Adviser Musical Chairs Report Industry research on financial adviser movement Quarter 2, 2020 This research report offers insights that will help key market players, such as fund managers, life insurers, platform and software providers, to identify key focus areas to improve sales and marketing strategies. The financial planning and investment advice industry has undergone significant changes over the past five years with the implementation of the Future of Financial Advice (FOFA) reforms and the creation of the Financial Adviser Standards and Ethics Authority (FASEA). More recently, the introduction of the new FASEA requirements on education and professional standards for financial advisers and the Royal Commission into misconduct in the banking, superannuation and financial services industry changed the industry dynamics substantially. Financial advisers continuously enter and exit the industry, as well as switch from one licensee to another. This report shows some of Adviser Ratings analysis and insight into these movements, for the benefit of those providing products and services to the industry.
Transcript
Adviser Musical Chairs Report Industry research on financial adviser movement Quarter 2, 2020
This research report offers insights that will help key market players, such as fund managers, life insurers, platform and software providers, to identify key focus areas to improve sales and marketing strategies. The financial planning and investment advice industry has undergone significant changes over the past five years with the implementation of the Future of Financial Advice (FOFA) reforms and the creation of the Financial Adviser Standards and Ethics Authority (FASEA). More recently, the introduction of the new FASEA requirements on education and professional standards for financial advisers and the Royal Commission into misconduct in the banking, superannuation and financial services industry changed the industry dynamics substantially. Financial advisers continuously enter and exit the industry, as well as switch from one licensee to another. This report shows some of Adviser Ratings analysis and insight into these movements, for the benefit of those providing products and services to the industry.
Key Findings
2.9 licensees were shut down for every new licensee formed in the quarter. YTD de-registrations up 63% (annualised) versus 2019.
2.9
Of 900 students enrolled in tertiary financial planning courses, 44% are not expected to complete their degree.
44%
Advised wealth in transition from advisers exiting was $120b+ YTD 2020, 13% higher than YTD 2019.
$120b+
Another 2,290 advisers passed exams in April and June, raising the total passed to 40% of the registered universe.
40%
Total adviser numbers contracted by 1,198 (5.2%) for the quarter.
5.2%
12%679 advisers changed licensees in the quarter, equal to 12% annualised switching and steady with the last 1-2 years.
74% of licensees shutdown in the quarter were less than six years old.
74%
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Industry Overview
Industry contraction accelerated this last quarter, enhanced by several significant corporate actions. By end Q2 2020, the adviser population had reduced to 21,631 according to Figure 1, representing a net decline of 1,198 advisers (5.2%) from Q1 2020, which is 80% higher than last quarter and, representing a 21% annualised decline, well above the overall adviser reduction of 16% experienced last year.
This quarter was characterised by the arrival and apparent passing of the first wave of the COVID-19 pandemic, although by end June there were already signs of Victoria heading towards a second wave that has since translated to a phase four shutdown in late July. The severe financial distress this has caused consumers has definitely led to an increase in demand for financial advice, evidenced both empirically through level of inquiries and anecdotally from advisers.
The severe financial distress to consumers caused by COVID-19 has definitely led to an increase in demand for financial advice.
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been released and now advisers have a confirmed pathway to make clear-headed decisions about remaining in the industry and completing their educational compliance obligations.
The adviser exits from the industry and the continued long-run trend of the radical mass privatisation of the licensee market remains a permanent feature of the landscape, however this quarter the institutionally owned and aligned sectors held their own against the privately owned sector in terms of market share. The institutionally owned and aligned sector fell by a combined 361 advisers, now representing 8,225 advisers or 38% of the total market. By comparison, the privately owned sector shrunk by 901 advisers in the last quarter but remains flat at 62% of the overall industry.
