Ever felt like there’s a huge gap between your need for financial advice and you capacity or willingness to pay for it? Relax, you’re not alone.
Financial advisers reckon there are around 12.6 million Australians who currently have unmet financial advice needs.
The reason why the number of Australians with unmet financial needs is so high comes down to good old fashioned affordability.
What’s really driving the advice gap?
According to Adviser Ratings, between 2018 and 2023, annual financial advice fees rose 58%, from a median of $2510 to $3960, while many (advice) clients are paying considerably more based on their financial needs.
Clearly, financial advice suffers from an unaffordability issue.
However, what unaffordability often masks, explains Wayne Leggett, principal of Paramount Financial Solutions, is the root cause of what’s really perpetuating Australia’s chronic advice gap.
What Leggett is referring to is the ‘all-or-nothing” way in which the sector is mandated by the regulators to deliver advice.
As the law currently stands, financial advisers’ hands a tied when it comes to providing anything less than Statement of Advice (SOA) driven outcomes for clients.
In short, financial advice regulations are tantamount to forcing you to get a full car servicing, tune up and new tyres, when all you wanted was a car wash.
Risk mitigation
As a result, current advice practices by default ignore what it is most would-be clients want.
Instead of letting clients seek single-issue advice, the SOA process means getting new clients to jump through hoops through which every facet of their financial life, their assets, liabilities, life aspirations and appetite for risk – like it or not – are divulged.
It’s not just new clients that are exposed to the rigours of SOA advice, with advisers having to revisit a client’s total financial situation every time they offer new advice.
“Part of the problem for advisers is risk mitigation, and if they don’t get clients to jump through hoops they can end up in court,” says Leggett.
“Even at social gatherings I need to be careful not to give advice as I could be liable if someone acts on it.”
Reasons to reject full service advice
Unsurprisingly, Leggett says annual fees, plus the SOA process, along with adviser warnings of dangers scoping out advice, are three reasons why Australians don’t become full service financial advice clients.
The net effect, adds Leggett is that the current SOA arrangement acts as a gatekeeper mechanism which locks Australians out of getting the advice they want.
“It’s not a case of the advice sector crying ‘poor me’ over current SOA arrangements, as most advisers have a full dance card,” says Leggett.
“But a lot of people won’t even engage in the process; they see it as akin to buying a dog only to do their barking.”
Better financial outcomes
In an attempt to remove the current barriers to Australians seeking the advice they want, draft reforms – dubbed Delivering Better Financial Outcomes (DBFO) - were first tabled in June 2023.
DBFO Tranche 1, which came into effect in July 2024, offered a bunch of little tweaks that didn’t really move the bar on the accessibility and affordability of advice.
The sector is now waiting for the implementation of DBFO tranche 2, which, subject to a pending green light, is expected to come into effect in 2027.
Included within key reforms embedded within DBFO tranche 2 are attempts to simplify an adviser's ‘best interests’ obligations.
Currently, an exhaustive list of safe harbour provisions must be met by advisers to ensure they are acting in the best interests of their clients.
However, under the new proposal, the safe harbour provisions would fall away.
A new class of adviser
One further Tranche 2 addition that could disrupt market affordability is the proposal for a new class of adviser (NCA).
It’s this NCA provision, adds Leggett that will get Australians closer to the advice they want.
For example, it would provide simple advice around everyday financial products, like super and term deposits (excluding SMSFs), without having to satisfy all the onerous requirements currently placed on advisers.
“Advice firms may end up allocating requests for single-issue advice to junior advisers as part of their career progression,” says Leggett.
“Both roboadvice models and existing (full service) advice practises could also engage AI to help cater for clients who only want advice on single issues.”
Based on Leggett’s decades of experience advising clients, he expects the most common requests for single advice to centre around:
- A mature couple may seek a super fund recommendation for a son or daughter entering the workforce.
- Income protection.
- A transition to retirement (TTR) strategy once a client hits preservation age.
- Putting downsizing contributions into super.
- Recontribution and catch-up super contributions.
- Advice on the home equity access scheme.
- Advice on putting extra income into super or a home loan.
Ongoing discussion
While DBFO tranche 2 appears to have broad industry support, it's not without its knockers.
For example, the Financial Advice Association Australia's (FAAA) single biggest concern in relation to the draft legislation is that it appears to give super trustees the ability to collectively charge for comprehensive retirement advice.
The other key area left unstated, notes the FAAA is whether advice can be offered via the “new class” of adviser, or only via qualified professional financial advisers.
“Overall, our concern is that these provisions could be used to effectively ‘staple’ a member to their super fund for life, with no trigger for the member to consider whether the current fund is still the right one for them in retirement.”
Meanwhile, industry submissions to DBFO tranche 2 are being received until 2 May.
