A brief history of the Financial Planning Industry and Dealer Groups in Australia
Back in the 1990’s the Financial Planning market was a fledgling industry seeking to carve out a space in the Investment, Superannuation and Insurance sectors.
Some suggest the birth can be directly linked to the introduction of the Superannuation Guarantee (SG) in 1992.
‘Dealer Groups’ (now referred to as AFSL’s) were established by major Insurers and Investment product managers with Authorised Representatives appointed to provide advice, superseding in most cases the ‘Insurance Agent’ agreements.
Dealer Groups were effectively a product distribution channel.
Product sales (funds), superannuation and insurance switching were rife, and the idea of wholistic advice to clients (let alone retirement advice) was just being born. The market was extremely fragmented with thousands of single Advisers previously Insurance Agents now running their own business (books) as ‘Financial Advisers’.
To do so, all they required was RG146 accreditation, the equivalent of DFP 1-2 and away they went. Further accreditation, DFP 3-4 allowed for more sophisticated (product sales) advice. Completion of the CFP designation (all 8 DFP units) was rare.
in 1998 there were approximately 120 CFP designated Financial Planners in Australia
The Banks obtained Licenses around this time and set up shop, going on to become the largest training ground in the industry for two decades. Albeit I was reliably informed one major in the early 2000’s had one product cancellation or outflow every month for every new product sale (Investment or Insurance).
This didn’t really matter because the upfront commissions were so large.
2o Years of Financial Planning Industry Growth
Over the next decade from the late 1990’s Industry Funds and advice emerged, ASIC started to take more interest in product sales and Adviser qualifications, the seeds of ‘Practice Management’ theory were being sown across Dealer Groups, and the idea of ‘fee for advice’ started to emerge.
I took a keen interest in the emergence of Practice Management services offered by the Dealer Groups, which can be defined as consulting services delivering a process of ‘corporatising’ small businesses with systems and processes so not to be solely reliant on ‘one Adviser’. It also provided efficiencies and increased capacity for growth.
Then during the aforementioned period, we saw the emergence of multi Adviser corporate advice businesses enter the market.
Interestingly, as I view the AFSL market landscape today it is these ‘Practice Management’ or Consulting Services that have come to the fore as the value adds for what is a fairly vanilla market.
Ostensibly the period from the late 1990’s through to 2017 was two decades of boom times, with experimentation, entrepreneurial endeavours and mass growth for the industry interceded with two mass periods of consolidation (cyclical market behaviour) occurring after the tech crash in 2000 and then again in 2008 with the GFC. Quantitative easing anyone…..?
Although the market was consciously wrestling with troublesome ‘vertical integration’ and the idea of ‘fee for advice’ services to remove any product bias and / or commission incentives relative to ‘best interest duties’ encapsulated in the Corporations Act.
These were not the only factors and likely oversimplification, but anyone reading the tea leaves could see the obvious coming down the road. The industry had to change or be changed, we got the later.
Footnote:
As with most new Industries in the western system the Financial Planning sector was granted the opportunity to self regulate on the provision that community standards were met. Any failure in this regard will attract Government intervention.
I view the ‘Big Tech & Social Media’ sector in a similar way, they’re reaching the 20 year mark and regulators have started to intervene. The EU with anti competitive behaviour regulations, more locally in Australia with pay for news legislation and responsibility for content.
Interestingly on Big tech, I view the East’s approach (China) as the most effective and timely intervention by effectively stopping tech companies from any form of social engineering or interference. Not against the state but potential harm to it’s citizens. We can all learn from each other, but more on this another time, I digress.
2017 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC).
The inevitable occurred and big brother stepped in.
The revelations, systemic structural and legacy faults, reputational damage and resulting downward spiral of the industry are well documented. Not to mention the financial damage and brutal psychological impact this had on thousands of Financial Advisers across Australia.
The answer was always simple, put client interests ahead of self interest. Anyone with the slightest knowledge of the Corporations Act could have told you this.
You can read more on the RC - HERE
As an interesting aside, with all the political agendas being driven and dangers of alternate views at the time a significant point was lost in the noise.
