Despite all the debates of recent years, it’s easy to overlook that Australia’s financial advice sector has undergone a fundamental transformation from ringing up sales to building relationships in which the adviser sits on the same side of the table as the client. I have had a front-row seat at this transformation.

It is hard for me to fathom but it is now almost three decades since I set up in my hometown of Sydney a small regional trading office for Dimensional Fund Advisors, a then boutique US-based asset management firm known for its systematic investing approach grounded in academic ideas.

Dimensional had been founded by David Booth and Rex Sinquefield in 1981 as an asset manager specialising in US small caps. Its clients were major corporates and institutional asset owners. Not until 1989 did it start offering its solutions through fee-based financial advisers. These days, Dimensional manages more than $AU900 billion for clients around the world.

In those intervening years, much has changed in financial advice.

How advice changed

From the start more than three decades ago, we committed ourselves to what we called a new model of advice.  This was in stark contrast to the old sales-centric model that had dominated up to that point. In the latter approach, the product provider stood at the top of the chain, incentivising ‘advisers’ (salespeople) to sell product to customers. The new model flipped that around. At the top of the chain was the client, who paid a fee to a professional adviser who in turn chose the most appropriate investment solutions for the client, free of commissions and other conflicts.

Leading the team who advocated for this change was the then head of our advice business, the recently deceased and much missed Dan Wheeler. A former adviser himself, Dan was a passionate and unyielding advocate for the idea of marrying conflict-free advice with cost-effective investment strategies grounded in a scientific approach. His message to advisers was always the same: “If you find someone who can do what we do better, you have an obligation to use them, because you don’t work for Dimensional, you work for your clients”.

Financial advice wasn’t like the car industry, where a car buyer visiting the local Toyota dealership would be shocked if the sales person didn’t try to sell them a Toyota. People consulting an adviser, on the other hand, had the right to expect the advice was not influenced by product-driven incentives. Otherwise, it couldn’t really be called advice. It was a sale.

We also cautioned advisers about the dangers of trying to look busy for clients, by constantly monitoring the financial media, issuing economic “outlooks” and “hot stock” recommendations and by adding to the noise that may only encourage people to make bad decisions with their money.

This traditional view of financial advice was folly, because it rested on the assumption that there were significant inefficiences in prices that were predictable and exploitable.

“You can learn this from us, or the market will teach you, but the market sends out really expensive tuition bills,” Dan Wheeler would say. The alternative was a “never having to say you’re sorry” approach that was not about making forecasts and constantly fiddling with portfolios, but about starting with the client’s needs, setting an appropriate asset allocation and then focusing on what they could control.

How times have changed

Of course, the new model of advice concept is now widely accepted and is not controversial in our industry. But it is not long ago that it seemed radical.

In fact, the nirvana of financial services in Australia right up until the calling of the Hayne Royal Commission was complete vertical integration in which one entity, usually a bank, controlled every step of the supply chain – from designing and creating the product, to providing asset management services and investment platforms, to distribution via financial advice or sales.

While that system has some advantages in terms of internal efficiency, lower costs and offering greater access to financial advice, there were clear problems in an incentivised sales process that created a bias towards promoting the owner’s products, a point noted by Kenneth Hayne in his final report.

The resulting changes to the old model, in Australia and elsewhere, include a gradual shift from transactional and product-led advice, based on attempts to outguess the market, to fee-based client-centric service grounded in goals-based investing that institutional investors have applied for decades.

I believe this change makes sense all around because it means advisers are working on the same side of the table as their clients and are aligned with their investment goals. Since Dimensional started offering its solutions to advisers in Australia and New Zealand at the end of the 1990s, we have seen many firms thrive and grow using this approach.

The advice challenge

This isn’t to say there are not issues in improving the access of Australians to affordable, quality advice, a challenge that was tackled in the Quality of Advice Review by Michelle Levy. In a move broadly welcomed by the advice industry, the federal government recently agreed to the bulk of her recommendations related to cutting some of the unnecessary and onerous paperwork around advice.

The challenges are real enough. Thousands of advisers have left the industry completely in recent years, often because they have not been able to see a way of providing quality advice at fees that people are prepared to pay and at which they remain profitable after meeting the costs of doing business.