14.6%
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21,631 Licensed Financial
Advisers
Figure 1: Industry overview Q2 2020
14.6%
3.3%
11.9%
16.4%
12.1%
3.7%
13.7%
24.3%
21,631 Licensed Financial
Advisers
Further driving demand for advice was the early access to super scheme that saw $19b paid out to almost 2.5m members by end June under the first tranche. This coincided with the creation of the ASIC instrument to cap limited advice on early super access to $300; to relax related documentation obligations; and to allow non-licensed accountants and tax agents to assist consumers with these inquiries. Clearly, this was about government making urgent decisions to stem the financial crisis by reducing regulatory friction and opening up capacity to serve more consumers. However, it has added momentum to calls for clearer definitions from ASIC on limited advice and intra-fund advice carve-outs, and permanent regulatory relief on compliance obligations. With that, advisers can confidently serve this growing demand at lower cost and for a more affordable price, without the threat of blow-back from regulators or their licensee.
The eventual passing of legislation on June 17 to extend the FASEA deadlines for exams for existing advisers to end 2021, and education deadlines to end 2025, came as a massive relief for advisers. Subsequently, the six exam sittings for 2021 have
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Over the last quarter there has been some minor re-positioning of the different privately owned licensee groups in Figure 2 in terms of size and market share. While we expect greater movement towards the “safe haven” of the larger licensees over the medium term, these same organisations are also making strategic shifts in their business plans and this is leading to some
Figure 2: Change in adviser distribution by licensee type (privately owned licensees only)
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For the first quarter in a long time, institutionally owned and aligned licensees maintained a stable market share relative to privately owned licensees in terms of adviser volumes.
material reductions in adviser numbers, not all necessarily equating to permanent departures from the industry. Meanwhile, the 2-5 adviser segment staged a fight-back, actually increasing overall numbers by 29 (1%) while all other segments fell, culminating in a 6.3% drop in overall privately owned sector adviser numbers.
The 2020 story of adviser movements is a rapidly shifting dynamic as the combined effects of long-run regulatory reform and the punishing economic impact of COVID-19 take their toll on the financial advice industry. From Figure 3, while new entrants remain a rare species, exits jumped to 24% annualised (from 16% p.a over the last five quarters) and switches fell slightly to 12% annualised (from 13% p.a over the last five quarters).
During the second quarter, several corporate actions have contributed to large drops in adviser
numbers that are somewhat artificially inflating the adviser exit rate, and may partially reverse in the future. These include the First State merger with VicSuper, and the continued trend of firms switching their focus to wholesale clients exclusively, thereby deregistering advisers from the ASIC Financial Advice Register (FAR). On the latter, two of the latest firms to have made this switch are PWC and Phillip Capital.
Nevertheless, with a second wave of COVID-19 potentially rolling across Australia, it is extremely
difficult to predict what this will mean for advice businesses across the board, let alone in terms of how individual advisers are thinking about their longevity in the industry.
From Figure 4, 1,387 (6.1% for the quarter, 24.3% annualised) advisers left the industry in Q2 2020. The overall reduction in adviser numbers was 1,198, as 12 new advisers joined the industry and a further 177 transitioned back after being previously ceased.
Figure 3: Adviser movements by type
New Adviser
Ceased Adviser
Switching Adviser
Adviser Movements
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1,066 1,759 949 1,325 947 1,387
Q2 2020Q1 2020Q4 2019Q3 2019Q2 2019Q1 2019
The late June decision on a legislated extension to the FASEA exam deadline meant that this ongoing uncertainty hung over the heads of advisers for much of the quarter, and would have contributed to further exits. Having said that, during the quarter, a total of 2,752 advisers sat exams in April (470 @ 79% pass rate) and June (2,282 @ 84% pass rate), with a total
Figure 4: Ceased adviser movements
The late June decision on a legislated extension to the FASEA exam deadline meant this ongoing uncertainty hung over the heads of advisers for much of the quarter.
of 2,290 advisers passing. This means that approximately 40% of advisers on the ASIC FAR have now passed the exam. Another 2,500 have already registered for upcoming exams in August, October and November. The extension into 2021 with a further six exam sittings provides many more opportunities for advisers to meet this obligation.
In Q2 2020, 679 advisers (12% annualised) switched licensees, which was consistent with recent performance. Figure 5 reflects the persistent shift of advisers out of the institutionally owned and aligned licensees into the privately owned camp.
