Super-Changes Ahead: Adapting to Australia’s Financial Advisory Landscape

Concerns over financial advisory

While inflation and rising interest rates have been grabbing headlines, another pressing but less discussed issue is emerging. The escalating cost of living and borrowing in Australia are fuelling a growing demand for financial advice. Australians struggling to make ends meet need quality financial advice now more than ever. Nevertheless, the cost of obtaining such advice in Australia has increased dramatically, outpacing even inflation, leaving many Australians stranded for financial guidance.

However, inflation isn’t the main culprit. The real issue lies in the complex and inflexible regulatory regime governing the sector. For example, advisers offering personal advice to mum and dad investors are obliged to produce expensive and lengthy paperwork, such as a Statement of Advice (SoA) and Product Disclosure Statements (PDS).

Adding to this complexity are the professional standards enforced in 2019 that required both existing and aspiring financial advisers to comply with specific education and training standards. Consequently, Australia’s Financial Planning and Investment Advice industry has faced a labour shortage, as many advisers chose to leave the industry and have not been replaced, leading to a sharp decline in their numbers.

Is regulation ‘bad’?

While these regulations are intended to protect Australians from subpar financial advice, they have unintentionally added layers of complexity. The complication of the existing regime inhibits financial service providers from offering regular advice, a necessity for Australians trying to navigate financial hurdles in these challenging economic times. The advice gap, characterised by the unmet demand for affordable, high-quality financial advice, has widened with the decrease in advice affordability and surging living costs.

Why is reform needed?

In response, many Australians, especially the younger demographic, are turning to their favourite social media platforms like Tiktok and Instagram for financial insights. This shift towards digital platforms has spurred the rise of ‘finfluencers’ - social media content creators who discuss money management, budgeting and investing.

The conjunction of rising living costs, dwindling financial adviser numbers, spiralling advisory costs, emerging investment scams and the shift to digital advice have spotlighted an urgent need for reform in Australia’s financial advisory industry. The Australian government has kick-started an ambitious reform of the financial advice sector, aimed at overhauling service offerings and making financial advice more accessible to Australian households in June 2023.

Government’s final response to the quality of advice review

The government decided to, in full or in principle, accept 18 out of 22 recommendations in light of the findings from the Quality of Advice Review, with two being considered as part of the Treasury’s review into Managed Investment Schemes. Super funds are set to play an important role in providing retirement advice, as they were already subject to rigorous duties to act in members’ best financial interests. Digital advice models will also be key to expanding financial advice access to many Australians.

Banks and insurers were initially excluded from the reform. Critics, including Michelle Levy, who led the Quality of Advice Review have raised concerns about the effectiveness of only partially implementing the recommendations. They believe that Australians require access to “simple advice” on financial products beyond superannuation, and that it would be beneficial to broaden the scope to include providers like banks and insurers. In its final response, the government has reopened personal advice to banks and insurers.

Who stands to gain from this reform?

Superannuation

Superannuation companies will play a bigger role in the financial advisory sector. The reform is set to increase access to retirement income advice. Superannuation funds will be able to provide a wider range of financial advice to their members and consider wider personal circumstances. Greater legal clarity about the payment of financial adviser fees is also expected. Overall, the advisory channel will become a more substantial revenue stream for superannuation companies.

Strategies for success

1. Digital Transformation: Embrace digital transformation to streamline advice processes. This not only improves member experiences, but also aligns with the increasing preference for digital interactions among tech-savvy members.
2. Workforce Upskilling: Invest in training the workforce to provide a diverse range of advisory services. This will help meet the evolving needs of members.
3. Fintech Collaboration: Collaborate with fintech firms to leverage innovative and efficient technical solutions. This can strengthen the company's digital presence and capabilities.
4. Regulatory Compliance and Transparent Communication: Ensure compliance with new regulations and prioritise clear, open communication with members. This is crucial for the smooth operation of superannuation companies and helps build trust and maintain strong relationships.

Banks and insurers

The Delivering Better Financial Outcomes package favours expanding the role of financial institutions like banks, general and life insurers. The introduction of a new class of financial advice providers will allow these financial institutions to provide advice to their customers and clients as well as complement their existing services. This situation positions the banks in a familiar landscape, before their previous ‘wexit’ from the financial advice industry, following the revelations from the Hayne Royal Commission.

Strategies for success

1. Integrate Financial Advice: Offer simple financial advice as part of their services. This will enhance the client experience and set them apart from competitors.
2. Use Digital Platforms: Leverage digital platforms to deliver advice. This modern approach can attract a younger audience and establish the providers as trusted advisers in the financial market.
3. Develop Educational Platforms: Build educational platforms to help clients understand complex financial concepts. This can further solidify their position as trusted advisors.
4. Risk Assessment Procedures and Customer Protection Measures: Implement robust internal risk assessment processes and establish stringent customer protection measures. These measures can improve reliability and build trust with clients.

