Perfect storm: Australia's growing financial advice gap

The increased cost is leading some CPA Australia members, especially those with limited Australian Financial Services (AFS) licences, to hand back their licences.

A perfect storm has the potential to cause Australia to lose thousands of financial advisers, putting the availability and affordability of financial advice at risk just as consumer needs are increasing.

At a glance

  • Factors such as ASIC’s industry funding model and the fallout from the Hayne Royal Commission are putting pressure on financial advisers.
  • Many small businesses are struggling with the changes and regulatory costs, and many lack the capacity to take on new financial advisers.
  • Despite the growing need for financial advice, the costs of seeking it are rising following the royal commission and other changes.

By Zilla Efrat

Keddie Waller, head of public practice at CPA Australia, says many financial advisers are questioning whether they want to remain in the business as a confluence of factors makes it harder for them to operate.

While CPA Australia and other groups have been advocating for change, the government remains focused on implementing the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Firstly, the Financial Adviser Standards and Ethics Authority (FASEA), established in April 2017, requires existing advisers to meet new education standards, complete an exam and adhere to a code of ethics.

According to Adviser Ratings, more than 4000 financial advisers left the sector in 2019, and this has resulted in the lowest number of advisers in Australia since December 2015.

“That’s having an immediate impact on the supply of advisers available to provide advice to consumers and small businesses,” Waller says.

More could leave as the deadline to complete the exam (1 January 2021) approaches.

“Our research found that a third of our members are currently considering giving up one or more of their advisory services, and the number one area was financial planning,” Waller says.

At the same time, the advice industry is being affected by the Australian Securities and Investments Commission’s (ASIC) industry funding model, in which those who ASIC regulates must pay for that regulation.

Waller says the increased cost is leading some CPA Australia members, especially those with limited Australian Financial Services (AFS) licences, to hand back their licences.

“If you are a small business owner and hold a limited licence, you have to pay A$1500 for it annually. Then there’s a fee of A$1142 per representative under that licence. It’s a big cost for a small business, especially when professional indemnity insurance and other costs are also rising because of the sector’s challenges.”

Increasing demand, fewer new entrants

Australia’s larger banks and AMP have been divesting from or exiting the financial planning space following the royal commission.

There is also concern that the sector will gain fewer new entrants.

In addition to having to meet its new education standards, FASEA requires newcomers to complete a year of mentoring under a registered adviser.

“That’s a great idea, but the challenge is that the larger end of town has moved out of the sector, and small businesses are struggling with all the changes and costs coming through. Many small business owners are saying they probably wouldn’t have the capacity to take on new advisers.

“For the first six months, the new adviser can’t provide any advice, and will basically do shadowing and other activities, so you’re investing in someone from whom you are not getting any revenue. Many members can’t afford to do that, and then the person may leave after receiving the mentoring.”

"There's a growing need for advice, but even for those who can access advice, the costs of seeking it are rising following the royal commission and other changes." Keddie Waller, CPA Australia

Only nine new advisers entered the sector in the fourth quarter of 2019.

Waller says this significant change in the sector is happening just as many of Australia’s baby boomers are nearing retirement.

“We also have forced retirement savings, on which people need advice. We also know that financial literacy is a real issue in Australia,” she says.

“There’s a growing need for advice, but even for those who can access advice, the costs of seeking it are rising following the royal commission and other changes. The costs themselves can be a barrier to getting advice.”

Waller says studies found that The Future of Financial Advice (FOFA) reforms, introduced in 2012 to improve the availability of affordable advice, were in clients’ best interests; however, costs continue to rise.

Higher costs, more complexity

There are still more costs to come – for example, the government’s promised compensation scheme of last resort, to be paid for by the financial services industry.

“We worry that we’ll have an advice market that focuses on high net wealth customers or wholesale clients. If you are a wholesale adviser, a lot of the FASEA requirements don’t apply,” Waller says. “There’s a cost disincentive to service lower-end clients who arguably could benefit from advice the most. If things continue, everyday Australians are not going to be able to access affordable advice.”

Waller believes having education standards, a code of ethics and other special requirements are great principles and should be in place, especially for newcomers. However, a major challenge with FASEA’s standards is that they don’t recognise experience and professional development.

“Regardless of the type of advice or how long you have been doing it for, everyone has to meet the same thresholds,” Waller says.

This doesn’t work for Murray Wyatt FCPA, director and chair of Morrows. Wyatt qualified in 1972 and has 47 years of practical experience as an adviser.

In addition to undertaking high-quality continuing professional development and comprehensive dealer group training “with some of the most talented and best-of-breed experts in Australia”, he’s represented the advice sector to government and lectured at university level on tax and associated areas. 

“Basically, I think it’s offensive for them to say go back to school at a graduate level and be trained on ethics,” Wyatt says.

“In my case, they’re saying, go back at a basic level when I don’t do basic work anymore. I am not going to [sit for the exam] because the last thing I want to do on weekends at my age is study.”

Andrew Albury, a director of MGD Wealth in Brisbane, agrees. “As an industry,” he says, “there’s this level of anxiety, tension and pain that I’ve never seen in my career. It is quite debilitating … I’ve been around a long time, but I walked out of the exam deflated because the structure and nature of the exam have nothing to do with real life.”

Albury believes the changes are killing off the specialist. “We have guys in this business who do nothing else but insurance and are very experienced in it. That specialist is forced to do the same exam as everyone else.

One guy with enormous insurance experience walked out of the door. Now our firm doesn’t have that high-level experience anymore. This puts pressure on the whole business. Without him, we won’t be as good.”

“The challenge is that the recommendations are adding extra levels of complexity and could make the problems worse,” Waller concludes.

CPA Australia resource: Information on the ASIC industry funding model and its bearing on AFS licensees. Learn more.

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