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.