Reasonable people can disagree about what is the most appropriate regulatory framework. But my own view is that however well intentioned and conscientiously designed, no framework will succeed if we in the wealth management industry do not put the welfare of our clients before all else.

From our own experience as an asset management firm managing about $40 billion for clients of financial intermediaries in Australia and New Zealand, we see many firms that are innovating in ways that deliver good outcomes for clients at reasonable fees while thriving as businesses.

Each year, we survey hundreds of advice businesses globally, including those here, and find firms succeeding by investing in processes, people and technology to deliver more efficient outcomes while providing high quality services to their clients. That service is allied with disciplined, systematic and diversified investment approaches delivered in increasingly innovative wrappers.

Defining ‘good advice’

Helping this transformation has been a change in how people define and value advice. Formerly, the public was encouraged to seek out out advisers who advertised an ability to outguess markets through stock selection or timing decisions. But it should be plain by now, especially after the experiences of the past decade, that this is an unrealistic expectation.

Instead, the focus has shifted to the idea of the adviser as a counsellor and coach and as someone who provides clarity and structure to people’s financial lives. They stake their businesses on doing the right thing by their clients on a holisitic level, and they know that success will follow. That’s because the relationship is built on trust, transparency and the setting of realistic expectations.

On the investment side, meanwhile, the emphasis has shifted to seeking to outperform the market without trying to outguess it. After more than six decades of academic research, we know what drives returns and we understand much more about building strategies that systematically aim to outperform.

Given the enormous amount of information contained in market prices, other approaches such as chasing the latest investment fads and market timing have become increasingly costly, haphazard and hazardous to client investment outcomes.

Where we are now

The transformation of financial advice has been huge. Advice is now a bonafide profession. A new model has taken hold – one that puts the client at the centre and changes the way advisers charge for services. Technology, meanwhile, offers an opportunity to generate scale without losing the benefits of personalised service.

While they once had limited fund choices for building global portfolios, advice firms can now work with fund managers that offer low-cost, diversified access to the Australian market, other global developed markets and emerging markets – using a multiple of different wrappers, including unit trusts, separately managed accounts and ETFs.

In the meantime, our own message to advisers has not changed. First, make sure you have an investment philosophy that is sensible and based on sound principles. Second, make sure the plans you offer are realistic and match each client’s needs. Even a great plan is no good if the client can’t stick to it through tough times. Third, never stop learning and being open to new ideas and approaches.

Thanks to some of the world’s most renowned financial academics and our own internal research team, we know much, much more about markets and what drives returns than we did just a few decades ago. But people are as varied and as complex as ever – and that is why financial advice is so important.

As an old adviser said many years ago: “I don’t, as a rule, have people with investment problems; I have investments with people problems. And that’s why I have the role that I do.”

Advice isn’t going away anytime soon.

One comment on “‘A bonafide profession’: Australia’s advice evolution”
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    What a wonderful article Glenn and thank you for those quotes from Dan Wheeler, they are ageless. We agree that many advisers have left our industry because they were not educated on, or had little time to learn, how to run efficient, profitable small businesses. There was scant assistance around on how to build operational efficiency via a conscious decision to use a Business System. This is not a criticism of well-meaning BDMs, but the reality is that as compliance became a cost centre the traditional adviser lacked the small business skills to scale, outsource or better use new technology to earn the revenue to survive with a modest profit. We now believe there is the new revolution within our industry. The average adviser is now up-skilling themselves on business efficiency. This is NOT about having a cookie cutter approach, nor a sausage factory, but a genuine belief that a healthier business is directly connected to the depth of your client relationships. It’s about creating a Business System that improves efficiencies and saves time for each staff member. This extra time is then applied to achieving client goals and objectives to a level never before witnessed in Australia. As an industry we now accept that planners are not investment managers, there is more to technology than Excel spreadsheets and Asian outsourcing businesses provide a quality alternative, allowing onshore staff to perform higher-level activities (i.e. client engagement). It’s the revolution of the Office Manager who understands operational efficiency and logistical bottlenecks and who will be the owners of successful planning business of the future. Yes, they will employ excellent financial planners for the engagement role, but many of these same planners can no longer fit the role of Head of Operations. Financial planning practices will transform into financial planning businesses, using a business system to generate efficiencies so that more time can be delivered to our clients. That’s right, its all about the client.

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