Figure 5: Adviser switching by licensee type
The anticipated slow-down in switching that we anticipated last quarter due to COVID-19 has not eventuated. This was on the assumption that there would be a brief hiatus as the pandemic caused businesses to pause and attempt to “wait out the storm”. On the contrary, COVID-19 appears to have
catalysed a range of corporate actions that have propelled more advisers into finding new homes. These include the ASIC suspension / cancellation of the MyPlanner license, and new or ongoing strategic downsizing from groups like ANZ, AMP and NAB.
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To survive long-term and to service the growing demand from consumers, the advice industry needs to stop this ongoing talent drain and build increased capacity. With the current ratio of leavers to joiners typically 100:1, the disparity is stark and should be raising alarm bells with government and regulators. Certainly, the industry itself needs no reminder.
The capacity building may come from: changing regulation including relaxing rules for accountants and other specialists; encouraging job changers from other industries; drawing from the talented pool of paraplanners and associates working behind the scenes; and growing the supply of talent from tertiary institutions. This special feature looks at what is happening with financial planning students at universities and the challenges confronting them as they on-board to a financial planning career.
The Student Pipeline
We understand from industry reports that there are approximately 900 students enrolled in tertiary financial planning courses nationally. These include students at all stages of a traditional three-year undergraduate degree.
Adviser Ratings conducted a survey in early August of academics from 24 universities offering financial planning courses. The following results are from the first nine respondents representing institutions in every state except Western Australia. Importantly, they do not include responses from two institutions that
Figure 6: University landscape for supply of advice talent
dominate student numbers, namely Deakin and Griffiths. This survey also excludes Kaplan that focuses almost exclusively on existing advisers.
From Figure 6 it is firstly encouraging to see substantial increases of up to 50% in the number of students anticipated to enrol,
Special Feature – Growing The Talent Pool From Universities
Figure 7: Attrition rates along the journey from studying to working in advice
Special Feature – Growing The Talent Pool From Universities (cont’d)
graduate and then enter the financial planning industry, although admittedly these are off a low base given the respondents’ relatively small market share. However, from Figure 7, what is disconcerting is the high drop-off rate of students actually making it into their chosen
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profession, with only 28% of enrolled students eventually working for a financial planning firm. Of further concern is the 44% drop-out rate of students not completing the degree.
Based on the survey, 44% of 900 students currently enrolled in tertiary financial planning courses won’t complete the degree.
Table 1: Major deterrents to enter financial planning
Deterrent #
Introduction of professional year #1
Negative perception by public #2
No clear pathway #3
Low salary expectations #4
Limited job opportunities #5
Long apprenticeship before licensed to practice #6
Special Feature – Growing The Talent Pool From Universities (cont’d)
Table 1 lists the key deterrents for students as perceived by their academic leaders, with the greatest concern being the introduction by FASEA of the professional year. The second greatest concern, being negative perception by the public, is likely reflective of the terrible press the industry has received, particularly from the Royal Commission. While the FASEA changes around onboarding new advisers are cast in stone, arguably the industry itself has not done itself any favours in promoting the benefits of advice to the general public in order to change perceptions. Nor has the industry done a great job marketing into the universities to promote interest and win more students across from other
courses. As an example, there are approximately 100,000 accounting students enrolled nationally that represent a huge pool of talent that should be targeted for conversion.
One business making a difference is Striver, previously known as Grad Mentor, that has placed hundreds of students in the financial planning and accounting professions since 2013. The Striver platform takes students through a comprehensive screening process of tests and interviews to not only help in the skills matching with potential employers, but increasingly to help with selection requirements around the softer elements of culture and ethical behaviour. It expects to place 120 students into financial planning firms over the next 12 months, although primarily into administration, client services and paraplanning roles. Striver acknowledges that the transition for graduates into financial planning is not a linear process and that it can take a few years after graduation to become sufficiently experienced to work as a financial planner.
Onboarding Graduates
The professional year requires participants to complete 1,600 hours of work and training (the
equivalent of one year), including 100 hours of structured education and training and 1,500 hours of work and supervised experience. Completion of the many “specified activities” and “key competencies”, including technical competence, client care and practice, regulatory compliance and consumer protection, all need to be documented by the individual and validated by their nominated supervisor and by the licensee.
