Sustainability has been the biggest, most pressing issue for most industries and sectors over the past decade.
Sustainability is not just about minimising impact on the planet. It is also about ensuring that industries and businesses are well run, ethical and financially strong so they can be around for the long term to meet their obligations to stakeholders including employees, customers and shareholders.
From an environmental perspective, financial services companies are not big carbon emitters but they are grappling with economic sustainability issues like wage growth, margin pressure, and ailing profitability.
In life insurance, the prudential regulator has taken extraordinary action to impose product changes and other penalties on life companies in a bid to return the industry to profitability.
Australia’s shrinking life insurance market is also forcing life companies to explore opportunities to grow and diversify.
For superannuation funds and administration platforms, regulatory changes and increasing pressure on fees has accelerated M&A activity and driven investment in product development and member engagement.
Similarly for licensees, sustainability remains front of mind, given the skinny margins on traditional dealer services and the potential for regulatory and structural change to disrupt operations.
Licensees are expanding their value proposition to include business coaching, technology and data analytics.
Yet, sustainability hardly seems a top strategic priority for the advice industry. Even before the introduction of higher education and training standards, growth in adviser numbers had stalled, as had innovation.
Despite burgeoning superannuation balances, ballooning household debt and Australia’s rapidly ageing population, the low number of Australians who get financial advice has barely budged in 30 years; a red flag that current advice propositions are no longer as relevant or accessible, therefore, potentially unsustainable.
Furthermore, while other parts of the financial services industry have aggressively pursued growth through M & A in a bid to get bigger and achieve significant scale, there has been relatively little activity of such scale amongst advice businesses.
Relevant advice
Of the 16 per cent of Australians (3.2 million people) who currently use a financial advice, the majority are baby boomers, according to research by Finder.
This is generally because older people have had more time to build meaningful wealth and have a more urgent need for advice on how to protect, manage and maintain it, as they enter and live in retirement.
They are also typically in a stronger position to pay for advice.
But current models based on comprehensive, upfront and ongoing advice are expensive and exclusive, evidenced by the small number of Gen X and Millennials who use an adviser.
Decades of regulatory reform have resulted in an operating model that is complex, compliance-driven and costly.
This has restricted access to professional advice, despite enormous demand from people of all ages and socio economic backgrounds.
The next generation of advice consumers will be looking for situational solutions; piecemeal advice that addresses a specific need at a specific point in time.
The industry must find a way to profitably provide this type of advice. To enable this, three things need to happen:
1.Regulatory certainty around the delivery of scoped/episodic advice is required.
Pleasingly, the Quality of Advice Review (QAR) has bought this issue to the fore and the government is committed to simplifying the advice process to make advice accessible and affordable to more people.
2. We need advice providers with the capability and capacity to deliver different propositions to consumers.
Alternative models could see an influx of new clients and, in turn, encourage more people to enter the industry.
3. Operating models must be developed that recognise a person’s circumstances and needs change over time and can deliver advice along a continuum.
A person with simple advice needs today, may need comprehensive advice in the future and vice versa.
The freedom of an individual to choose how his or her needs and wants are fulfilled is called consumer sovereignty and it is a fundamental principle in economics although it has been lacking in financial advice.
We know that people’s circumstances change over time and that certain events, like marriage, divorce, pregnancy, redundancy and retirement, trigger people to seek advice.
As such, a person’s advice needs fluctuate over time.
QAR has given the industry an opportunity to reimagine advice and dream up different propositions and models. Advisers can choose to specialise in a particular area or span the continuum.
Irrespective of their model, advisers are in pole positon to identify if and when a client requires more or less service and advice.
Sustainability and purpose
When it comes to corporate speak, one of the most popular phrases used by businesses to describe themselves is purpose-driven.
A purpose-driven organisation is aspirational and focused on achieving a clear mission, beyond profit.
Their strategy and decisions are guided by their purpose, values and mission.
If the advice industry is driven by a mission is to help as many Australians as possible achieve financial freedom then it will find ways to make good advice accessible to more people.
Rather than try to manipulate and force people into one type of solution, it will create a range of options to cater to their varying needs.
In doing so, the industry will become increasingly relevant and secure a vibrant, sustainable future.
Neil Younger is group CEO and managing director of Fortnum.
