Do you need a financial adviser?
Ever thought about reaching out to an adviser?
Australia is running out of advisers.
The supply and demand curve of financial advice has shifted.
2019 saw the commencement of regulatory changes on financial advisers lead by the Australian Securities and Investments Commission (“ASIC”), requiring financial advisers to register with them and meet new education and regulatory standards.
Since then, there has been a mass exodus in the financial planning industry. 2019 - 2022 saw a ~40% decline in the number of advisers, creating a noticeable shortage of advice available to investors.
Additional operating costs have resulted in advisers prioritising higher income earners or those with higher net worths to sustain their books. Such clients tend to have complex financial requirements and therefore give provides more scope to add value and justify greater fees. This has decreased levels of serviceability towards middle income earners and arguably further exacerbates wealth inequality.
Analysis by Rainmaker provides several scenarios for the future of financial advice in Australia. The most optimistic (scenario 2) suggests that in the long-term forward projection that Australia in 20 years will still have about 11,000 financial advisers. Alternatively, the most pessimistic predictions suggest that if adviser numbers continue to fall by 5% per annum, the industry could be left with only 5,500 advisers by 2044.
Figure 1: How many advisers will Australia have in 2044. Source: Rainmaker. Financial Adviser Report. 2024.
Our study
Last year, Morningstar’s behavioural research team released a report ‘Financial Adviser Faux Pas: Inadvertent mistakes and their impact on adviser-client relations’. Participants in the study were presented with a list of 15 behaviours demonstrated by their advisers and asked to rate their emotional response on a scale from “I really disliked it” to “I really liked it”.
Figure 2: 15 behaviours that may irritate clients. Source: Morningstar Behavioural Research. 2024.
The survey found 7 attributes that clients reported disliking the most about advisers (in order from most to least disliked):
- Not explaining fees
- Taking more than a week to complete tasks
- Using financial jargon
- Not considering a client’s values
- Not providing enough detail on investment options
- Making the client fill out long, complex forms
- Not providing holistic advice
For the rest of the actions in the survey, clients reported either neutral or positive feelings.
Understanding the fees
Fees are a common sore spot in financial advising. Research finds that fees are a core factor when it comes to building trust between a client and their adviser, yet there are many clients who are confused by payment structure.
Fee structure differs based on the adviser you choose. For clients with larger networths, adviser fees are often based on a percentage, whereas clients with lower points of entry can be offered a flat fee for scaled advice. Regardless of the entry fee, there is often an ongoing advice fee that may be taken from superannuation either monthly or yearly.
Why would you need a financial adviser?
We are often the biggest detriment to our own returns.
Emotion and financial decisions go hand in hand. Emotions can often affect our investing strategy and cause us to deviate from actions that are in our long-term best interest. Too often investors fall victim to the 24-hour news cycle, dialling into market volatility and adjusting their portfolios as they see fit.
Our annual Mind the Gap 2024 study aims to examine the gap between investor results and reported total returns of a fund. The study found that the average dollar invested in US mutual funds and ETFs earned 6.3% per year over the 10 years to Dec 2023, which was 1.1% less than the average fund’s total return over the same period.
This returns gap stems from mistimed purchases and sales which are likely driven by emotionally irrational decisions. The pandemic was a particularly difficult time for investors as many incurred heavy timing costs in 2020 (leading to an even wider 2% gap that year).
This is where a financial adviser comes in.
Given the abundance of financial advice free and readily available on the internet, the value proposition of financial advisers is changing.
Vanguard published a study in 2020 where they attempted to quantify adviser alpha or the amount advice adds to investment returns. The chart below shows Vanguard’s quantified value-add of best practices in wealth management across various regions. As illustrated, the most value add to the average client experience came in the form of behavioural coaching.
Figure 3: Quantifying Vanguard Adviser’s Alpha. Source: Vanguard. 2020.
The report concluded that advisers could improve their client’s net returns by up to 3%, with the value add being in financial planning, discipline and guidance, rather than by trying to actively outperform the market.
Besides the behavioural value-add, advisers also provide valuable strategies on tax structuring, cost savings through cheaper product options and better investment performance that avoids reactive decisions.
If you’re looking for a financial adviser, Shani recent went through a few tips for choosing the right one.
