The irony should not be lost on anyone. Although the royal commission might achieve its goal of overhauling a malevolent financial services sector, it will also mean many people who previously got personalised financial advice will no longer find this is a viable option.
The reason for this unintended outcome is quite simple. The cost of financial advice in Australia is set to rise because the royal commission’s recommendations will come with a high price tag.
The need to meet tougher compliance standards as the regulators become more interventionist and the likely increase in professional indemnity insurance are just two factors that will push up the cost of advice.
On the supply side, many advisers, especially those nearing retirement age, may choose to leave the industry (up to 30 per cent has been suggested), particularly with many having to meet higher educational standards under the guidelines being devised by the Financial Adviser Standards and Ethics Authority (FASEA).
Post the royal commission, some advice firms will opt to own an Australian Financial Services Licence (AFSL). While that brings advantages, such as providing full autonomy over the business, it also comes at a cost that will ultimately be borne by the client.
It’s not just the cost of the licence. Firms opting to go down the AFSL path will have to devote significant resources to governance and client management, including data management, audit, and technology and platforms.
For those not wanting to own an AFSL, the dealer group model is likely to be a popular choice. But the model will be a far cry from the institutional dealer groups that could subsidise their fees with product sales. Instead, the new dealer groups, most likely to be adviser-owned, will have to absorb the cost of platforms and product and that will ultimately flow through to the client.
So, our crystal ball shows a future where there are less advisers and a higher cost of advice.
At the same time, we know more people need assistance with their wealth management. Research shows that about 85 per cent of Australians don’t get any form of financial advice. Perhaps more significantly, the majority of the 1.1 million self-managed super fund (SMSF) members, who, on average, have superannuation balances of about $1.2 million, don’t get advice.
In this environment, the growing appeal of robo-advice is perfectly understandable. It provides a solution for the many investors who need assistance but don’t want to incur the high fee structure of a financial adviser. It offers efficiency, convenience, affordability and is totally engaging.
It’s not just the many people with modest investment amounts for whom this will be attractive; even people with a singular objective, such as how to save for their first home, will take advantage of it.
In a recent piece of research, Sydney-based strategy consulting firm Thinque surveyed more than 1,000 adults, discovering that 30 per cent were prepared to trust their money to robo-advice. It’s a finding that not only doesn’t surprise us, especially following the royal commission’s revelations, but one we would expect to see grow strongly as the efficiency, convenience, affordability and engagement of robo-advice becomes more widely understood.
Graeme Brant, senior executive – strategic partnerships, Quantifeed
ASIC has stated what ongoing service means and it’s a product switch in a RoA or hold…. and when to hand back fees. We also are moving to an annual opt in. These all require set time frames. You can’t operate in a mass market space and not have clients that are going to be actively engaged and meet legislative time frames.
If you have 500 clients under the above conditions there’s a good chance you’ll be handing back money. You can’t operate a business like that. Imagine if the Gym owner at the end of the year had to hand back money for every client that didn’t attend weekly Gym sessions. The Gym owner would move to a more personalized service with smaller committed numbers paying more and that’s what’s happened in financial planning in the last several years.
Any rational business owner running an advice practice will be strongly considering pulling out for a few years – until more efficient operating models emerge (including regulation and good software) and/or customers accept the cost and value of advice en mass.
None of those things look likely for the next 2 years.
I estimate the cost of giving compliant advice is now $5,000 per client and an extremely dangerous game to be in. Mum and Dad customers will tolerate $500. That’s a $4,500 loss per customer, plus you’re carrying extraordinary business risk. The banks aren’t stupid by pulling out.
Scaled advice (including robo-advice) doesn’t match the fact that clients are extremely heterogeneous. Far more so than entrepreneurs and software developers realise. These tools have a LONG LONG way to go before they can solve the problem.
it’s a relationship business not a relationship with a robot business. The AI must be pretty good to understand human emotions..
As a Fin-tech developer, solutions are being developed all the time. These solutions will allow Financial Advisers to service more clients more efficiently. From my research consumers want to have an adviser ‘hold their hand’. I don’t think it will be long before advisers are providing online scaled advice to the mass market. Those that stay will flourish.
It’s OK. Their super funds will look after them. They even seem to be able to go from accumulation to pension with some funds and not require a fact-find, risk profile, advice document, OSA, an annual FDS or to opt-in. How can an adviser compete with a call centre operator under these circumstances?
I can remember Charles Swabb did start up a robo advice business in the US and when the Market crashed at the GFC the funds robo adviced into the platforms roared out of it.
Clients who had advises stayed in the market and were rewarded.
When the Market goes South and the Robo advice is to sell then who will the client sue for the losses??
It is an interesting thought and it seems to be following along the crypto currency path.
What do you mean by “trust their money to robo-advice”?
I think if you drill further into this people kind of like the idea but, when they go to use it they run a mile as they don’t know what the tool does nor even what advice they want.