However, there appears to a disparity of views amongst advice firms about exactly what is required, perpetuated by inconsistent guidance from FASEA and different approaches taken by licensees according to how they view their role and the risk attached to their responsibility for the new entrant.
Maybe it is to be expected that the first tranche of new advisers entering the industry would come up against some teething problems. With relatively few advisers taking part in this process (there are only 16 advisers listed as “provisional” at the moment) these participants form the vanguard that will potentially smooth the progression of the transition into advice for those that follow. We would expect the method and administration of the process will become somewhat smoother over time.
Licensees Licensee Type Total advisers entering and leaving per licensee
77
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ST A
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AVANA FINANCIAL SOLUTIONS PTY LTD
SEQUOIA WEALTH MANAGEMENT PTY LTD
LIFESPAN FINANCIAL PLANNING PTY LTD
AD ADVISORY SERVICES PTY LTD
NEXTPLAN FINANCIAL PTY LTD
STERLING PRIVATE GROUP PTY LTD
LINK ADVICE PTY LTD
CLARITY FINANCIAL SERVICES PTY LTD
INDUSTRY FUND SERVICES LIMITED
CAPSTONE FINANCIAL PLANNING PTY LTD
SMSF ADVISERS NETWORK PTY LTD
PHILLIP CAPITAL LIMITED
NATIONAL AUSTRALIA BANK LIMITED
VICSUPER PTY LTD
CHARTER FINANCIAL PLANNING LIMITED
PRICEWATERHOUSECOOPERS SECURITIES LTD
AMP FINANCIAL PLANNING PTY LIMITED
ORD MINNETT FINANCIAL PLANNING PTY LIMITED*
MYPLANNER PROFESSIONAL SERVICES PTY LTD
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
Private (6-30 adviser)
Private (30+ adviser)
Private (30+ adviser)
Private (6-30 adviser)
Private (30+ adviser)
Private (6-30 adviser)
Private (30+ adviser)
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Aligned
Private (30+ adviser)
Private (30+ adviser)
Private (30+ adviser)
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Figure 8: Licensees with most adviser additions and reductions in Q2 2020
It was another busy quarter of corporate actions that led to significant changes of ownership, structure and adviser volumes amongst licensees.
In May, MLC announced the formation of a new business called TenFifty, that brought all self-employed advisers under the Garvan, Apogee, and Meritum businesses under a single licence. In June, Clime acquired the formerly Sargon-owned licensee Madison from OneVue for $4.4m as part of Clime’s new integrated wealth management business strategy.
Corporate Actions
From Figure 8, Avana Financial Solutions topped the growth table, boosted by multiple advisers joining from MyPlanner, where 84 advisers departed in the quarter following ASIC’s cancellation of its licence in June. Sequoia came top two for the second quarter running, supported by the arrival of the second tranche of advisers from the Yellow Brick Road transaction earlier in the year.
The licensees featuring at the other end of this chart primarily followed three themes:
• Reclassification of advisers from retail to wholesale (Phillip, PWC, Ord Minnett)
• Continued economic streamlining of major institutions (AMP, ANZ, NAB).
• Super fund mergers (VicSuper, merging with First State Super / StatePlus), although this is an anomaly as the large majority of these advisers are simply in transition to the StatePlus license and should appear once more on the register in Q3.
In Q2 2020 there were seven reported ASIC actions against licensees compared with three in the prior quarter. Five licences were cancelled including MyPlanner that had previously had its licence suspended in February. Another two licences were suspended. Interestingly, two of the actions were due to a perceived lack of financial sustainability. Given the ongoing pressures from enforced business shutdowns or isolation, we may see more licences being shut down this
way, particularly with the financial year-end now behind us.
Together with an increased number of suspensions and actions against individual advisers during the same period, it reflects an ongoing step-up in surveillance and enforcement from the regulator, notwithstanding relaxation of requirements around other regulatory obligations due to COVID-19.
Substantial licensee downsizing was driven by adviser reclassifications from retail to wholesale and continued economic streamlining by the majors (AMP, ANZ, NAB).
