It’s a very cool objective to want to help more people get the advice they need to make the most of their retirement. It’s a goal Professional Planner wholeheartedly supports. It’s good for Australians, and the more financial advisers there are in the market, the more potential readers there are.
But the problem with a proposal to subsidise financial advice fees to help more people get advice isn’t that there aren’t enough people who want financial advice, it is that there are not enough advisers to deliver it.
There’s no doubt that the cost to deliver advice has been driven up by regulation. There are estimates that as much as 30 per cent of the cost of advice is due to compliance costs alone.
(It’s another question altogether whether compliance and red tape should be reduced on an industry that only attracted such a heavy regulatory burden in the first place because of previous practitioners’ misconduct and historical disregard for clients’ best interests.)
But also, the advice market is broken in part because the supply and demand sides are out of whack. To get them back into line, you need to either reduce demand (not a good idea) or increase supply (a much better idea).
The subsidisation issue blew up after the advice profession’s peak representative body, Financial Advice Association, suggested in a submission to Treasury that a means-tested $2000 special payment be available to “support those seeking advice in the lead-up to retirement”.
It said the subsidy should only be available for a fixed period – it suggested a decade – and only to those aged over 55 or 58.
In the overall context of the FAAA’s Treasury submission, the advice fee subsidy is small beer. The association makes other suggestions that will have a far broader and deeper impact on the quality of Australians’ retirements. But the subsidy idea caught the eye because it’s an extension of a campaign the FAAA, and the Financial Planning Association before it, has waged for years, namely, tax-deductibility of advice fees. Deductibility and subsidisation are both attempts to increase demand for advice by shifting the financial burden from the individual receiving the advice onto taxpayers.
And that’s something Professional Planner has much more mixed feelings about. Even though we often hear practitioners and association heads saying things like that after your physical and mental health your financial health is the next most important thing.
Those issues are often linked. But even so, unlike healthcare, financial advice isn’t an essential service, and the case for taxpayer support is far less clear-cut.
Professions occupy a privileged position in society, in part because they do things that set them apart from other occupations – such as (but not only) setting and enforcing their own standards of behaviour and practice that exceed the bare minimum requirements of the law.
The FAAA’s position on fee deductibility and subsidisation is understandable and probably popular among practitioners, but it’s a big ask for government to use taxpayer money to support an occupation that in some respects still falls short of being a true profession.
Besides, basic economics says that if you increase demand for something and you don’t increase the supply, the cost of that thing will go up. With no influx of new advisers on the horizon, the likely impact of putting $2000 into someone’s pocket – which they can only spend on financial advice – will be to increase demand for an already scarce resource.
People who haven’t sought advice already often say it’s because they either don’t need it or think they don’t need it, or that they don’t see the value in it (and often those reasons are intertwined). Because the FAAA proposal is that the subsidy be means-tested, it’s lower income-earners who’ll get the greatest subsidy – and its lower income-earners who generally perceive the least value in advice to begin with.
But if you give someone who doesn’t value advice $2000 and tell them they can only buy advice with it, they’ll probably value advice at exactly and no more than $2000. It’s called anchoring – the subsidy sets in their minds a price that advice should cost. They’ll baulk at paying more, because they’ve been told the value of advice is $2000 and if this adviser is trying to charge me more than that they must be trying to rip me off. Playing back into outdated stereotypes of financial advisers is the last thing the profession needs.
One of two things will happen for someone with $2000, and no more than that, to spend on advice. They will be turned away by advisers who can’t afford to service them, the $2000 will be unspent and there’ll be no improvement in the take-up of advice.
Some people might tip in some of their own money to meet the cost being asked. Or, else, advisers will need to figure out how to craft an advice offering they can sell for $2000.
Given that advice currently costs just slightly less than twice this amount to deliver, it’s anyone’s guess what will need to be left out and what corners will need to be cut to get it out the door for so little.
