Robo advice will become more important as fewer advisers face growing demand, explains Gayle Bryant.
As the federal government brings in its planned reforms to address the kinds of issues the financial services royal commission has been exploring in advice, there will be far-reaching implications for advisers.
One of these is the expectation that with a deadline fast approaching to meet specific levels of education, training and ethical standards, quite a number of advisers will leave their careers. And that exodus will powerfully reshape the sector.
Financial advisers’ incoming education standards
By January 1, 2024, all financial advisers will need to have certain qualifications to meet the new minimum standards. The reforms include:
- compulsory education requirements for both new and existing advisers
- supervision requirements for new advisers
- a code of ethics for the industry
- an exam that represents a common benchmark across the industry
- an ongoing professional development component.
While the educational qualifications are mandatory for all advisers, the timeframe to gain them differs.
From January 1, 2019, new advisers will need to hold a relevant degree before being eligible to commence the supervision year and to sit the exam. Existing advisers have a couple of years’ grace as they don’t need to pass the exam until January 1, 2021 and five years – until January 1, 2024 – to reach a standard equivalent to a degree.
Broad research points to adviser exodus
Associate Professor Adrian Raftery of the Deakin University’s Faculty of Business and Law says many advisers tell him that December 31, 2023 is now their retirement date.
“We expect between 5000 to 8000 advisers will leave the industry rather than study,” he says. (This equates to between 20 per cent to 32 per cent of Australia’s 25,000 registered advisers.)
“They will largely be aged 55 and older with no professional qualifications, and will have decided to pull the pin rather than study for the new professional environment.”
“Maybe one-third of the industry will be gone within five years time,” he says. “Advisers are reluctant to do the extra training; they feel it is a mandatory impost that they don’t want to do.”
The royal commission found only 8704 of registered advisers had a bachelor’s degree or higher – about 35 per cent of the sector.
The Financial Services Institute of Australasia found 57.8 per cent of its adviser members hold AQF8 and AQF9 qualifications, which is higher than the minimum AQF7 level required under the draft guidelines. But if these qualifications aren’t recognised, about 20 per cent will leave the industry while nearly 35 per cent remain uncertain.
A study by UBS found about one-quarter of Australia’s 25,000 financial advisers will leave the industry over the next five years. In the report: School or Beach? UBS found the biggest catalyst for the exodus is the new educational requirements.
The report stated that while it is difficult to gauge how individual advisers will react to new educational standards, UBS felt it was reasonable to assume at least 25 per cent of existing advisers could exit the industry over the next five years due to the new standards.
“This excludes natural attrition through retirement, which we believe in normal times would be offset by new entrants,” the report stated.
Demand for roboadvice will increase
One adviser who will be undertaking the extra study is Barrie Smith, 45, a Perth-based financial planner with RSM Australia who holds a diploma of financial planning. He’s been in the industry for 20 years and says his clients have never asked about his qualifications. However, he says he will definitely do the extra study, “when they work out what it’s going to be”.
“They have proposed what they think you have to do but they haven’t come out and said what it actually is,” he says. “So we’re sitting around waiting to find out what’s going to happen.”
Smith doesn’t think the new requirements will make much of a difference to the industry. “But if it’s what we have to do, it’s what we have to do. At the end of the day I think it’s just going to make advice more expensive as there will be fewer advisers for the number of people who will be seeking advice.”
He adds, if advisers leave, the industry won’t suffer as people will step up and take those spots.
“I think there will be a transition period where robo advice will begin to take over tasks where advisers were previously giving advice,” he says. “Especially around the smaller-end tasks that consumes a lot of time.”
Some of these tasks could include opening a bank account, rebalancing investments and undertaking fund transfers between accounts.
Association of Financial Advisers national president Marc Bineham says it’s difficult to know the effect the new educational requirements will have on the industry.
“Anytime in the past when there has been changes announced you inevitably read about how the industry is finished – but it never is,” he says. “This time I’m not sure what the overall effect will be. I’ve spoken to people in their late 50s who say they’ll just bite the bullet and get the new qualifications while others in their 40s who find their degree isn’t recognised say they will leave because they don’t think it’s fair.”
Bineham is particularly interested in how robo advice will affect the industry and says while it is here to stay, it will be more in the back-office rather than the front.
“Our business is an emotional one and people want the human touch, particularly around big money decisions,” he says. “Robo advice will certainly be used more to open bank accounts or produce model portfolios but people need advisers to keep them on track with their financial decisions.”
Bineham believes that robo advice and artificial intelligence will help make advisers more efficient, and unlike Smith, who feels the cost of advice is set to rise, Bineham says if robo advice is adopted then ultimately the cost of advice will come down.
“If an adviser has to deal with 10 hours of compliance then that is going to add significantly to the cost of advice,” he says. “If a computer can do the same task in half an hour then it follows that the cost of advice will come down. But at the end of the day, people want to speak to people about major life decisions.”
Advisers should start studying now
Professor Raftery believes the new requirements are a form of filter. “They will eliminate some of the advisers who do the wrong thing but it won’t eliminate all of them,” he says. “And some good eggs will also go, and with them, a lot of intellectual property. Unfortunately it’s the price we will pay.”
He adds the changes will also lead to a fall in the average age of advisers overall. “Those leaving will be replaced by 21-year-olds who have a formal degree and are doing a bachelor of commerce right now,” he says. “This will be a generational change for the industry.”
Whether older Australians would be comfortable receiving financial advice from new graduates with limited life experience is a topic discussed at the Financial Services Council recent annual summit. As reported in The Australian Financial Review, the chair of one of the sessions, Colin Tate, asked “…will retirees want to take advice from a 20-something?”.
If advisers do decide to undertake the extra study, Raftery says they should be starting now. “Find a university with an approved degree and start doing one subject a semester,” he says. “If you do it slowly there’s little stress.”
He adds there is likely to be many advisers who won’t start looking at what they need to do until 2023. “And they will likely have to spend their entire year doing up to eight subjects,” he says. “But by then there will be many new clients in the market and advisers will want to ensure they have the time to market to them so it’s best if they start getting their educational requirements in place now.”
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