financial advice, the most cited disincentive is cost.
Managing without advice is a risk
As someone who believes strongly in the value of good financial advice, I find that report very concerning. Yes, it’s perfectly possible in theory to manage without an adviser, but in practice it’s a risk.
For example, you might think you know about investing, but do you really understand the minutiae of risk management and portfolio construction? Can you keep abreast of all the latest tax changes? And can you really trust yourself to make rational decisions if, for example, markets fall sharply, or experts are warning of a long and deep recession?
Of course, the cost of advice is an important consideration, and there’s no doubt that fees have risen. The median cost of financial advice services in Australia rose by about 8% last year. Much of this relates to the escalating cost of compliance arising from government crackdowns in recent years and to the continuing exodus of mainly older advisers from the industry amid the imposition of higher professional and training standards.
Mark Minchin, Managing Partner of Minchin Moore Private Wealth Advisers, believes that whilst reforms to professionalise the advice industry were long overdue, the new regulatory burdens placed on advisers since the Royal Commission have become excessive and overly mechanical.
“My view,” says Mark, “is that professionals are best bound by codes of conduct, professional standards, and educational requirements — rather than mechanical disclosures and processes which he says some clients don’t read or value.
“Realistically, the new rules have pushed the cost of quality advice out of reach for most Australians.”
“High-net-worth (HNW) investors, on the other hand, remain better placed to leverage advice costs for their benefit, because as costs can be spread over a larger capital amount.”
“On the downside, HNW investors have fewer places to turn if they’re looking for high quality holistic advice. In my experience, the major providers of advice to the HNW segment have shunned the retail advice requirements and drifted toward providing expensive, ‘investment-only’ advice.”
Reasons for optimism
One sign of hope is that the recent change of government in Australia may create an opportunity for a reduction of the regulatory burden on the industry. Stephen Jones, the Financial Services Minister in the incoming Labor government, has promised to fix what he has described as the “hot mess” in the regulation of advice.
Another sign of impending relief is the Quality of Advice review instituted by the previous government. This review, overseen by Treasury and conducted by an industry lawyer, is due to report back by the end of this year on ways to improve the access of Australians to “high quality and affordable” advice.
It’s also encouraging to see that consumer confidence in the value of advice is recovering. A measure of trust in advice last year returned to levels that prevailed before the Commissioner Hayne issued his findings.
So, after all the bad news surrounding the advice profession in recent years, there is a sense of a corner being turned. The demand is there, the will among policymakers for a reduction in regulatory complexity is there, the technology is changing rapidly, and, most of all, people are increasingly looking for advice.
A cautionary tale
There is, however, no room for complacency, and consumers need to stay on their guard. True, the banks have now withdrawn from wealth management, but conflicts of interest remain, as the recent collapse of the once-respected pensions specialist Dixon Advisory reminded us.
Dixon, whose clients were mainly self-managed superannuation funds, had started as a pure retirement advisory firm. But in recent years, under a new generation of the founding family, the company started selling in-house products to clients.
Chief among these was a business that bought up distressed apartments on the US east coast. The US Residential Masters Fund, as it was known, renovated and flipped apartments. Dixon clients not only owned units in the fund, but also the debt and hybrid capital to keep it going.
In 2018, Dixon Advisory merged with broking firm Evans & Partners and listed on the Australian Stock Exchange as Evans Dixon. The entity described its business as providing asset management services and financial advice — particularly to trustees of self-managed super funds.
It was at this point that things started to go wrong. Dixon Advisory clients were strongly encouraged to buy into the initial public offering on an entity that was overly reliant on fees charged by the US property venture. Their retirement nest eggs were in an undiversified, highly leveraged and highly risky property play.
More than 4000 clients, many of them self-funded retirees, subsequently lost control of their savings.
Conflicted business models survive
Dixon Advisory was a classic example of what’s called a vertically integrated business; in other words, Dixon’s advisers were recommending the company’s own products, thereby generating a double layer of fees.
Thankfully, vertical integration has become less dominant than it was, but it certainly hasn’t gone away, and consumers choosing a financial advice firm should particularly look at the company’s ownership structure.
Most of the major financial planning businesses in Australia are majority owned by external third-party shareholders whose overriding priority is to maximise returns. Mark Minchin says this in turn has “made leadership in the industry more mercenary.”
“Mergers and acquisitions,” says Mark, “have been driven by financial engineers looking to squeeze ever higher margins out of financial products through amalgamation and scale. Rarely has the quality of personal advice and client relationships featured.”
“High product costs and the needs of shareholders inflate the cost of the advice value chain, putting pressure on the fees that can be charged for the part of the chain that really matters — the personal advice bit.”
Adviser or salesman?
The key takeaway, then, is to look for a firm that has your best interests at heart. In short, you need an adviser, not a product salesman.
Don’t be afraid to ask difficult questions. For example, How are you paid? Do you receive commission for the funds you recommend? And how do you ensure that clients receive good value for the investment costs that they incur?
Also make sure that the adviser you are considering hiring believes in proper financial planning. “Financial planners,” says Mark Minchin, “invest time in getting to know each client’s situation — understanding their needs, goals and aspirations. This is time consuming, clunky work. It isn’t scalable like the product side of the industry is, so the advisers who truly invest in this aspect are likely to have the right motivations.”
Check as well that it isn’t just portfolio management that the adviser is offering. Ask them, Do you offer tax planning? What about estate planning? Can you help our family to pass wealth smoothly from one generation to the next? Can you devise, and manage, a philanthropy strategy for us?
Finally, if you aren’t convinced that the adviser you’re speaking to is genuinely independent, is thoroughly competent, and works to the highest ethical and professional standards, walk away and find an adviser who is.