Why financial advice is so expensive
Simplifying financial advice regulations will be key in making it more accessible to everyday Australians – but at what cost?
There are roughly 16,000 financial advisers in Australia, compared to a working age population of 16.9 million. That’s less than one adviser for every 1,000 workers.
And financial adviser numbers are in decline – more than 13,500 have left the profession in the past five years. At the same time, Australia is bringing in more overseas workers to address a national shortage of workers.
Financial adviser numbers have fallen sharply in recent years. Picture: AP
There are simply not enough financial advisers to go around. But it’s not just accessibility presenting a barrier to advice. Affordability is the other issue.
Adviser Ratings’ latest Adviser Landscape Report shows median advice fees have surged by 40% since 2018, with a median advice fee of $3,529. Ongoing advice is even more lucrative, and firms are selecting higher-net-worth clients in order to remain profitable, the report says.
At a media event last week, I listened to a speech by Michelle Levy, a partner at international law firm Allens who for the past year has been leading an independent review into financial advice regulation.
Her key message was the need for simplicity – reducing red tape and excessive paperwork requirements, which are partially why advice is difficult to get and expensive, she says.
Reflecting on my own experience with financial advice, it was exciting to hear her hint that simple questions around superannuation, insurance or banking could be answered with my personal situation in mind – without the need to fork out thousands of dollars.
This can be a question as simple as, “should I put my savings in a term deposit or top up my super”. Sometimes, people just want validation that they’re doing the right thing.
But at what cost would these changes come?
Reactions have been mixed – industry groups have welcomed the recommendations, while consumer groups warn they’ll expose consumers to ‘unacceptable risk’.
Quality of Advice Review: The crux of it
This week, the government released Levy's final report – a 276-page document with 22 recommendations.
Some of the key recommendations were to:
- Remove the need for lengthy statement of advice statements, which can be hundreds of pages long, instead recommending financial advisers take notes of the advice provided.
- Broaden the definition of personal advice, and make it 'easier’ for banks, super funds and insurers to provide personal advice; and
- That these providers be subject to a ‘good advice duty’.
Levy says she chose the term ‘good advice’ because it describes what consumers want and what the law should require.
“Good advice does not mean ‘okay advice’ or ‘good enough’ advice – it means what it says,” Levy says.
“It is unlikely to be good advice to recommend a poorly performing superannuation product. It will not be good advice to recommend that a person who is unable to pay their mortgage open a term deposit and it will not be good advice to recommend a life insurance product that does not provide the protection the customer needs.”
What it means for investors
The government will now undertake a review, of the review. Meaning we won’t know whether any of the 22 recommendations will be implemented for a while.
What it has highlighted is the complexity of the industry has made it more expensive and difficult to get personalised financial advice.
But there’s another level to this – and that’s independent financial advice.
The Profession of Independent Financial Advisers (PIFA) says a decade ago, 85% of Australia’s financial planners were paid by commission or asset fees, meaning they earn money based on the products they recommend. In today’s terms, that would equate to just 2,400 of the 16,000 advisers nationwide being independent.
When seeking out financial advice myself, independence was a key criteria. I also wanted one-off advice, rather than ongoing.
Having worked as a financial journalist for 11 years, and undertaken a mortgage broking course, I felt like I was on the right path with my finances. But I wanted this confirmed. And here, is where the lengthy statement of advice was a major consideration.
I could pay upwards of $3,000 to an adviser to tell me what I was doing was correct, or to offer modest changes. Or, I could pay a $300 fee to get general advice by an independent financial adviser on a range of topics that I had questions about.
I opted for the latter, even though my personal situation wouldn't be considered.
Perhaps this is an option not many people are aware of. It was useful and answered some general questions I had around taxes, the best options when investing for (future) children, and the tradeoffs between contributing more to super vs. investing outside of super. But the general nature meant that ultimately I had to draw my own conclusions.
The Levy review seeks to change this, so that any financial product advice would be considered personal advice - rather than general advice - if the provider of advice has information about the client's financial situation or objectives.
At the end of the day, people need financial advice for different reasons.
Morningstar’s Mark LaMonica, who has recorded countless podcast episodes and webinars on this topic says there’s a few key things to think about as an investor.
“The first thing to think about is what type of financial advice do you need,” he says.
“So maybe you need comprehensive advice if you have a very complex financial situation. Or maybe you just need episodic advice… like you receive an inheritance, perhaps if you're transitioning to retirement, those can be opportunities to go out and get advice at a certain point in time.”
“And many people just need a plan that they can stick to over the long term.”
But importantly, it also comes down to you and your own financial literacy.
“And so what I would say for most investors is to take the time to continue to learn more.”
Luckily, we have a myriad of free resources here at Morningstar.