Providing useful and effective financial advice is a highly complex process. It assumes that advisers have a strong knowledge of income tax rules and regulations, superannuation, financial markets, behavioural finance, risk management, financial products and services asset allocation and portfolio construction, life and general insurance and estate planning.
Unfortunately, the barriers to entry enabling an individual to be called a financial planner have historically been very low. I can recall some of the banks providing just a six-week training course after which an individual was licensed to provide advice. In the businesses in which I was involved, an individual would not be able to provide unsupervised advice to a client unless they had studied and trained for at least three years and had a relevant university degree.
In the lead up to the royal commission, the Government established the Financial Adviser Standards and Ethics Authority (FASEA) – an industry body tasked to develop and enforce minimum education standards for the financial planning industry. This is long overdue. Sensible minimum standards of education, experience and ongoing training is a vital prerequisite for an industry to transform itself into a profession.
Once the royal commission reports next year and we see the reaction of the government and regulators, some of the more egregious problems may be resolved.
For example, there may be some changes around the problems of vertical integration. A number of the banks have seen the writing on the wall and have already started to unwind their vertical integration business models. ANZ sold its advice businesses to IOOF, CBA has announced the sale of Colonial and NAB the float or sale of MLC.
Much more enforcement effort by the main regulators is highly likely. Both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have been heavily criticised in the royal commission because commissioner Kenneth Hayne QC feels there is enough laws and regulations but not enough enforcement. This is fine but legislation and regulation do not solve the entrenched cultural problems in the industry. These will take many years to wash out of the system as the old school advisers, reluctant to change, are forced out, resign or retire.
Frankly, I am very hopeful about the future of the industry. I believe it can transform itself into a profession as long as it accepts the inevitability of substantial and sometimes painful change. Elements of the status quo are currently railing against the proposed changes, however, their voices will fade into the distance as the manifest need for change overpowers them. The coming changes means there is a strong likelihood there will be a significant loss of older but less qualified advisers over the next three to five years. This will make it harder for clients to obtain advice until this gap is filled. Some estimates indicate that up to 40 percent of existing advisors may leave the industry over the next five years.
Younger advisers coming into the industry are already better qualified academically than the old guard but they lack experience. As the industry has grown and developed there have been numerous specialised academic qualifications emerge to support the skills needed for financial planning. This new generation of advisers are where the industry’s greatest hope lies.
In the meantime, however, Australians still need financial advice. Both political parties are talking about changes to tax and superannuation rules ahead of the next election. Things are not going to get simpler. Getting good advice is more important than ever.