No shortcuts to bridging the advice gap

A number of different research sources suggest that financial advisers serve, on average, about 140 or 150 clients each. If there are, say, 15,000 financial advisers currently operating and each has 150 clients, the profession has the capacity to serve about 2.25 million people.

Clearly, that is somewhat lower than the number of Australians who might benefit from receiving advice, and who might actively seek it out if they didn’t perceive it to be too expensive, or too difficult to access, or simply not for them.

There’s two principal ways of bridging the advice gap: increase the number of new advisers entering the profession (including introducing a new category of “qualified adviser” as proposed by the government in its response to the Quality of Advice Review); and finding ways to help existing advisers to serve more clients.

An example of the kind of solution popping up to help address the undersupply is software pitched at existing financial advisers claiming it will allow them to “reach the 12.6 million Australians who currently have unmet financial advice needs”.

The vendor of a particular software package claims that “the client and the software do most of the work, leaving the adviser to optimise the plan and write their advice specific to the client”.

But it doesn’t take much tooling around on the website of the vendor to discover that there’s also an “independent investor” version of the software available, pitched explicitly at “DIY Investors” and offering the ability to “manage your investments, including superannuation or SMSF, reduce your debt and plan your retirement income”.

“Our cash flow management software helps you to create a personal financial plan,” it says.

The company selling the software doesn’t have an Australian financial services licence and none of its directors appear on the ASIC Financial Adviser Register. Yet it is selling software that it says will help the user to produce a personal financial plan.

Without paying the money and signing up, it’s not possible to say definitively if the software makes financial product recommendations. But producing “personal financial plans” sounds like it might.

When a vacuum is created, all sorts of stuff gets sucked into the void. There’s a very big vacuum in financial advice right now, created by the mass exit of advisers, and the market has worked exactly as you’d expect it to. As demand for a service increases and supply of the service declines, a service provider steps in to fill the breach.

Except that advice is a profession, and in professions some basic market forces don’t work quite as we generally understand them to. If they did, there would already be thousands, perhaps tens of thousands, of new advisers entering the market to meet the demand for advice.

There are barriers to entering financial advice, as there should be and as there are to any profession. The supply of new advisers should be constrained to some extent by making it challenging to get in, and by setting onerous requirements for staying in.

While we undoubtedly need a lot of new advisers, we also need them to meet minimum standards. So, while wait to see a meaningful supply of new a properly qualified advisers, there are going to be more and more services popping up offering to help bridge the advice gap.

As long as those services are designed to be used (and actually are used) by properly authorised advisers, that’s great. But if they’re pitched directly at the public, with no appropriately authorised individuals and no AFSL involved in the delivery of what purports to be personal financial advice, then we could be looking at a problem.