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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 hit, followed by rising interest rates and a cost-of-living crisis and it’s been a gamechanger for advisers and their clients.
Demand for advice is growing
The 2022 Investment Trends Financial Advice Report found 91% of Australian adults have concerns about their finances, with rising inflation front of mind (58%, up from 42% in 2021). Yet there appears to be a reluctance to seek advice, with an estimated 12.4 million people reporting unmet advice needs.
The report found the advice gap was widest among younger adults. While 81% of those aged 18–34 indicated they had unmet advice needs, only 18% had sought advice in the previous 12 months.
Significantly, while many super fund members said they were open to seeking advice from their fund, they were often unaware of services available.
On a more positive note, new clients outnumbered those leaving their adviser for the first time in three years. Even so, growing numbers are considering stopping or switching advisers, citing unhelpfulness (31%), unclear fees (27%) and slow responsiveness (28%).
Clearly there is growing recognition of the value good financial advice can provide, and a willingness among existing clients to walk if an adviser fails to meet their expectations. 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.
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 reforms over the past decade.
The Future of Financial Advice (FOFA) reforms introduced in 2013 prohibited 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.
Financial advisers are also required to increase their professional, ethical and educational standards under an amendment to the Corporations Act in 2017, which comes into effect between January 2019 and 2024.
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.
A lack of transparency around fees and ongoing fees for no service were major themes of the Hayne Royal Commission, while access to reliable and affordable financial advice was the focus of the government’s Quality of Advice review.
In June 2023, the Albanese Government announced it will adopt 14 of the Quality of Advice review’s 22 recommendations in full or in principle, with legislation expected in late 2023 or early 2024.
Despite these significant reforms, some many advisers continue to offer conflicted advice. This is due in part to the vertically integrated business model that is prevalent in the industry.
The risks of vertical integration
Vertical integration is the business model where two or more different stages of production are combined. This model was enthusiastically adopted by our big banks and financial institutions who not only produce financial products such as managed funds and superannuation platforms but also offer financial advice.
There are obvious benefits for the institutions, which can use their advice arms as a channel to sell their products, although their obligation to act in the best interests of their clients is meant to address any conflict of interest.
There can also be benefits for clients. Vertical integration produces economies of scale that, theoretically, should produce cost savings for the banks and their clients. Some people may also be attracted to the convenience of a one-stop shop and the perceived safety offered by doing business with a large, well-known brand.
As the Royal Commission heard, this perception of safety and cost effectiveness is not always the reality.
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 even considering it.
Examples of bad advice
In a 2018 surveillance report, ASIC provided two case studies from the client files it reviewed that demonstrate the conflicted nature of some of the advice being given.
Unfortunately, similar examples still occur.
How to avoid the risks
You can 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.
- 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 of 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 its 2020 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.
Times 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.
Rice Warner estimated the dollar increase in wealth at retirement from taking advice at age 25, 40 and 50. As you can see in the table below, which shows the benefit of savings advice only and savings plus investment advice at different ages, it pays to seek advice well before retirement.
Total wealth at retirement, age-based scenarios for various levels of advice
Financial advice doesn’t have to be ongoing. You can seek advice for a single issue and pay a one-off fee for service. You may also be able to get low or no-cost advice from you super fund.
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 2022 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.
While the key benefit advised Australians received from their financial adviser was greater confidence in having a comfortable retirement (47%), one third reported improved general wellbeing. And two-in-five believe professional advice has benefitted their family life (41%) and mental health (44%).
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.