As financial advice moves up-market, super funds stand still

Top financial advisers are relentlessly concentrating on more lucrative clients but instead of capitalising, super funds could blow their opportunity to offer choice for everyday investors.

Financial advisers who made The List 150 – Laurel Moulynox of Morrows Private Wealth, Richard Felice of Belay Advisory, Cathy Ding of Morgan Stanley Wealth Management, Charlie Viola of Viola Private Wealth and Sean Abbott of Koda Capital. Picture: John Feder

If you are looking for financial advice, then you had better move fast because the sector is about to split.

Pretty soon we will have up-market advisers and, well, not much else.

Up until now investors have always asked “how do I find an adviser that suits me”?

But the narrative has recently flipped. There is a serious shortage of advisers and there are virtually no new recruits. Industry players are actively recruiting from India to try to fill the gaps in the local market.

Now advisers are asking “how do we find investors who suit us”?

The shoe is on the other foot. That’s why advisers have been culling their own client lists.

There are two sides to the story when advice costs about $5000 a year on average. The obvious part is that fewer people can afford to pay that sort of money, but the crunch is that fewer advisers can operate below that level and yet stay solvent.

This week The Australian released its expanded roll call of the best advisers in the market. The List Top 150 Advisers is a major piece of work; Garth Hu of Morgan Stanley topped the ranks for the fifth year in a row. Meanwhile, the biggest presence on the list is the Shadforth Financial Group with 25 spots in the ladder.

Talking to entrants on the list there is one overriding theme this year and that is the industry’s key players are shifting up-market.

A growing number of advisers on the list now insist that any customer must be a sophisticated investor. What that means is they must have either $2.5m in net assets or an income of at least $250,000 per annum two years in a row.

Some advisers will, of course, take on clients where they believe the investor’s portfolio will grow to meet the average minimum demanded inside the firm.

Either way though, it’s pretty clear the level of fees is not going to drop. Here’s why. More than half the fees you pay to an adviser are not being spent on advice at all.

A new report from the Elemnta group says: “For the average Australian advice practice, 56.5 per cent of the cost of advice is the cost of administration and compliance, with the remainder the cost of actually engaging with the client and designing the advice.”

Sector on the rebound

One thing common to all these advisory groups on the list is that the wider industry is rebounding. Profit margins are improving across the industry and part of the reason for this rebound is the clinical selection of clients on the basis of net assets.

Even mergers and acquisition action – always a strong signal of a buoyant sector – is coming to life. The LGT Crestone group’s acquisition of CBA’s personal advice business, Commonwealth Private Advice, stands out as a prime example.

Moreover, it’s also clear that investors will pay high fees if there is clear value from the transaction. Put simply, a $5000 fee that supercharges a $2.5m portfolio will be worth it. If the portfolio is $250,000 the investor is not going to fork out that amount of money in the first place.

This is the crux of advice in 2024 – there is a gap in the middle market. This gap was meant to be filled by the promise of so-called “digiadvice”. That was meant to be low-cost and low-contact advice which would be passive in nature and good enough for everyday investors. With the exception of the Stockspot group, now backed by Korea’s Mirae Asset Management, there are few significant options.

As list veteran Will Hamilton of Hamilton Wealth Partners says in this week’s Top 150 special edition of the Money Puzzle podcast “digifinance just has not come to pass”.

As digiadvice fails to deliver its initial promise, the provision of everyday cheap advice to the mass affluent has been left to “big super” – but the superannuation funds are now threatening to blow this chance.

Even with the obvious flaws of asking say, Cbus, for advice and expecting it to be independent, there was a fighting chance until very recently that super funds could at least offer a minimum service to many people currently cut out of the market.

The problem now is that the funds are having their management reputation bombarded at the worst possible time. Cbus is the lead offender and faces a string of investigations from regulators.

But Cbus is only the most high-profile problem. There has been a cocktail of recent failings inside big super covering everything from IT failures to unlisted valuations at funds as diverse as ART, Australian Super, Hesta and Unisuper.

You might think that, with these issues looming as the biggest reputation threat yet faced by the $3.5 trillion sector, it would seek to be flexible in parliamentary negotiations aiming to get the next phase of financial advice reforms through the system. These much-needed reforms would allow big super to expand its financial advice products.

But the big industry funds want to do the usual thing and sidestep transparency by pooling everything, whereby an investor would pay a standard advice fee never knowing the value of the advice they paid for in the first place.

There is no sign big super will concede ground here. Meanwhile, the financial advice caravan moves on without the majority of everyday investors.

James Kirby presents the twice-weekly Money Puzzle podcast

Originally published as As financial advice moves up-market, super funds stand still