Date Licensee Name AFSL No. Decision Reason for Closure
30 June My Planner Australia 345905 Cancel Administration
1 June Personal Risk Management 247844 Cancel Financial governance
1 June Australian Golden Securities 363925 Cancel Financial governance
28 May Squareknot 454694 Cancel Financial sustainability
28 May Forex Plus Australia 259763 Suspend Not providing financial service
18 May Tailormade 464688 Cancel Administration
18 May Ausfunds 440900 Suspend Financial sustainability
The sharp reversal of licensee volumes has continued this quarter in Figure 9. From a ratio of new licence registrations outnumbering de-registrations by 3-4 times over the last few years, this trend switched direction in Q2 2019 to where de-registrations outnumber new registrations. Now this pattern is accelerating as more businesses struggle with the current economic conditions.
In Q2 2020, 83 licensees ceased and 29 formed. This compares with 61 licensees ceased and 29 formed in Q1. The ratio of licensees ceased: formed has climbed from 1.48 in Q2 2019 to 2.90 in Q2 2020, with YTD 2020 de-registrations up 63% on an annualised basis versus 2019, while licensee formation rates remain steady. In Figure 10, as of June 2020, there are a total of 2,155 licensees with 97% of these licensees privately owned.
In terms of licence de-registrations, Figures 10-12 reflects the changes over the past quarter.
Summarising these trends:
• 93% of de-registrations were privately owned licensees (no change from the last 12 months)
• 74% are five years old or younger (versus 65% in prior 12 months)
• 47% of businesses have one adviser and 87% have no more than five advisers (versus 65% and 90% in prior 12 months)
Licensee Movements
Figure 9: Newly registered licensees vs discontinued licensees
These latest results show a worrying trend: that the sustainability pressure on younger businesses continues however it is now spreading to the larger (2-5 adviser) self-licensed boutiques. Encouragingly, rather than leaving the industry entirely, 24% of these advisers have remained but are working for other licensees, although this number is well down on the 62% who remained last quarter.
Behind the ongoing saga of adviser departures is the plight of their clients. A few years ago it was not uncommon for advisers to have client lists of over 500, although the very size of those client books meant that most were not well-serviced and many not at all, contributing to the fee-for-no-service (FFNS) debacle uncovered through the Royal Commission and subsequent regulation around removal of grandfathering, introduction of annual opt-ins and best interest duty (BID).
Today, advisers are streamlining their client books for financial survival while others leaving the industry are invariably contributing to a growing pool of client “orphans”. Figure 13 highlights the
potential advised wealth that is in transition from the advisers that have left the industry over the last 18 months. This special feature looks more closely at this orphaning trend amongst advisers remaining in the industry.
Drivers To Streamline
It is too simple to say that financial pressures are causing this orphaning trend. There is no question that rising costs to stay in business are translating to higher fees for clients. While maintaining profitability is absolutely the central motivation for many advisers, the underlying reasons depend on the nature of the advice business itself and are often a combination of those listed below. They include:
Figure 13 – FUA in transition from ceased advisers
• Value justification. Due to client circumstances, advisers are not adding value so can’t justify continuing to charge the same fees.
• Flat fees. Switching from commissions to flat fees creates a sticker shock that clients can’t accommodate.
• Capacity. Increased regulatory burdens (from ASIC and/or licensee) takes time away from facing customers and limits capacity to handle client volumes.
• Risk. Some clients represent unacceptable risks due to their needs and the extra regulatory / compliance hurdles potentially imposed by the licensee.
• Business focus. Slimming the business to focus on specific areas or taking time off to deal with mental health demands a smaller, more targeted client base.
• Client mix. Taking a proactive approach to reaching a better mix of profitable clients by jettisoning legacy and chasing new.
• Demographics. Adviser departures force replacement of experienced advisers with younger, inexperienced ones. This creates tension with clients and requires strategies to deal with.
The types of clients that are being orphaned are consistent with the drivers described earlier. They are typically lower value in terms of funds under advice (FUA), although for lower FUA clients it may still be possible to justify the fees if the client is highly active or has dynamic, changing circumstances.