Technology companies

As the reform paves the way for streamlining and digitisation of processes, tech (especially fintech) companies will benefit from the expanded need for digital solutions. The consideration of expanded advisory provision, with the promotion of digital advice models, indicates an increased demand for tech-centric solutions in the financial advisory sector. This demand opens opportunities for these players. However, reform poses certain challenges for these companies. The increased digitalisation of processes and data will require additional digital security and robust data privacy measures.

Strategies for success:

1. Partnerships with Financial Firms: Tech companies should collaborate with financial advisory and superannuation firms to understand their specific needs. This collaboration can enable the development of bespoke digital solutions tailored to their requirements.
2. Innovation and Technology Use: Implement continuous innovation and leverage technologies like Generative Artificial Intelligence (GenAI). These advancements can help streamline processes, align offerings with regulatory changes, and adapt to evolving market demand.
3. Proactive Marketing: Deploy proactive marketing strategies to highlight the benefits of digitization and technology adoption in the finance sector. Key advantages to emphasize include increased efficiency, real-time insights, and cost minimization. This approach can educate potential clients about the value of tech integration in financial operations.

Legal and compliance services

The proposed package includes the removal of certain regulations and red tape and is set to streamline compliance processes. However, the lessons learned from the Royal Commission’s investigation into misconduct in the financial services industry underscores the need for balance to maintain consumer protection. The role of legal and compliance services will be crucial in manoeuvring through the new reform, as striking a balance between the need for more efficient operations and the essential requirements of consumer trust and protection will be vital.

Strategies for success

1. Stay Updated on Regulatory Changes: It's critical to keep up with regulatory changes. This will ensure that the advice given is accurate and compliance solutions are effective. This involves constant monitoring and interpretation of regulatory updates and draft legislation released by the Treasury.
2. Understand the Superannuation Fund Sector: Develop a deep understanding of the superannuation fund sector. The significance of this market is expected to rise substantially under the new reforms, so understanding its intricacies is crucial.
3. Tailor Offerings: Services should be customized to help clients navigate the specific legal and compliance challenges posed by the impending reform. By tailoring offerings, legal and compliance services can better meet the unique needs of each client.

Consulting and advisory services

Consulting and advisory service providers will be instrumental in assisting both financial institutions and consumers navigate through these regulatory changes. They can offer advice on implementing technological solutions that can streamline the process and comply with new regulations. Furthermore, consulting firms can help businesses formulate robust strategies for their operations that enable them to promptly adapt to the changing market dynamics and maintain a competitive edge.

Strategies for success

1. Stay Updated with Changes: It's crucial for these services to stay abreast of industry changes. By doing so, they can offer strategic advice, including the development of specialized services, with a particular focus on digital transformation and regulatory compliance.
2. Position Services as Essential Tools: Advisory services should position their offerings as essential tools for clients to navigate the reforms effectively. This positioning can help clients see the value in their services during this transitional period.
3. Highlight Advantages: Emphasize the benefits of using their services, particularly in areas such as compliance, operational efficiency, and identifying greater opportunities. Highlighting these advantages can provide added value to clients during this period of change.

Who stands to lose from this reform?

Financial advisory companies

The reform will bring significant operational changes to current financial advisers. Although the proposed simplification and digitisation processes will help reduce compliance burden and improve workflow, financial advisers must still maintain robust consumer protections. Competition will intensify with the expansion of advisory services by financial institutions like superannuation funds, eating up the market share and revenues of existing financial advisory services.

Strategies for success

1. Offer Specialised Services: Firms can offer specialised, bespoke services tailored to the unique and complex needs of High-Net-Worth Individuals (HNWIs). By understanding and addressing the specific financial needs of this group, firms can differentiate themselves in the market.
2. Invest in Staff Training: It's crucial for firms to consistently invest in staff training. This will equip their advisors with the necessary skills and knowledge to navigate changes effectively and deliver high-quality financial advice.
3. Adopt Digital Platforms: Given the growing consumer preference for digital financial solutions, pivoting to digital platforms can be beneficial. It's about meeting clients where they are and providing a convenient, seamless experience.
4. Update Practices: Businesses need to update their practices in line with revised best interest duties and regulatory requirements. This ensures utmost compliance and demonstrates a commitment to operating within the legal framework.

Shaping the future of financial advisory

The upcoming Delivering Better Financial Outcomes package is a game-changer for Australia's financial advisory sector. Key changes include streamlining advice procedures, expanding super funds' role in providing advice and exploring new channels for advice. This reform is expected to impact various industries, with superannuation, banks, insurance companies and tech firms potentially gaining a significant advantage.

Meanwhile, the role of existing advisory firms may be challenged. As the landscape evolves, adaptability and strategic planning will be crucial for businesses seeking to navigate these shifts and capitalise on new opportunities. This underscores the need for companies to reassess their strategies, keep up to date with regulatory changes and find innovative ways to cater to their customers in this evolving environment.