After being involved in the Financial Services Reform, FoFA and the Hayne royal commission, Pamela Hanrahan has come to the view that non-holistic policy is undermining advice business models and unwinding the “democratisation” of advice.
“I know that’s an uncomfortable message,’ Hanrahan told a crowd of 300 at the Professional Planner 2019 Risk Summit in Sydney this morning. “But that’s the trajectory.’
Hanrahan, a professor of commercial law and regulation at UNSW who authored three of the royal commission’s published background papers, observed that the FSR and FoFA didn’t do enough to mesh with existing business models.
‘Where we’ve had difficulty implementing policy change over those two cycles was that we tried to bolt a new set of rules and a new set of economic imperatives onto the existing business models,” Hanrahan explained.
“Sometimes you can get dragged along by perhaps a mistaken belief that policy reform and regulatory reform is something that you can take and try and shape to the existing business model.”
Hanrahan voiced concern that the implementation of Hayne’s royal commission recommendations will continue this trend. The problem could be exacerbated by the current pace of technological change in the advice industry, she noted.
Hanrahan spoke on a panel called ‘Behind the post-Hayne policy agenda’ with Michael Vrisakis, a partner at Herbert Smith Freehills and former federal MP Bernie Ripoll, who chaired the session.
After Ripoll asked the speakers to explain the state of the industry in five years, Hanrahan said the policy reforms will continue to drive a different structure, one that may involve a significantly smaller client base.
‘I suspect we’ll end up with a situation where the number of clients that need personal advice in respect of their financial future will be much smaller than it is now,’ she said.
The declining client base won’t be for a lack of need, Hanrahan believes, but due to the cost of delivering it. What we think clients need and expect from advice is not properly aligned to the economic fundamentals of providing that service.
The end result will be a further drive towards specialisation, she said.
“If the policy agenda unfolds as we expect… it won’t be economically viable to provide that level of services to a mass market of clients,’ Hanrahan commented. ‘It’s going to be a more niche solution.”
The defining feature of the wealth sector over the last 25 years has been democratisation, Hanrahan explained, but we may be headed towards a reversal of that trend.
‘I’m not sure that we’re at the stage where policy makers are convinced that’s viable.’
Vrisakis brought a different perspective to Ripoll’s question, replying that other methods of payment for advisers will need to be canvassed within the next five years.
“We’ve got to explore other remuneration methods that may be useful,” he said.
Vrisakis suggested that product and advice may come together in the form of “product sponsored payments”. These would be client sanctioned, he said, and only paid to the adviser if the client agrees.
“There would be a mechanism within the existing legislation that could be unfurled to actually get to that position,’ he added.
There is a huge need for financial advice, especially from the ‘mass market’. These are people who, by definition, haven’t done particularly well financially and would therefore need decent financial advice more than most.
Roboadvice is only a partial (small?) answer as money issues are very individual.