The advice and investment week in focus - 21st November

1) Financial advice industries aren't analogous in different regions, with different regulatory systems and market conditions shaping the way that operate within the services ecosystem. But they does share similar levels of demand, with most developed nations in the midst of a sea of change as wealthy boomers transition to retirement and the greatest multi-generational transfer of wealth in history begins in earnest. As demand is growing, and the importance of financial advice is increasing, so are consumer trust levels. At home, the Financial Advice Association of Australia last month revealed that trust in advisers was "at an all-time high", with the FAAA's 2024 Value of Advice Consumer Report, released in early October, revealing that 94 per cent of financial advice clients trusted their financial adviser to act in their best interests. This came after research group CoreData reported in September that trust scores in Australian financial planners had climbed back up to their pre-Hayne Royal Commission level of 55 per cent, after falling all the way to 35 per cent in the commission's aftermath. Australia is not alone in having trust levels increasing. According to consultancy group Cerulli Associates, trust in US financial advice is also reaching historic levels. Cerulli reports that in 2014 only 39 per cent of "affluent" investors agreed with the statement: “I trust that financial services firms are looking out for my best interests.” Asked the same question in the middle of 2024, and that figure had increased to 60 per cent. In the UK, financial services regulator the Financial Conduct Authority (FCA) report has been charting consumer trust in financial advice since the retail distribution review (RDR), which 12 years ago introduced education standards for advisers and curbed commissions.

2) With the Hayne Royal Commission fading from recent memory, demand for financial advice at an all-time premium and the country's burgeoning superannuation system ensuring it will stay that way for a long time, there is plenty of evidence to show that the future of the advice industry looks sound. The tailwinds behind financial advice are plentiful. Add to them the prospect of regulatory reform via the Delivering Better Financial Outcomes Bill, and you get an industry that's likely entering an era of growth after a dour half-decade that saw adviser numbers drop to their lowest ebb. A recent study from Colonial First State highlighted the growing confidence advice practice principals now have in their ability to grow the business, as well as the factors they believe they need to overcome to achieve that growth. The study, which CFS conducted in partnership with independent research firm Empower Business Advisory, found that advisers manage an average of 110 clients each, but believe they can handle (on average) 152 clients each. That ambition, however, is conditional upon several obstacles being overcome, with two thirds of the 300 advisers surveyed identifying the hurdles they need to pass before they can reach their profitability potential.

3) ASIC will stage a working group made up of consumer advocates, business leaders and industry groups to tackle the "dizzying web" of complexity in Australia's regulatory system after chair Longo highlighted the need for more efficient and effective management of the law.

With candour that has become a trademark (for a regulatory executive), Longo delivered a speech at ASIC's recent Annual Forum challenging his own professional ecosystem to ask whether the current framework is working, and what can be done to improve it. "We don't do simplicity well in Australia," Longo said. The chair highlighted recent findings from the Australian Law Reform Commission's seven-year probe into complexity within financial services legislation, which delivered a withering final report into the state of the Corporations Act in January. To that end, ASIC's new Simplification Consultative Group will specifically identify how ASIC can more efficiently and effectively administering the law. "The fundamental approach of this group will be to listen to consumers, investors, and industry and challenge us to simplify and streamline how these issues are addressed," Longo said. "They will do this by leveraging the existing consultative panels ASIC runs, and inviting additional participation of groups, all with an urgent focus on establishing the key priorities that we can help address.”

4) For stakeholders in the responsible investment sector, there's good news and bad news. Returns for responsible investment products have never been better, which has contributed to a marked decrease in the percentage of investors that worry about performance according to new research from the Responsible Investment Association Australasia (RIAA). The good news is worthy of highlighting for providers of responsible investment products; the hurdle they've always needed clients to overcome has been the perception that products forged around ethical, social and governance pillars will tend to underperform the market. Broadly, this narrative has been a false one for several years now. Not only do ESG-themed investments benefit from lower risk due to the standards they uphold, but the investments they tend to make – things like energy transition, biotech and information technology – have become incrementally further entrenched in the mainstream and more reliable generators of alpha. As part of this growth, RIAA says, specific verticals within responsible investment are emerging as leading investment areas. "Clean energy remains a leading impact theme, attracting 53 per cent more funding than climate change mitigation," RIAA says. "Together, clean energy and climate change mitigation account for $5.13 billion in AUM, representing 71 per cent of the total AUM for impact investment products/funds, such as financial inclusion, quality jobs, and access to quality healthcare."

5) The outperformance of market heavyweights, such as the banks domestically and big technology stocks internationally, is still making life difficult for active managers, with research showing most of these funds (54 per cent) across all Australian categories underperformed their assigned benchmarks in the six months to June 30, 2024. As highlighted in the S&P Indices versus Active (SPIVA) scorecard, the first half of 2024 proved to be a particularly challenging market environment for active managers across developed equity markets as the outperformance of the largest companies resulted in a high proportion of index constituents underperforming their benchmarks. In Australia, 72 per cent of actively managed global equity general funds trailed the S&P World Index’s total return of 14.9 per cent, posting an asset-weighted average return of 11.8 per cent as measured in Australian dollars. Sue Lee, S&P Global’s Asia-Pacific head of index investment strategy, said Australian domestic equity funds had relatively better results, with the country’s equity market setting the bar significantly lower with a 4.2 per cent return for the S&P/ASX 200. “A slim minority (48 per cent) of Australian equity general funds underperformed the S&P/ASX 200, while less than one-third (32 per cent) of Australian equity mid and small-cap funds underperformed the S&P/ASX Mid-Small Index (3.1 per cent).