The Financial Planning industry has had to rapidly adapt to the changes in compliance measures and the shift in the industry as a whole over the last three years, which is leading some firms to increase their fees in 2021.
With the major banks, largely transitioning away from Financial Planning advice and the professional standards for Financial Advisors being increased since the Haynes Royal Commission into misconduct in the banking, superannuation and financial sector, there is a wave of Financial Planners leaving the industry, having decided it is too much for them.
Whilst this does mean less Financial Advisors in Australia, the businesses and advisors that are left are seeking to correct the image of the industry. Providing invigorated Financial Advice to clients for the next generation of Financial Planning.
A consequence of this has been an increase in Financial Planning fees in 2021 as the number of advisors’ decrease and the cost of doing business increases.
The team at Yield believe it is important for our clients and broader community to be aware of the factors that are influencing Financial Planning fees in the coming years, albeit there are no foreseeable changes we anticipate for our own.
Financial Planning in Australia
There has been a continuous loss of Financial Planners in the industry since 2018 as the Royal Commission recommendations started to come in.
There were around 25,500 planners across Australia in the middle of 2018, and in only two years, that number has now reduced to 21,600.
Mark Hoven, chief executive of Advisor Ratings, has predicted that planner numbers will continue to fall, including Accountants and Stockbrokers who are licensed to give advice.
Hoven predicts the reduction in numbers could even be as low as 15,000 by the middle of 2022 as planners and businesses consider if new educational and compliance measures are worth it.
The Cost of Business for Financial Planners
The escalation of professional standards that have now come into effect for Financial Planners has meant the cost of doing business has increased.
The amount of work that now goes into plans, ensuring they meet all compliance standards, and communicating advice correctly to their clients have meant businesses need more hours and work to go into ensuring client satisfaction and outcomes.
Importantly, the new compliance measures that are expected from Financial Planners, mean clients are now receiving an improved and safer service from the Financial Planners that remain, and many businesses have used this new age in Financial Planning to their advantage. Leveraging off what they are already doing well and growing to meet the advice need of many Australian’s, as advisor numbers fall.
Education requirements for new advisors mean they must have a Bachelor’s degree at a minimum, and then complete a professional year that culminates in a 3 and ½ hour exam on professional and ethical practices in the financial industry that they must pass.
Those already working in the industry will also have to meet all of these professional standards, with the test to happen by the end of this year, and the educational standards by the end of 2025.
All Yield advisers already meet all these requirements.
Fees for Comprehensive Financial Planning Advice in 2021
The mass exodus of Financial Planners from the industry, and the boosted educational experience of new and remaining advisors in the industry signifies the likeliness of fees to continue increasing.
Hoven has also said that businesses that provide comprehensive personal Financial Advice will become an ‘increasingly rare service’ and be able to increase their fees.
As baby boomers move into retirement and require advice, and the number of advisors reduce further, the need is growing for comprehensive on-going advice.
Survey on Financial Planning Fees in 2021
An Advisor Ratings survey released in 2021 on fees in the Financial Planning industry found that they have risen by 28% in the last two years.
The median price for Financial Advice was around $2,500 at the end of 2018, rising to around $2,800 in 2019, which is a 12% increase.
This then rose by a further 16% in 2020 with the median being $3,240 as the fee-for service price-tag.
It is important to remember that these are the medians for ongoing advice. So, whilst some may pay as little as $500 for simple investment advice for example, others will have more sophisticated needs, which forms the median. As we look to 2021, the trend in Financial Planning fees appear skewed to the upside.
Hesitancy in Financial Planning and Fees
The Retirement Income Review, commissioned by Treasury, was aimed at improving the understanding of how the retirement income system works for all Australians.
The report centres around the three pillars of the retirement income system; the age pension, compulsory superannuation contributions and voluntary savings (including home ownership).
As many consider and engage with Financial Advisors for Retirement Planning and Financial Plans in general, the report considered this. It found that Australians are hesitant about accessing Financial Advice due to the cost and the lack of trust of providers.
The changes the government have initiated to increase the educational standards for advisers, aims to resolve this issue.
Regulatory Framework Changes Effecting Financial Planning Fees in 2021
As legacy trailing commissions on Financial Planning investment products came to an end on the 31st of December 2020, it has meant that all clients of Financial Planners must agree to engage in a fee-for-service model, if they would like an engaged Financial Planning advice relationship.
Yield Financial Planning’s fees have been using this fee-for-service model since 2006, long before it became mandatory Australia-wide in 2013.
Why? Because we could see that investment commissions had the potential to create a conflict of interest. Because we wanted it to be obvious that we put our client’s interests before our own, we identified that by rebating investment commissions we could be transparent and remove the conflict.
There are a range of changes to the regulatory frameworks that are now before parliament, including the government preparing to simplify regulatory framework and creating a central disciplinary body for planners in an effort to reduce complexity and cost for advisors.
Another change before parliament is for Financial Planners to ask their clients to ‘opt-in’ for on-going advice every 12 months and then agree to the service and Financial Planning fees. Currently this must happen every two years, along with an annual Fee Disclosure Statement that outlines the fees paid and service provided.
Financial Planning Fees in 2021 and Beyond
Transparent Financial Planning and Investment fees are now what the entire industry has moved to, and 90% of respondents to a 2019 Profession of Independent Financial Advisors survey stated that they prefer to pay fees-for-services rather than commissions.
The only commission that now remains in Financial Planning is for insurance products and these have been reduced and adjusted to be uniform across all insurers, removing the potential conflict of interest of recommending one insurer over another.
Financial Planning is now becoming more difficult to work in with the rising cost of doing business in a contracting industry, with more demand and more professional standards needing to be followed. The upside of this trend for consumers is that Financial Planning is becoming the profession it must be, that can be relied on by Australian’s in the future.
As indicated previously, the reason why many do not engage in Financial Planning services is due to the price. That is why we believe it is important for advisors to discuss the changes to fees and the reasons behind the changes.
If this prompts any questions for you or about your current Financial Plan, get in contact with us and we would be happy to discuss this.