Can financial planning rise again?

Remember when becoming a financial planner was seen as a great career move?

That was quite a while ago now and since then, the industry has flicked the switch from fast growth to shrinkage in very short order.

In many ways the 2018 Hayne Royal Commission marked the turning point – shining a spotlight on plenty of dodgy practices such as charging dead people for financial advice, high fees, trailing commissions, conflicts of interest and not acting in the best interests of clients.

In the process of effectively re-regulating the industry that followed it shrank alarmingly – from 28,000 to 16,000 people – as advisers were forced to get new qualifications and pass exams and provide wads of chunky documents to prove they had acted in the best interests of their clients.

Demand for advice falling due to higher costs

Demand for advice also fell sharply, with people who would have once unwittingly signed up for products with trailing fees proving to be unwilling to instead pay thousands of dollars upfront to get some advice.

Where once the financial advice industry looked set for many years of expansion, instead it has now shrunk so much that only about 10% of Australians are using it – most of them already wealthy.

It is not hard to see why the wealthy are now dominating financial services where once-aspirational people from a wide spectrum of society were using financial advice – data shows that the median annual fee for financial advice hit a record high of $3,710 this year – almost doubling since the time of the Royal Commission.

The lack of affordable and available advice could be costly indeed for the swathes of Baby Boomers who are expected to retire over the next decade.

Levy report could spark big changes

That might all be about to change again after a long-awaited report from Michelle Levy, a partner at law firm Allens who specialises in financial advice was delivered to financial services minister Stephen Jones.

Her report didn’t pull any punches, saying the current system was “not coherent and it is plainly not working.”

Mr Jones doesn’t disagree, having described the state of financial advice regulation as a “hot mess” – however, that was when he was still in opposition.

Now he has a lengthy report in his hands from Ms Levy – one commissioned by the previous Morrison government and which also recommends watering down some of the earlier Labor changes that made up the Future of Financial Advice (FOFA) reforms.

The report also provides a framework to deliver more financial advice to more Australians, including a greater reliance on digital platforms.

Mr Jones will need to walk a very fine line though if he is going to keep everybody happy.

The Levy report recommends doing away with the reams of documents that few people actually read for simpler forms of financial advice and instead to rely on existing consumer law to regulate behaviour.

She thinks allowing financial institutions like super funds, insurers and possibly even banks to provide some personal advice would be a good idea.

Such advice could still be “good’’ without needing the bells and whistles approach of a thorough financial plan that currently requires a lot of money upfront to produce and a mountain of paper as well.

Mixed reaction to reforms

Those recommendations have been broadly welcomed by the financial advice industry but they have not gone over well with consumer groups such as Choice, who are worried about a return to the bad old days of hidden fees, straight out product sales and unsuitable advice.

Choice chief executive officer Alan Kirkland said introducing “such radical and untested changes at a time when global financial markets are unstable will be a disaster”.

So far, the signs are that Mr Jones will tread very carefully in implementing changes and stress test various scenarios, although many superannuation funds are already in advanced planning to increase the array of advice they can give to their members.

He will no doubt consult widely with the industry and his colleagues, particularly about changing the FOFA rule that advisors needed to act in the best interests of customers which is seen as something of a proud Labor Party legacy.

Something certainly needs to be done to fix the unintended problems caused by excessive regulation of the industry which has increased costs and reduced availability but at the same time we don’t want to go back to the bad old days that led to the Hayne Royal Commission in the first place.

The Levy reforms make a distinction between comprehensive advice provided by specialist professionals working with a statutory duty to act in the best interests of the client and what she calls “incidental, simple and limited advice” that can be provided without such intensive safeguards.

Defining that difference and introducing it so that consumer groups and the financial planning and superannuation industries are happy with the result will be one heck of a challenge for Mr Jones and the Albanese Government.