Generals and majors

By Alex Burke

I think it’s critical to acknowledge that the way the advice profession is regulated in this country – sandwiched uncomfortably between financial product distribution provisions in the Corporations Act – has played a substantial role in making the cost of advice prohibitive for many Australians.

Yesterday, Iress and Deloitte Access Economics released the Advice in 2030: The Big Shift report.?

I won’t go into all the details in this article – you can read our synopsis here, or download the full report here if you’re logged into your Advisely account – but I do want to discuss one of the headline figures. By 2030, the report says, advisers can expect an influx of around 486,000 new clients.

That's the conservative estimate, by the way; it doesn't include the ever-elusive 11-12 million Australians who might benefit from financial advice if only they were willing (or able) to pay for it. But those 486,000 clients alone would contribute an additional $2.1 billion in revenue, assuming – and here's the important part – the advice sector can scale in proportion to the increased customer demand.

Going by current ASIC numbers, that works out to around 31 extra clients per adviser. I rounded down, obviously, as I figure even the constituents of a substantially larger advice industry probably wouldn't have time to serve a pair of legs, or the weight of regret, or whatever else you'd classify as a third of a person.

It wouldn't surprise me, though, if that number seems like a daunting prospect to many advice professionals reading this. While some advisers (like Mat Tenison) are actively pursuing a generalist, “financial GP”-style strategy, the majority (Anne Graham among them) appear to be going in the exact opposite direction; they’re focused on keeping clients at a manageable level and being highly selective to ensure maximum compatibility with their existing processes and areas of specialisation.

This is because, as I’m sure you’re aware, providing retail financial advice is pretty expensive. As the report explains, the average client is charged around $4,250 per annum for ongoing advice – some respondents indicated they could reduce their current rates by 28-30% and remain profitable, but even that price point is well above the $800 most Australians are willing to pay.?

That disparity was, of course, the foundation of the Quality of Advice Review. The report notes that consumers “may turn to other forms of financial advice” – elsewhere referring to super funds and robo-advisers as key competitors – if current advisers don’t “reassess their business models to ensure they can reach as many potential clients as possible.”

The research discusses some of the levers advice businesses can pull to reduce per-client overheads; potential solutions involve workflow automation, restructuring existing fee models and “digital-first” client acquisition. Again,?you’ll need to read the full report to find out exactly what’s being proposed, but the overall message is this: the next five years will present an increasingly diverse set of client needs and preferences for advisers to accommodate, and the industry will need to adjust its service and pricing models accordingly.?

Apropos of nothing, let’s talk about Dixon Advisory.?

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The squeeze

The last time I wrote about Dixon, it was with reference to the estimated $18.6 million the advice industry would be billed to fund the CSLR. Actuarial firm Finity Consulting attributed most of this figure to Dixon-related complaints, noting at the time "outgoing scenarios" for the advice sector could result in costs ranging from $11.5 million to $39.4 million.

Since then, Dixon was expelled from AFCA – two years after going into voluntary administration, mind you – and the total number of complainants, who might subsequently lodge successful complaints with the CSLR, was capped at 2,773.?

In a statement, FAAA CEO Sarah Abood noted that while this is “less than the administrator’s estimate of 4,606 investors whose losses in the US Masters Residential Property Fund made them potential creditors, this is still a huge number of complaints that will likely take years to process.”

She added that a public inquiry into the Dixon collapse was warranted given that, among other things, “estimates suggest financial advisers could be forced to pick up as much as $135 million of claims related to Dixon Advisory, whilst the parent company, E&P Financial Group, has settled its class action for around four cents in the dollar, while continuing to operate and advise many of the affected clients.”

While we’ve discussed this extensively on Advisely, I think it’s worth reiterating why Dixon casts such a long shadow over the advice profession. There are reputational considerations, obviously – for example, I doubt Super Members Council CEO Misha Schubert was unaware of Dixon’s SMSF clients when she referenced “dodgy financial advisers” using “clickbait” to get members to switch super funds ahead of a recent advice policy debate.?

The more material concern, though, is that the law treats all advice businesses – regardless of fee model, area of specialisation or proximity to an ASX-listed wealth management firm like E&P Financial Group – as essentially one in the same. And in the case of the CSLR, advisers are on the hook for the bulk of industry funding precisely because managed investment schemes (such as the E&P-owned one Dixon clients were rolled into) are excluded from the scheme’s remit.?

The CSLR's funding model inherits its industry sub-sector definitions from the the regulations made under the ASIC Supervisory Cost Recovery Levy Act 2017. And those sub-sectors are categorised primarily by the scope of financial products an AFSL is authorised to provide advice on; in turn, those financial products are defined within Chapter 7 of the Corps Act.?

This chapter – this "old cupboard," as it was described by the Australian Law Reform Commission last year – is the basis upon which an entire profession must guide its clients towards reaching their goals and achieving financial security.?

The road to 2030

Why am I bringing all this up? I think it’s critical to acknowledge that the way the advice profession is regulated in this country – sandwiched uncomfortably between financial product distribution provisions in the Corporations Act – has played a substantial role in making the cost of advice prohibitive for many Australians.?

Returning to the Advice in 2030 report, the research portrays an emerging client base with concerns ranging from the inherently long-term and complex, like intergenerational wealth transfer, to more straightforward ones like the acquisition of digital assets – which, it’s worth noting, currently sit in a sort of regulatory penumbra as most exist outside of the set definition of a "financial product".?

The report discusses multiple external factors (seven of them, in fact) that will influence the advice future clients will be looking to receive, regardless of how neatly they can be stuffed into a legislative cupboard built over 20 years ago. These consumers, the report makes clear, have an urgent need for advice.

I would argue they also require a policy framework that allows them to get it.?

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