Why obtaining quality financial advice will become even more difficult

 Most people would say that finding a good financial advisor has always been a difficult task. Ten years ago, most financial planners received commissions for remuneration, so clients had to navigate endless conflicts of interest. Thankfully, investment commissions no longer exist. The challenge is now finding an advisor with well-rounded experience. 

Commissions are banned – it's more about experience and scope

Financial advisors use to receive commissions from managed fund providers which created a conflict of interest, as data showed that they’d only recommend the funds that paid commissions, and the higher fees (resulting from the cost of paying this commissions) greatly diminished net investment returns. In essence, commissions incentivised planners to recommend poor quality investments (managed funds). 

Commissions on new investments were banned in 2014 and on existing (grandfathered) investments in 2018. Financial advisors now cannot accept conflicted remuneration arrangements by law e.g., commissions. 

Obviously, this was a massive step forward because the existence of commissions was almost wholly responsible for all the poor advice outcomes that people experienced. In a commission-based (or any conflict of interest) world, most advisors core competency was salesmanship, not delivering quality financial advice. But most unsuspecting customers didn’t realise this – often planners were wolves in sheep’s clothing. 

This has changed now. Financial advisors no longer need to sell, just advise. Therefore, in my view, when choosing an advisor, you must consider (1) whether they have enough experience and (2) whether the scope of their advice maximises your opportunity i.e., knowledge. 

With respect to scope, I’m a staunch believer that holistic advice maximises value, as discussed here (where I shared 6 case client studies). High quality advice is multifaceted because it includes many considerations including tax, super, estate planning, insurance/risk and so on. 

The mass exodus of advisors will take years to repair 

There have been several changes in the financial planning industry which have resulted in a mass exodus of advisors. In 2018 there were about 28,000 financial advisors in Australia. Around 40% of these advisors have already left the industry and it is predicted that advisor numbers will fall to circa 13,000 by the end of next year. 

Of course, there were many shoddy financial advisors that really needed to leave the industry, so that’s a good thing. But more than halving the number of advisors in only five years is a terrible outcome for Australians. Imagine if that happened with lawyers, accountants, or doctors. 

The problem is that as older, more experienced advisors leave the industry, there aren’t enough intermediate advisors to eventually take their place. You can’t replicate decades of experience overnight – there are no shortcuts. Therefore, the financial advisor shortage will get worse before it gets better. A lot worse! 

Robo-advice has limited application 

Robo-advice solutions have been lauded as a cheaper alternative to personal financial advice. Robo-advice is an algorithm-driven software tool that makes recommendations based on the answers to a series of questions. Currently, robo-advice tools provide very limited solutions. 

The problem with robo-advice is that it’s a very logical tool. However, the study of behavioural finance tells us that financial decisions can be heavily influenced by emotions. Often, it is difficult to change someone’s mind with logic alone, especially if they did not use logic to make their original decisions. In this situation, a human-to-human relat