How the banking royal commission changed things for Aussies
The financial advice industry had the professional equivalent of an enema at the banking royal commission. And research shows that Australians in need of advice will most likely be better off for it.
While financial adviser numbers have fallen, professional standards across the industry have lifted, as has the value an adviser can deliver.
"These movements continue to follow the trend that the financial advice industry has experienced since the release of recommendations from the royal commission," says Alex Dunnin, executive director of research at Rainmaker Information, which publishes Money magazine.
"This was followed by tighter education requirements and exams mandated by the Financial Adviser Standards and Ethics Authority, while COVID-19 has no doubt impacted the industry as well."
Russell Investments' Value of an Adviser Report found that financial advisers deliver value of 5.2% a year to their clients (4.4% in 2019), with the value they provide extending well beyond investment-only advice.
The current recession underscores further the cost-benefit proposition of professional advice.
"We know some clients can experience sticker shock when they see advice fees for the first time," says Bronwyn Yates, Russell Investments director.
The report shows that an adviser charging a $3250 fee to a client with a $250,000 balance can potentially deliver $13,250 of value - that's $10,000 extra for the client, says Yates.
The report also found one of the most important functions of an adviser is to protect people from their own worst impulses.
"Our report shows advisers can play a critical role in helping investors avoid common behavioural tendencies and may potentially help their clients achieve better portfolio returns than those investors making decisions without professional guidance," says Yates.
Crystallising losses as the market tanked in March is a case in point. The report estimates that an investor who sold an investment balance of $250,000 when the market bottomed would have locked in a loss of $50,000 compared with someone with the same investments who stayed invested.
While some advice is universal and can be widely adopted, possibly the best aspect of personal advice is just that - it's for your own unique circumstance.
"More than just return-seeking, advisers are experienced at working with a client to closely identify their needs, with the ability to manage planned, unplanned or unforeseen expenditures," says Yates.
The changes the advice industry has gone through don't show any sign of letting up.
Separate research by Rice Warner has found a need for simpler, more affordable and accessible advice. It envisages adopting a model that would see advice divided between strategic and financial product advice, with less red tape, lower compliance costs and tax deductibility for advice.
"Quality financial advice is needed now more than ever as the economic impacts of the coronavirus pandemic are felt by individuals right across the nation," says Sally Loane, chief executive of the Financial Services Council.
"[The research] shows evident benefits of financial advice to the health and wellbeing of individual consumers, as well as broader economic benefits such as reduced long-term expenditure on the age pension."