This year’s advice: rip it up and start again

Getting good financial advice can be significantly harder in the wake of the Hayne royal commission. Picture: iStock

As we move towards the end of the financial year you’re probably thinking about financial advice. You’ll need it this year. Volatile markets, inflation concerns, changes to super “caps”: it’s all happening just now.

Well, best of luck finding an adviser, because they are disappearing off the face of the earth.

Three years after the Hayne royal commission revealed the sector as an industry awash with conflict and corruption, there is an exodus of staggering proportions.

Older advisers are fleeing the industry in the face of looming ­national exam standards, while younger professionals are changing tack. A recent survey shows that, among the students in financial planning courses, only 28 per cent were actually becoming advisers. Or as one commentator on an industry forum suggests, “72 per cent of financial advice students are smart enough to realise the industry is stuffed”.

In reality, financial advice is not “stuffed”. If you can pay enough and if you can find an adviser who will take you as a client, it remains highly important for any serious investor.

But this is a sector in crisis. Industry reports suggest the total number of licensed advisers will drop from 22,000 to 15,000 over the next few years. But this raw number barely scrapes the surface.

Due to the burden of post-Hayne financial advice regulations, the best advisers often now want to concentrate on “sophisticated investors” who ­operate with much less red tape than everyday investors. That is, they satisfy the legal definition of “sophisticated”, having $2.5 million in investable assets or an annual salary of $250,000 a year. The only other sustainable manner an adviser will take on a client is if that client is going to become a successful client over the long term – in other words, they are going to grow their assets sufficiently that it will make sense for both parties to continue the ­relationship.

Now, here are the numbers and they are set in stone. The adviser must be able to charge you $3000 a year at least. The $3000 figure per client is the magic number for making a practice viable. This is not written in any planner’s marketing material, but you will find it repeated among brokers who buy and sell advisory practices.

Not for the first time in the investment industry, it is the middle layer that gets squeezed. If you have very little to invest, then don’t worry, stick with a good fund and keep an eye on your access to the pension. If you have more than $2.5 million, everyone wants you.

But if you are among the vast majority of investors who have funds sitting somewhere in between those two extremes, you are standing on thin ice. Off the record, advisers suggest you need to have $500,000 in investable assets to be considered as a ­client.

But is that amount even enough? Let’s turn it the other way around. You must pay $3000 in fees for the whole exercise to be economic for the industry. And let’s assume a 4.3 per cent return (I’m using the target figure of Magellan’s new retirement fund launched this week). If you had $500,000 and you made 4.3 per cent, you would earn the grand total of $21,500 a year.

Now if you impose a $3000 fee on your $21,500 you are paying an effective rate of 14 per cent for the advice on the money you made. Gasp. This is hopeless, it is about 10 times higher than what might be deemed reasonable.

In a better system you might be able to get around this problem. Perhaps we could just pay advice that we want at the time we want – you might call it “niche” advice.

Under the current arrangement, that’s not possible. You must do an end-to-end arrangement that costs at least $3000 for initial advice and then $3000 each year. (Online advice offering off-the-shelf digital solutions can be cheaper, but it presents a separate set of challengs for an investor.)

Worse still, advisers are not allowed to advise on some very ordinary issues.

Just to offer one sterling example: there has been a lot of interest in the government’s Pension Loans Scheme – it offers a reverse mortgage run by the government on broadly similar terms to private offerings. But most advisers cannot advise on it because it is classified as a “credit product”.

Advisers can advise you on margin loans for the speculative tech stocks you have just bought, they can advise you on the crypto that the ATO is waiting to tax in your self managed super fund – but they can’t talk to you about a pension loan scheme run by the government.

What a mess. Every investor with any ambition needs advice. Heavy-handed regulation fails, disclosure-based regulation fails miserably. Laissez faire regulation will not work, either.

Allow niche advice. Drop the excess regulation that means planners must charge everyone $3000 a year. Review a licence system whereby advisers can advise on crypto but not on government-run investment schemes.

Actually, rip it up and start again.