In this guide
Financial advisers are supposed to act in the best interests of their clients. That’s not a vain hope or fluffy belief, it’s enshrined in law.
Confidence in financial advisers fell to all-time lows in the wake of the Hayne Royal Commission, which unearthed serious financial misconduct. Most notably, fees for no service and advice that left clients worse off.
Then COVID-19 hit, followed by cost-of-living pressures, market volatility and the tail end of the Baby Boomer cohort moving into retirement. All up, it’s been a game changer for advisers and their clients.
Demand for advice is growing
The most recent Financial Advice Report, Investment Trends, found 11.8 million Australians had unmet advice needs. The main areas people said they would like advice on were investment strategy, longevity risk (outliving their super and other investments) and growing their super.
The main barrier to getting the advice people said they needed was cost. The most that people said they were prepared to pay for advice, on average, was $580. Although this amount increased to $800 for help in starting a retirement income stream.
Compare this with the average annual cost of advice of $5,500, up 17% in one year according to the Investment Trends 2024 Adviser Business Models Report, and there’s clearly a huge unmet demand for financial advice in the community.
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There are several reasons for the rising cost of advice, from higher professional training standards and compliance red tape to falling adviser numbers, down 47% to 15,600 in the past six years.
Ongoing reforms
There is general agreement that good financial advice should be affordable, tailored to your individual needs and not focused on product sales, and delivered by qualified, experienced professionals.
The Future of Financial Advice (FOFA) reforms got the ball rolling in 2013, prohibiting certain types of conflict of interest in the financial advice industry. This includes conflicted remuneration, such as the payment of commissions for selling certain products and volume-based payments.
Over the last few years, new professional, ethical and educational standards have been introduced. Professional advisers must complete financial planning degrees, pass a national standard exam, complete a professional year, adhere to a national code of ethics and complete 40 hours of continuing professional development.
Advisers are also now obliged to provide annual fee disclosure statements to clients and invite clients to opt in to ongoing fee arrangements every two years.
Lack of transparency regarding fees and ongoing fees for no service were major issues highlighted in the Hayne Royal Commission, while the government’s Quality of Advice review (QAR) focused on improving access to reliable and affordable financial advice.
In December 2023, the Albanese Government released its final response to the QAR as part of its Delivering Better Financial Outcomes package. Some reforms have already been implemented, while others are awaiting legislation.
Reforms include:
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Find out more- Updating the ‘best interests’ duty
- Simplified statements of advice
- A new category of ‘Qualified advisers’ for advice on simpler financial matters
- Clarifying what advice super funds can provide to members
- Clarifying the fee structure
- Streamlining financial advisers’ fee consent and renewal requirements.
Despite these significant reforms, some advisers continue to offer conflicted advice.
Entrenched conflicts of interest
The financial industry regulator, the Australian Securities and Investments Commission (ASIC), conducts regular reviews of financial advisers. An ongoing issue of concern is financial advisers licensed by big financial institutions placing most of their clients’ money in approved in-house products.
Most institutions have specialist teams to research and approve products for their advisers, to save them time and compliance worries.
However, these approved product lists can act as a barrier to advisers considering and approving clients’ existing products. Even if an adviser is not actively prevented from recommending an existing product not on their approved list. The time-consuming bureaucratic hoops they must jump through to prove the product is in their client’s best interest may be enough to dissuade them from considering it.
Examples of bad advice
ASIC frequently provides updates on bad or illegal advice practices, some of which result in prosecution and/or bans on providing financial advice.
Some recent examples are:
How to avoid the risks
So how can you protect yourself and get the most out of your adviser?
It starts by knowing what you are entitled to expect from a financial adviser.
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Under the Corporations Act, advisers are legally required:
- To act in the best interests of their client
- To provide appropriate advice
- To give priority to the interests of the client if there is a conflict of interest.
It’s not enough for advisers to pay lip service to their best interest duty. It requires documented processes and actions that clearly demonstrate they have acted in the best interests of their client. Unfortunately, that doesn’t always happen despite significant and ongoing reforms.
You can also avoid some of the risks of conflicted advice like the examples above, especially where the adviser is aligned with a product provider, by asking questions.
For example:
- Are the products being recommended in-house products?
- Can you offer advice on my existing products?
- Can you give me a breakdown of fees?
- Can you give me evidence that I will be better off switching out of my existing products to new ones recommended by you?
The benefits of good advice
Enough on the risks. Despite some bad behaviour in the financial advice industry, a good financial adviser can be enormously beneficial.
There is plenty of research showing the advantages of advice. For example, in a report for the Financial Services Council (FSC) entitled Future of Advice, Rice Warner cited research showing people who get advice accumulate 3.9 times more assets after 15 years than those who make their own decisions.
Appropriate advice that takes all your relevant personal circumstances into account can help you:
- Set and prioritise your financial goals
- Learn how to manage cash flow and start a savings and investment plan
- Put in place strategies to build wealth
- Learn the difference between good and bad debt
- Protect your assets and income with appropriate insurance cover
- Get any government assistance you are entitled to
- Make sure your assets end up in the right hands when you die
- Avoid expensive mistakes.
Timely advice counts
Professional financial advice can be particularly helpful at key points in your life. People typically think about getting advice when they are approaching retirement, with all the planning that entails. But strategic advice earlier in life could potentially make a big difference to your financial health.
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Find out moreTimes when it could be worth seeking financial advice include:
- Buying a home
- Starting an investment portfolio
- Starting a family
- Receiving an inheritance or other windfall
- Being made redundant
- Approaching retirement
- Entering aged care.
Financial advice doesn’t have to be ongoing or expensive. You can seek advice for a single issue and pay a one-off fee for the service. You may also be able to get low or no-cost advice from your super fund. Increasingly, super funds are offering comprehensive, personal advice at competitive rates.
The intangible value of advice
It seems the Beatles were on the money when they sang Money Can’t Buy Me Love. But as a 2024 study conducted for the Financial Advice Association Australia (FAAA) discovered, professional advice that helps you make the most of your finances can improve your quality of life.
Seven out of 10 advised clients said advice improved their quality of life. Notably, 80% were less worried about money, 83% felt they could cope better with health issues, and 49% said advice positively impacted their family life.
Research has consistently found that people who are advised tend to have:
- Greater levels of happiness
- More peace of mind
- Improved relationships due to the alleviation of financial stress (money is one of the top three causes of divorce in Australia)
- Better health.
If you do choose to seek out financial advice rather than go it alone, it is still important to educate yourself about money, investing and super. You also need to stay well-informed about financial markets, economic trends and investment issues. That way, you can assess the advice you are being given, know what questions to ask and sniff out any conflicts of interest.
If you have found your way to SuperGuide you are already doing just that.
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