Australia remains one of the most attractive markets globally for investment advice, with nearly $3 trillion in retirement savings potentially available to advisers. Given this opportunity, it begs the question: why is the advice industry in Australia under so much pressure? Allan Gray Australia Chief Operating Officer JD de Lange explores five key themes impacting the advice landscape in Australia.
Constant change driven mostly by regulation, and amplified by lower interest rates, lower returns and fee pressure, has had an adverse effect on the investment advice industry over the last decade. Clients have lost confidence and the industry has been affected negatively.
The current state of the advice industry can be summarised by looking at five key challenges for advisers.
Challenge one – Adviser exodus
Because of the pressures named above, combined with new educational standards and the drop in practice valuations, one-third of advisers surveyed by Wealth Insights in 2020 indicated that they would consider leaving the industry in the next 12 to 24 months. As a result, adviser confidence is at its lowest level since the global financial crisis (GFC). This lack of confidence not only affects current participants, but also keeps new entrants away.
Challenge two – Investor exodus
According to Wealth Insights, 32% of advisers have lost clients as a fallout of the Royal Commission. Of the clients leaving advisers, only about 23% move to other advisers. Clients have been attracted by low-cost offers from industry funds but have also exited the advice industry as a result of the continued negative publicity and the increasing cost of advice. As a result, a number of clients are trying to have a go at it themselves, leading to a boom in low/no cost equity trading platforms. Most advisers expect this attrition to continue for at least the foreseeable future.
Challenge three – Continued fee pressure
As practices have had to move from asset-based fees to fixed fees there has been sudden pressure on the level of fees being charged. This has had an immediate adverse effect on smaller clients for whom the cost of advice has become unaffordable. Nearly 70% of all practices now only charge fixed fees, and 7% charge asset-based fees only. To make advice affordable, advisers have looked to active asset managers to drop their fees and have also invested heavily in passive-style products and ETFs. Advisers are also looking to fintech providers, as well as incumbent platforms, to reduce the costs of producing plans and giving advice.
In addition, advisers have actively tried to increase their revenue through products like managed accounts, which allow the adviser to charge fees for portfolio management. This fee pressure is also resulting in platforms lowering their fees. Many of the large incumbent platforms have repriced over the last 18 months.
Challenge four – Constant change
There are few things that create as much uncertainty and lack of action as constant change. With the advice industry in constant flux, nearly 2,000 advisers have exited the industry over the last two years. This has been driven mainly by the large banks exiting the wealth management industry. There are still some regulations to come through, including the reduction of commissions charged on life insurance products, which could have a material negative impact on the revenue of a large number of practices.
The uncertainty has however created some new opportunities. In the space of a few years we have seen a number of independent asset consultants set up shop to design and manage portfolios for dealer groups. ‘Independent’ dealer groups were also beneficiaries of new advisers, as a result of the exodus out of wealth management by the banks.
Challenge five – The focus on holistic advice
The challenge here is that in the transition to provide holistic advice, advisers and dealer groups have had to do a lot of work on their value propositions as their whole revenue model has changed. In an asset-based fee world, the discussions were more investment-focused and price was a function of assets under management. Today, an advice plan needs a structuring fee and an ongoing management fee – both based on the value proposition offered by the adviser. A new proposal can cost $3,600 or more to deliver, while the annual fee could easily be more than double that, making it obvious that the adviser needs a very clear and quantifiable value proposition.
In summary, I would venture to say that these challenges will ultimately create opportunities for committed advisers and dealer groups with a genuine value proposition, thus better serving client needs and resulting in improved quality of advice. This could be very positive for the advice industry in the long term.
As they say, no pain no gain!