Orphans also tend to be older clients that have gone through the full advice journey and neither side sees value in continuing. Equally, legacy clients that don’t fit the current (narrowed) business focus of the advice firm, or legacy clients in grandfathered commission-based products where the commission-to-fee discussion and the work to switch under BID is not economically feasible.
Orphaning “Benevolently”
Smart businesses are “benevolently transitioning” their clients away from full service. This involves finding a range of potential solutions, from remaining a (scaled-back) client to simply remaining in touch, while ensuring that clients are not entirely abandoned if at all possible. These include:
• Treatment of clients on a transactional basis for major or complex one-off events, and remaining in touch through newsletters or other ongoing communication. Of course, there is no guarantee that clients will return to the same adviser for an occasion that may be many years in the future.
• Directing clients to their super fund for “full service” under the intra-fund advice provisions.
• Introductions to digital advice solutions, although this alternative may not be suitable for every orphan who has previously relied upon a face-to-face relationship. This also provides the opportunity to incubate at arms-length and return the client to a full-service relationship once they grow into the adviser’s sweet spot.
Special Feature – Client Orphaning (cont’d)
$79b of estimated advised wealth was in transition due to advisers exiting the industry in the second quarter and potentially orphaning their clients.
The digital investment cohort is probably the most ubiquitous of the robo tool sector, although cashflow / budgeting robos like MoneySoft and MyProsperity are more advanced in partnering with advice and accounting firms. Some investment robos are aggressively pivoting away from B2C to also focus on partnering with face-to-face advice businesses to provide B2B2C services to consumers. This solution
may be appropriate for transitioning orphans, as well as helping to build funnels to attract new clients at the start of their investing / advice journey, including the offspring of HNW clients or deceased estates.
Figure 14 showcases three investing robos (Clover, Nucleus Wealth, and SixPark) that are generating traction with advice firms to help
in a range of circumstances. While they take different approaches, some key fundamentals for success include:
• Getting the right fit. Ensuring advisers are genuinely aligned to this new approach.
• Being in control. Generally businesses that have their own license and are the right size to execute.
• Tech savvy. With these robos offering white-label solutions, it is important that the advice business has sufficient tech capability to engage and execute.
• Retail focus / higher client numbers. Having a sufficient number of low-value retail clients making the transition effort economically viable for both adviser and robo.
Meanwhile, the more comprehensive advice robos like MapMyPlan, and new ones being imported from offshore, present even greater opportunities to partner with advice businesses to handle simple client needs this low-cost way, while concentrating the adviser’s skills and talents on complex cases.
Special Feature – Client Orphaning (cont’d)
Figure 14 – Examples of digital tools for B2B2C servicing of clients
Adviser Ratings has recently commenced a weekly Adviser Movement video series that keeps you updated with the latest statistics on advisers joining, switching and leaving the industry.
These videos are posted on the Adviser Ratings YouTube channel each Thursday / Friday. The videos for this quarter are also accessible through the links below.
New adviser A new entrant who is newly registered as a financial adviser on ASIC’s financial adviser register (FAR) in the sample period.
Ceased adviser A financial adviser whose AFSL Authorisation with a licensee has ceased during the sample period.
Switched adviser An existing or previously licensed financial adviser who has switched-in to a new practice/licensee in the sample period.
Returning adviser A financial adviser whose AFSL Authorisation was de-registered prior to the sample period and has switched-in to a new practice/licensee in the sample periods.
Switched-in Refers to the movement of an existing or previously licensed adviser moving to a new practice/licensee.
Switched-out Refers to the movement of an existing or previously licensed adviser moving from a practice/licensee.
Moving adviser A joint name of new, ceased and switched financial advisers.
Institutionally owned licensee Organisations that are wholly owned subsidiaries of major “parent” institutions with diversified business models beyond providing financial advice only, where the advisers are directly employed. These institutions may be banks, super funds or stockbroking firms.
Institutionally aligned licensee Organisations that are partly owned by or tied exclusively to a parent institution. Advisers are generally not directly employed but operate as authorised representatives.
Privately owned licensee Organisations that are independent of any major institution. Advisers may be directly employed or authorised representatives.
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