A culture of risk aversion and ridiculously high compliance requirements have made personal financial advice so much harder than it needs to be.
“There's a tremendous bias against taking risks - everyone is trying to optimise their ass-covering."
This quote from Tesla founder Elon Musk epitomises the financial advice industry.
Don’t get me wrong, I’m not saying it hasn’t achieved the desired outcome. It has made financial institutions the darling of the Western world economy, and its advisers, agents and representatives well remunerated for their work.
But, I believe what was once used as a way to corner the market behind ‘regulation’ will now be its demise. Why? The arguments for being an adviser are getting thinner every day. Let me explain.
You wouldn't find many financial advisers who would disagree with me when I say giving good advice is harder than it needs to be. The financial advice industry is insanely over regulated - and the responsibility to uphold these regulations is ultimately placed at the feet of the adviser. Governments issue new laws, which are then interpreted by ASIC, who scare the dealer groups into creating a Frankenstein’s monster of the original intention.
Ultimately, the adviser is left with additional requirements that don't fit what the government set out to do in the first place. But, I’m not telling you anything you don’t know here.
FOFA has changed a lot. A simple law came in that said no commissions from new investment products. That fixed 50 per cent of the issues right there. And theoretically, it should have reduced the compliance burden by 50 per cent. But it didn't. In fact, there were additional compliance requirements. Neither to the benefit of the adviser or the client.
So what’s the issue here, what are the results, and what does it mean for financial advisers?
The issue is not unique. We’ve seen the battle between regulation and capitalism unfold repeatedly. But when FOFA came around, capitalism was delivered somewhat of a critical blow. Not enough to immediately kill financial advice as we know it, but enough for everyone to look around and say ‘the tides are changing’.
This change equates to no commissions from new investment products. Let that sink in. The bedrock of financial advice remuneration was cut off. Not entirely, most of the existing products will retain their commission status, but it’s now impossible to grow that part of the business. As I said, critical, but not enough to immediately kill.
Now the government is looking at insurance commissions. You know it, I know it, everyone knows it – they’re gone. Not today, not next year, but they are gone. And at that stage, the era of commissions would have ended.
None of this is new information. The writing has been on the wall for some time, and as a result many advisers have started becoming comfortable with charging fees directly to the client’s bank account. So all future remuneration being earned with no connection to a financial product at all. With commissions dying I see this becoming more and more the norm.
But then – and here is why I left financial advice – what’s the point in being an adviser? Once you are completely weaned off the commission teat so to speak – why put up with SoA’s, APL’s and every other three letter acronym advisers get berated over the head with every day? Financial advisers jump through a million hoops to give advice, but those hoops exist because of commissions from financial products.
Scott Pape, the Barefoot Investor, has created a fantastic business for himself without giving personal advice (though even he has an FSG). I’m not suggesting everyone has to create a multimillion-dollar financial education business – but he’s proof there is a market for it.
The term financial advice sits on the same trust spectrum as a politician. Compliance is going up. Commissions are drying up. Automation is knocking at the door. And the most searched term on YouTube is now ‘how to’. People don’t want things done for them anymore – they want to become more competent people. They want to learn. They want to improve. They want to feel self-reliant.
But people will still need help with their money. YouTube can only provide so much information. Silicon Valley failed at its first attempt to take over. And robots just aren’t as friendly as a familiar face. So what do I see for financial advisers over the next 10 years?
Big changes. And with each change, the less appealing it will be to work under the current compliance regime. I’m not saying what advisers do isn’t valuable – I know it is. What I’m saying is how that value is delivered needs to change. Either compliance backs off as conflicts and commissions subside, or expect more advisers to follow the same path I did and move out of the position all together.
Clayton Daniel is the author of Fund Your Ideal Lifestyle and a former financial adviser
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