Skyrocketing fees and red tape push financial planning out of reach

Financial planning has gone through a massive change over recent years and not all of it has been for the good.

The biggest changes resulted from the Banking Royal Commission and the resulting increase in unnecessary red tape, in the form of masses of documents that nobody reads, and in much higher fees.

Those higher fees have effectively changed financial planning from something that was available to a large swathe of the population to what is now so expensive that it only applies to wealthier clients.

There were certainly faults with the old model – mainly the trailing fees that enabled greater client access but which were too high and opaque – but it is still the case that a good financial planner can arguably have a greater long-term impact for families of more modest means.

Planning ranks thinning out dramatically

It is important to note that these changes have not really resulted from the financial planners themselves – indeed the remaining 15,600 planners, down dramatically from a peak of almost 28,000 in 2018 – have been unjustifiably slugged a massive amount to help customers from the failed Dixon Advisory.

That in itself is a long and controversial story full of dodgy moves but the end result is that financial planners have ended up on the hook to foot the bill for Dixon Advisory clients under the compensation scheme of last resort.

It is estimated that a financial planning business with 10 planners faces a bill of about $40,000 a year for that compensation plus an annual levy to the Australian Securities and Investments Commission.

Planners paying a high price to fix up Dixon mess

It is worth noting here that ASIC arguably failed to take prompt action against Dixon and also that the Dixon failure pre-dated the “prospective” compensation scheme and also that failure was passed on to the industry after E&P Financial Group ejected its Dixon Advisory subsidiary.

There are lots of arguments about who is most to blame for the Dixon Advisory mess but the end result is that there are fewer financial planners who are charging more at a time when demand for financial planning is set to skyrocket.

There are legislative plans by the Albanese Government to reduce the red tape burden on the industry but on current numbers that will be too little, too late.

Consumers want to pay $911 – get charged $3960

Adviser Ratings, which rates financial advisers, estimated that financial advice fees increased by about 7% over the past year and that the median fee was now $3960 a year.

Over the past five years, fees have risen by 58% and there is a continuing shortage of suitably qualified financial planners.

That comes at a time when the number of people aged 65 years and over is expected to double in the next 40 years, with many of those retirees wanting solid financial planning advice to navigate the complex rules around retirement and investment.

Adviser Ratings research shows that at the same time as median fees approached $4000 a year, consumers on average said they are willing to pay $911 a year for advice.

You don’t need to be a financial planner to see that those two numbers are not close to being reconciled, although changes that make it clear that super fund members can use their super accounts to pay for personal financial advice about their superannuation from an independent financial adviser might go some way to bridging the gap.

Streamlined advice still to come?

Still to come in the second bunch of proposed legislation are measures that allow statements of advice to be streamlined and less costly and also a new class of adviser who can give limited personal advice.

Those changes can’t come quickly enough because the current trends are for fewer financial planners giving advice to smaller numbers of wealthier clients.

Analysis by Investment Trends showed that financial advisers have lost nearly 18% of their clients due to fee increases in the last financial year but at the same time are reporting higher profit margins.

Advisers went from servicing 120 clients on average in 2023 to 99 clients in 2024, a drop of 17.5%, according to the 2024 Adviser Business Model Report.

While recent fee increases led to substantial client attrition, this has resulted in higher earnings and funds under advice (FUA).

FUA has grown by 10% year on year to $69 million on average for the 1732 practices surveyed.

A small group of advisers even reported profit margins exceeding 40%, although they were best in class and used a combination of strict cost control and strategic fee increases.

Government and advisers want the same thing

While the remaining advisers might now have a smaller number of wealthier, more engaged and more profitable clients, in the long term the financial planning industry will need to develop models that work across a much wider range of client wealth levels.

Navigating the forest of rules around superannuation, investment and retirement is unlikely to get any easier but the use of more automated and perhaps less comprehensive financial advice with less red tape is becoming more urgent by the day.

Arguably the interests of advisers and the Federal Government are quite closely aligned with every client that is kept off welfare payments such as the age pension a real win, win all around.