Shrinking financial advice sector in turmoil

Australian Financial Review

2 June 2019

Adele Ferguson – Investigative journalist and columnist

There will be a lot of pain as the industry transitions. But winning back trust doesn’t come cheap.

There are few industries facing as many apocalyptic events as the country’s 24,000-plus financial advisers, who look after billions of dollars of their clients’ money.

There are also few industries grappling with as many trust issues after being at the centre of a string of financial scandals over the past decade, which has prompted a clean-up.

For the newly appointed Financial Services Minister, Jane Hume, it will be a lot to get her head around as she is lobbied from all and sundry.

There are those calling for the current timetable to be extended to meet tougher education requirements and a code monitoring program, those wanting grandfathered commissions to remain as well as the preservation of commissions on life insurance products.

As the sector recalibrates, and some of the bigger players including Westpac and ANZ abandon the sector, she will need to think about how the new Financial Adviser Standards Ethics Authority (FASEA) works. FASEA is an independent body set up by the government in April 2017 after a series of scandals.

According to the current timetable, advisers have to comply with the new FASEA code of ethics from January 2020, code monitoring bodies need to lodge their applications with the corporate regulator by June 30 for the regime to be in place by mid-November and grandfathered commissions come to an end January 2021.

It means some big decisions will need to be made soon.

Against this backdrop, Peter Johnston, executive director of the Association of Independently Owned Financial Professionals, emboldened by the success of mortgage brokers fighting off changes to the industry, is fighting to preserve the status quo.

He is threatening to challenge the grandfathered commission legislation in the High Court when it is passed in the Senate. He told The Australian Financial Review he was looking to raise $3 million under an independent entity called the Adviser Remuneration Challenge (ARC) Fund to mount a legal argument that the changes are unconstitutional.

According to research house IBISWorld, the industry generates about $5 billion a year in revenue and a third of that comes from grandfathered commissions.

Shrinking industry

Since Hayne’s second round of hearings on financial advisers, licensees have been falling like tenpins, sometimes on a weekly basis.

On Friday Freedom Insurance Group became the latest licensee to call it a day. In a statement to the ASX it said it would close its Spectrum Wealth Advisers business. It said it would notify its authorised representatives that it was terminating their agreements and therefore not advisable to write any new business as they would no longer be covered under the agreement.

It follows other high-profile departures, including Aon, which announced last month it was exiting its Aon Hewitt Financial Advice in a management buyout. Westpac announced in March it was abandoning financial advice and before that ANZ sold its advice business to IOOF and Dover Financial pulled the plug on its advice business in June 2018 after its founder collapsed on the stand after a grilling at the Hayne commission. The sudden abandonment left 500 advisers, representing more than 50,000 clients, needing a new home.

Then there are licensees who have had their financial services licence cancelled by the Australian Securities and Investments Commission, including Bristol Street Financial Services, Financial Circle, Jade Capital Partners and Evermore Money Management.

The turbulence has prompted industry speculation that CBA might take a similar scorched-earth approach to Westpac after announcing in March that it had puts its wealth demerger on hold to prioritise the recommendations of the royal commission, including remediating customers.

It has created unprecedented turmoil in the sector as advisers seek a new home. It has also created uncertainty for clients. When a licensee no longer exists and a customer has received poor advice, how will they be remediated?

The loss of trailing commissions, or grandfathered commissions, is one of a series of big events facing the advice sector in the next five years. The second key event is the introduction of compulsory exams for advisers from January 2021, and the third event is making advisers degree-qualified by 2024.

The industry estimates that such transformative events will shrink the industry by a third or even half – equivalent to the loss of between 8000 and 12,000 advisers – by 2024 as some retire, sell up or close down. The shrinkage could even be higher if the banks continue to withdraw funding in this area.

Given the reforms taking place, the market is flooded with advice businesses for sale. According to CountPlus boss Matthew Rowe, three years ago for every one advice firm for sale there were 12 buyers. Now there are eight sellers for every one buyer.

In the past four months the ASX-listed CountPlus made three acquisitions to bolster its network of accounting and advice network as converged accounting and advice firms become more active players in the financial advice sector in Australia. Its plan is to invest in more advice and accounting firms through equity partnership rather than outright ownership.

AMP biggest advice army

On Friday online industry magazine Professional Planner’s Tahn Sharpe and team released its annual list of licensees. It said the largest licensee owner remains AMP with 2412 advisers registered on ASIC’s financial adviser register, losing 143 in 2018 and another 216 in 2017. IOOF jumped to second place with 1802 advisers after bulking up with the transfer of 700 ANZ advisers into its growing army. The third highest is NAB with 1515, followed by CBA with 1414.

After that it gets interesting, with National Tax and Accountants Association ranking fifth with 1021 advisers, followed by Easton Investments with 855, reflecting the trend towards limited licensing arrangements for accountants who offer advice to SMSFs.

According to Professional Planner, the National Tax Accountants Association sole licensee the SMSF Advisers Network had 33 advisers in 2016, compared with 853 in 2018 and 1021 in 2019.

Westpac ranked number seven with 632 advisers and ANZ ranked 10 with 385 advisers, reflecting their extrication from the industry.

But there are other changes taking place, including the emergence of new user pays models for licensees and their authorised representatives, which was previously heavily subsidised by the licensees.

Under the traditional model, largely dominated by vertically integrated operators, namely the banks and AMP, which at one time controlled up to 80 per cent of the financial planning industry, licensees subsidised the costs of authorised representatives in return they sold the licensees financial products.

But as the vertically integrated model loses its dominance, the industry will shift to a user-pays model.

To put it into context, the industry estimates the true cost of authorised representative services are up to $45,000 a year per adviser, plus professional indemnity insurance. It is understood that the average cost being charged under the subsidised model was $12,000 a year per adviser.

In March, listed licensee and advice services firm Centrepoint kicked it off when it flagged a new pricing arrangement for its authorised representatives from July 1. Centrepoint, which is ranked number 11 on the Professional Planner list, will increase the prices it charges to authorised representatives to better reflect the true cost.

Others will follow suit. There will be a lot of pain as the industry transitions. But winning back trust doesn’t come cheap.