Like sightings of the Yeti or Bigfoot or the Loch Ness Monster, the prospect of tax-deductible financial advice fees has raised its head again.
Some advice fees are already deductible, of course. But right now, a fee paid for the creation of a financial plan isn’t deductible.
This is not because a financial plan isn’t set up with the intention of creating assessable income – which is a general condition for deductibility – but because the creation of a financial plan (at least in an investment context) subsequently leads to the creation of an investment portfolio. Creating a portfolio – acquiring assets – involves capital expenditure.
But there are plenty of situations where a financial plan doesn’t lead to the creation of an investment portfolio at all, and what the profession ultimately wants is deductibility for the fees paid by clients for a professional service that may or may not have an investment component to it.
Financial advice representative bodies have lobbied for tax-deductibility before. What’s clearly different this time is that financial advice more closely resembles a profession today than at any other time in its history.
Entry to the profession has substantial educational hurdles; remaining in the profession requires commitment to ongoing professional development; practitioners are required to adhere to a code of ethics; and most (not all) of the remuneration and structural conflicts that historically blighted the industry have been cleared out.
But is that enough to justify effectively asking taxpayers to subsidise financial advice? Well, let’s not forget that most individuals who seek financial advice are taxpayers, so it would be taxpayers who don’t seek financial advice who would be subsidising those that do.
We already have a kind of analogue for this: it’s a bit like what happens with superannuation funds now, where the cost of a fund’s advice service is borne by all members but only a fraction of those members actually use the service.
Even if tax deductibility of fees reduces the cost to the client, it doesn’t fundamentally change the cost of delivering advice. That’s still largely driven by all the inputs into advice, including compliance, and the issues around that are a separate discussion – except to say that if the government can successfully implement steps to help reduce the cost to deliver advice, and advice consequently costs less, then the extent of the taxpayer subsidy will also be reduced.
Whether or not advice fees are or could be deductible under current legislation isn’t strictly the point. The question is: should they be? What’s the overall benefit – the national interest, to be highfalutin’ about it?
Allow me to be self-indulgent for a moment (again). In 2020 when I was working with Andrew Inwood and his team at CoreData Research, we were retained by CPA Australia to examine the macroeconomic impact of financial advice.
I’m not going to go into detail here about the methodology underlying the research – you can read it here if you want to, starting on page 20 – but the research concluded unambiguously that there’s an enormous potential economic benefit in more Australians receiving financial advice.
The benefit was measurable even if only a few more people received advice, but the benefit if everyone received advice was phenomenal.
The report found that if the take-up of advice increased from (the then-assumed) level of 39.1 per cent of Australian adults to just 40 per cent, the economic benefit would be more than $9 billion a year. If half the adult population received advice, the benefit would increase to almost $113 billion. And if every single adult received advice, the benefit would be $630 billion a year – and that did not include an estimated $10 billion reduction in age pension outlays because of the population’s overall improved financial position.
In economic rationalist terms, if allowing advice fees to be tax deductible encourages more people to take up advice and provided the taxpayer-funded subsidisation of advice fees is less than the macroeconomic benefit that comes from that greater-take-up of advice, it’s worth considering.
It’s doubly worth considering when the vast improvements in standards and professionalism of financial advice practitioners is also taken into account. There’s significantly less chance today that asking taxpayers to subsidise financial advice will necessarily and automatically just help to swell the investment products of the institutions that once controlled financial advice networks.