As noted above, and have been reasonably informed on numerous occasions over many years the birth of the Financial Planning Industry primarily coincided with the introduction of the Superannuation Guarantee in 1992.
“In the Budget delivered on 21 August 1991, the then Treasurer, John Kerin, announced that from 1 July 1992, under a new system to be known as the Superannuation Guarantee (SG), employers would be required to make superannuation contributions on behalf of their employees.”
On introduction of this legislation the Government of the day approached the Accounting Industry to administer the new system. On review the response was a simple ‘NO’, we don’t have the systems and infrastructure.
Second port of call, the Life Insurance Industry – refer above ‘The market was extremely fragmented with thousands of single Advisers previously Insurance Agents now running their own business (books) as ‘Financial Advisers’.
My point is that lost in all the RC noise was the Government asked the industry to perform a vital function for the future retirement system, then returned with blunt force 25 years later to bash them into submission.
Interesting how the world turns!
FASEA
Next up and fast on the heals of recommendations from the RC the industry had mandatory re-education and compulsory ethics exams imposed (continuing to date of this article) plus minimum requirements for all Financial Advisers wishing to be on the ASIC register with a deadline to do so.
Financial Adviser Standards and Ethics Authority (FASEA) – Read More
Education and Compliance became the order of the day.
Caveat Emptor, conventional law and the Corporations Act were all thrown out the window.
Remediation programs became the norm in 2018, and the banks and large institutions ran for the door fearing ‘Regulatory Risks’ and reputational damage could endanger their entire business.
AFSL’s were cancelled on mass and the IFA sector imploded.
A general state of chaos ensued for several years.
Lawyers and the BIG4 Consulting Firms were the winners.
Joint RC & FASEA Impacts - A seismic shift driven by regulatory costs
The effects of the RC & FASEA should not go down in history without exploring some of the key impacts on the dynamics of the industry.
On the positive side:
- Minimum Education standards
- Re-setting the ‘Professional’ status
- Establishing acceptable community standards
- Plotting a framework and course for the future
On the downside:
- Reputational damage to the Industry (Advice Community bashed in the media)
- The loss of in excess of 10,000 Financial Advisers (circa 26,500 down to 15,500) in 2024
- The loss of associated support roles – circa 10,000
- Increase in minimum fees to receive advice - $2500-$3000
- Increased administration costs and burden on advice businesses
- Institutional Investment withdrawn
These represent just a few highlights and are not intended to be comprehensive.
The over arching effect of the RC & FASEA requirements were to increase the cost of delivering advice. The un-intended consequences of the over-reach from government and regulatory intervention was to price hundreds of thousands of Australians out of receiving advice.
The direct costs, plus associated administrative and compliance burdens resulted in the majority of professional advice firms setting minimum advice fees. Post RC the majority of the Financial Planning industry in Australia only services mass affluent and wealthy clients.
Post Royal Commission = Advice Industry assisting rich people get richer.
But hey, let’s be frank most politicians have a few investment properties!
Unfortunately advice is not affordable or available to those who most likely need it the most.
QAR to the Rescue
Where did Michelle Levy come from?
The Quality of Advice (QAR) review was then commissioned in 2022 by the Government to improve the accessibility and affordability of quality financial advice, to be Chaired by prominent financial services Lawyer Michelle Levy.
Without going into the recommendations in details (you can read the Final Report in the link above) the review suggested reverting to the corporations act pointing out this covered the primary areas regulated by ‘best interest duty’ and that ASIC’s safe harbour provisions are needless.
In short, it took one Lawyer circa 12 months to unravel what ASIC and Lawyers had spent 20 years building into a regulatory framework for the Financial Planning Industry.
Many, but not all of the recommendations have promptly been introduced through legislation. Some remain under debate.
AFSL Licensing Guide Series:
Dugald Braithwaite
Principal | 25 Years Experience
Since 1998 Dugald has delivered Management Consulting Services to the Financial Planning Industry.
Experience extends to supporting local & international wealth management clients with executive search, strategy, board reporting and large scale project execution.
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