Half a decade has passed since the conclusion of the damning Hayne royal commission and the advisers who stayed the course during the sector’s lowest point are reaping the benefits.
The royal commission led to a raft of changes to the industry, including the removal of grandfathered commissions, originally left intact by the Future of Financial Advice reforms, along with the controversial fee consent regime, reference checking and breach reporting requirements.
Additionally, the Financial Services and Credit Panel, Compensation Scheme of Last Resort, and the Quality of Advice Review were all outcomes of Hayne’s recommendations.
Forte Asset Solutions founder Steve Prendeville says the impact of the commission was unprecedented.
“Greatest change the industry has ever seen, certainly in my 35 years,” Prendeville tells Professional Planner.
“What we saw was the brand damage and the following period of actions and payments/damages from the banks. We saw the great banks exit and we saw the great exodus and diaspora of advisers.”
However, data taken years after the commission shows the quality of advisers has improved. Prendeville notes that Adviser Ratings’ 3Q21 ‘Musical Chairs’ report 14.8 per cent of current advisers are rated by consumer ratings via the researcher as “exceptional”, compared to just 3 per cent of advisers who have left the industry.
More than a quarter (26.9 per cent) of current advisers are rated in the second-highest band of “very good”, compared to just 11.1 per cent of advisers who have left.
Conversely, 62.5 per cent of advisers who have left the industry had a score of either “fair” or “poor” – the two lowest categories – while only 37.5 per cent of current advisers were rated as low.
AFCA lead ombudsman for advice Shail Singh says the number of advice-related complaints has reduced, with the drop in the number of advisers and market conditions being factors, but also because standards have improved.
“From my observations it is the latter that’s driving it,” Singh says.
“The fourth aspect is that [Internal Dispute Resolution] processes have improved in this industry and I’m noticing a lot of the big financial firms are now developing pretty robust IDR [systems].”
Additionally, Singh says complaints about fees for no service, a key royal commission finding, have also reduced.
And while the Adviser Ratings report used quantifiable data to back its view that the quality of advisers has improved, Singh says anecdotal evidence also supports the finding.
“When you go out to meet groups and go to conferences and talk to advisers, the level of sophistication is much higher than it was previously,” Singh says.
Bigger picture
Financial Advice Association policy general manager Phil Anderson describes the outcome of the commission as nadir for the industry.
“The perception of financial advice in the broader market whether fair or not was absolutely destroyed and it led to a series of recommendations, some of which may have merit, but others certainly didn’t and led to an excessive phase of regulation,” Anderson says.
“Looking back on it, some of what went wrong since has been because the government overreacted, [going] above and beyond what the Hayne recommendations proposed.”
Anderson says although it has been a challenging five-plus years, the industry is through the worst of the damages.
“We now have a media and parliament that can look beyond [the commission] and recognise it’s not the only determinant of the value of financial advice,” Anderson says.
“While it will always continue in perpetuity to be a blight on the advice profession, the distance between the report and now… and probably a better perception of the value of financial advice is helping to correct that.”
But Anderson laments the fact the royal commission was always a review of misconduct, providing only a negative perception of the industry and perhaps not enough of a balanced or pragmatic view.
“It was always an inquiry into misconduct,” Anderson says. “Despite the fact that we often provided them evidence of what good advice looks like, they were only ever interested in misconduct.”
Business is booming
Despite the short-term reputational damage, overseas investors have taken an interest in advice, including the Italian backing of AZ NGA, along with US investment in Koda Capital and investment in advice firms by Merchant Investment Mangement.
Prendeville says the industry is still trading at the normal historical values of 3.0x recurring revenue or 6.0x adjusted earnings before interest and tax (EBIT – which measures profit) over the past five years.
Despite the multiples not changing, purchase prices have increased because of the overall revenue boosts seen by practices.
“We just looked at 2021-2023, average practice revenues gone from $1.1 million to $1.6 [million],” Prendeville says, quoting figures from Iress’ ‘2023 Adviser Efficiency Report’.
However, he cautions that not all businesses are enjoying the same level of profitability.
“We’ve got about 45 per cent of our industry that is single advisers/single practice and that 45 per cent are earning less than 500,000,” Prendeville says.
“We’ve got rising costs coming through our whole production line, and the war for talent.”
Noting previous comments from the PI insurance industry that insurers are returning to the sector, Prendeville says they believe there is less risk.
“Part of that reduction of risk is legislation…but more importantly it’s the move from institutional ownership to independence,” Prendeville says.
“The vast majority of licensees have less than 10 advisers and most of the advisers are directors of the licencees so they are hyper aware of their responsibilities.”