In March, wealthdigital issued a white paper on the future of the financial advice industry. The white paper looked at the pending exodus of financial advisers in the wake of the education and training reforms, and concluded that adviser numbers will likely dip to somewhere between 12,500 and 15,000 before rebounding over the next decade.
Throughout late 2018 and the first half of this year, there has been an increase in media coverage identifying accountants as the likely candidates to meet any excess demand resulting from this massive drop in capacity in the advice industry. Much of this commentary, however, has undervalued two factors standing in the way of such an outcome:
- A reduction in demand for traditional financial advice services, and
- The impediment that is the professional year.
This month’s Industry Insights examines how these two issues make a hybridisation of accountancy and advice unlikely.
Lower supply meets lower demand
There are two dates that will precipitate the greatest falls in existing adviser numbers under the education and training reforms overseen by the Financial Adviser Standards and Ethics Authority (FASEA):
- January 1, 2021 – the date by which existing advisers must have passed the adviser exam, and
- January 1, 2024 – the date by which existing advisers must have met their increased education requirements.
It is reasonable to suppose that the number of financial planners in the industry, and hence the supply of financial advice, will drop significantly around both of these dates. Around both of these dates, however, the supply of revenue sustaining the adviser base will also drop, potentially by a commensurate or greater amount.
January 1, 2021 is a significant date for financial adviser revenue models. It is on this date that grandfathered commissions on superannuation and investment products will cease to be payable. In its submission to Treasury, the FPA acknowledged that such grandfathered commissions represent between 8 and 10 per cent of their members’ revenue. Given the profile of FPA members, as well as its championing of the fee-for-service model, it is reasonable to assume that the overall industry number is slightly higher. In fact, it has been reported that one former bank-aligned group expect a drop of 60 per cent in revenue due to the reforms.
Making a conservative assumption, it is reasonable to suggest that somewhere between 10 and 15 per cent of total adviser revenue will disappear in an instant. With the number of advisers currently a touch over 25,000 (as per the white paper), this would immediately account for the full revenue equivalent of somewhere between 2,500 and 4,000 advisers.
Life insurance commissions
January 1, 2020 sees the Life Insurance Framework (LIF) reforms take full effect, with upfront commissions on life insurance policies restricted to 60 per cent of the premium cost. Before the introduction of the LIF reforms, it was not uncommon for upfront commissions on life insurance to be up to 120 per cent of the policy’s premiums. As such, upfront commissions have been effectively halved by the reforms.
ASIC’s 2014 review of life insurance identified that 82 per cent of intermediated life insurance sales saw the adviser remunerated by upfront commissions. It is hard to find definitive data on what percentage of advice revenue comes from life insurance commissions, but a reasonable number seems to be around 10 to 12 per cent.
As such, the full impact of the LIF reforms will likely see total advice revenue drop by around 5 or 6 per cent. This is without considering the scheduled ASIC review of life insurance commissions, due to take place in 2021, which could result in further restrictions on life insurance commissions.
As such, the LIF reforms will likely account for the full revenue equivalent of around 1,300 to 2,000 advisers. If the oft-prosecuted argument that consumers won’t pay upfront fees for life insurance advice is true (which, to a point, might be on the money), this will see an equivalent drop in market demand for advice services.
Superannuation and retirement revenue
In late 2018, the Productivity Commission issued its final report into efficiency and competition in the superannuation industry. The recommendations in this report stand to have a major impact on the 35 per cent of adviser revenue currently generated in relation to superannuation and retirement advice.
The report recommends a system of matching employees to superannuation funds that will effectively cut advisers out of any decision-making on super fund choice outside of Self Managed Super Funds (SMSFs). Furthermore, Treasury’s position paper on the retirement income covenant clearly outlines a greater role for super funds in providing retirement income stream advice, potentially through an intra-fund advice service.
It will take some time for any reform in this area to be implemented, but it is not unreasonable to envision that, by 2024, adviser revenue in relation to superannuation and retirement will have taken a significant hit. A 50 per cent reduction would see the eradication of the full revenue equivalent of 4,500 advisers – and 50 percent may be a conservative estimate.
The full impact
The regulatory changes outlined above will see the demand for financial advice drop significantly over the next five years. In a worst case scenario, the drop in revenue could exceed the attrition rate of advisers persuaded to leave the industry by the FASEA reforms. The future isn’t all bleak, motivated advisers will be able to find new advice services that will be valued by clients, but it is nonetheless it does beg the question as to what gap in demand there will be for upskilled accountants to service.
The professional year
Discussion around the convergence of accounting and financial advice has considered the disincentives accountants face in needing to complete relevant planning qualifications and planning-based Continuing Professional Development (CPD). While these two elements are hurdles accountants face in becoming licensed planners, the tallest hurdle is one that seems to have gone largely unremarked – the professional year.
Accountants commonly undertake a professional year already, and are no strangers to the requirements therein. The major question would be, how many established accountants would be willing to undertake a second professional year in order to become a financial planner – particularly after they have already practised for a period of time?
FASEA’s professional year requires new planners to undertake a minimum of 1600 hours-worth of work. That leaves very few hours for accountants who are diversifying their skills to continue their accountancy practices. In all likelihood they would need to take a year off from generating revenue as accountants, not an appealing prospect.
If existing accountants won’t fill the notional gap left by departing advisers, perhaps new accountants will. There are two major impediments to this outcome, FASEA’s qualification requirements and the professional year.
An accountancy degree will not necessarily be enough to be licensed as a financial planner. Most of the accounting degrees approved by FASEA tend to have multiple majors, or a joint major, with one major element specifically being financial planning. Many new accountants would need to undertake further study to become financial planners.
The burden of undertaking two professional years – one to become a practising accountant and one to become a practising financial planner – is not going to appeal to many new graduates. Perhaps some enterprising firms will find ways to integrate the two years into a shorter timeframe, but the challenges in doing so will be significant.
The more likely outcome is that enrolments in accounting degrees will be cannibalised by an increase in enrolments in financial planning degrees. Rather than becoming both, budding professionals will choose one or the other and proceed straight down their chosen path.
There is one potential joker in the deck, and that is the possible reintroduction of the accountants’ exemption. In its ongoing review of the Tax Practitioners’ Board (TPB), Treasury has identified such a move as one potential option. That said, it was offered as one of seven different possibilities and would only open up certain SMSF advice areas to accountants. Such a narrow exemption would not greatly overlap with the advice industry.
It is unlikely that the advice industry is about to be subsumed by diversifying accountants. A likely reduction in demand for advice, as well as the increased regulatory burden, make this future improbable. The march of advice towards becoming a profession is not likely to end up in it being swallowed by an existing profession.
That said, advisers and accountants may well find themselves working closely to achieve strong outcomes for their mutual clients. Professionals should aim to engage with other professionals who possess complementary skillsets. It is the best way to help clients achieve their goals. The future should see increased respect across the accounting/advice divide and, with that respect, greater willingness to recommend each other’s distinct, and valuable, services.