Fee-based advice is having a negative impact on client access, says professional

Speaking at the Morningstar Investment Conference Australia 2023 in Sydney on Wednesday, president and chief executive of Franklin Templeton, Jenny Johnson, said that wholly fee-based advice is deterring clients from accessing financial advice.

“I think people are much better served with a financial adviser helping them for a few reasons,” Ms Johnson said.

“I do not agree [with fee-based] and I think that’s the model that has come out of both Australia and the UK. I do not agree that 100 per cent of advice should be delivered fee based, I think there’s about 20 to 25 per cent of the population that is better served paying a one-time commission and maybe a small trail versus paying the external fee.”

She added that the fee-based system can both discourage clients from seeking advice and disincentivise an adviser from taking them on.

“What happens is when somebody’s too small for an adviser to take on, the adviser will do it if they can get a commission and we leave out a huge percentage of the population,” Ms Johnson said.

“It’s happening in the UK. They can’t get advice because they’re not big enough.”

Advisers, Ms Johnson opined, are key to getting this segment into the market.

“Small investors in their 20s aren’t getting any advice. The difference between starting to save between 20 and 30 — if you save $5,000 a year and earn a 7 per cent return from age 20 to 30, you’ll have more money at the end, then someone who starts at 30 saves for 30 years. That first 10 years when you turn 20 of savings is so important to retirement,” she said.

“We’ve historically seen [financial advisers] bringing investors in, because the risk is the do it your own, you end up with the GameStop and the meme stocks and all these things that people get burned on, and then they don’t want to come back in the market.”

However, the CEO also pointed out that with Australia’s compulsory super system, much of the population is in a much better position than in other markets.

“Advisers can coach you into saving, but I often tell people that I think what Australia has set up with compulsory saving through the employer is actually one of the best markets and much of the world should look to Australia and have a similar model,” Ms Johnson said.

She added that moving to fee-based has also expanded the services that advisers need to provide.

“What has happened to the financial adviser is they’re being required to provide the capability that used to just be available to ultra-high-net-worth clients,” Ms Johnson said.

“You’re really a wealth manager or financial planner. People expect tax efficiency. I talked to an adviser in the US who had negotiated the prenuptial agreement on behalf of a client. So, the expectation as the world’s gone fee-based is you’re doing a lot more, so we have invested in tools and either acquired or made investments in tools to work with our financial distributors as they grow that business.”

In an op-ed published on ifa earlier this month, financial adviser Helen Baker argued that access to financial advice is key to closing the gap on financial inequality.

“Most school leavers have at least a basic idea of what an accountant or a lawyer does, but few, if any, know anything about financial advisers,” she wrote.

“Better education about the role of financial advice and what it delivers would go a long way — both for children before starting their working lives, and the general population.”

In the Quality of Advice Review final report’s recommendations, lead reviewer Michelle Levy argued that access to advice could be solved through non-relevant providers.

According to Ms Levy, the spectrum of financial product advice is “very broad” and there are “simple questions that can be answered simply”.

“It is also clear that even where the advice is not simple, many of us have common needs and so not all advice is unique. This means that technology and digital advice tools can be used to support people who are not financial advisers to provide personal advice, which without that support, could only be provided by financial advisers,” she said.

“Digital advice tools can also be made available directly to consumers. Some already are and improvements in technology mean that they are increasingly able to provide more sophisticated personal advice.”

As part of her recommendations, Ms Levy suggested that the Corporations Act be amended to say that personal advice must be provided by a relevant provider where: a) the provider is an individual; and b) either: i) the client pays a fee for the advice; or ii) the issuer of the product pays a commission for the sale of the product to which the personal advice relates.

“In all other cases, personal advice can be provided by a person who is not a relevant provider,” Ms Levy said.