2015: Year in review - Staking our claim

WHILE ADVISER bad behaviour dominated headlines last year, 2015 has been something of a turning point for the advice industry. Rather than attracting a focus on the rogue bad apples, advisers – aligned and non-aligned; risk and investment; salaried and self-employed – are looking towards the future to find ways of pushing the profession forward and keeping it relevant.

This year has been marked by a surge in mergers and acquisitions, which demonstrates an ever-increasing thirst for collaboration – something that is sorely needed if the non-aligned space wants to continue to challenge the big end of town's vertically integrated model.

Implemented Portfolios' Santi Burridge perhaps said it best in a recent blog for ifa: "During my career, I have been guilty of poorly collaborating and I have met so many business owners who believe their way is the only way. This attitude has cost this industry dearly and ensured the conflicted model received oxygen in the face of a toxic culture," he wrote.

"This lack of leadership is creating the greatest opportunity for true non-aligned advice (why we can't call it 'independent' is beyond me) to dominate in Australia, and it is happening. I am meeting more and larger scale businesses that are working this out now and are putting collaboration at the core of their business – and they will grow much faster than anything we have ever witnessed in Australia before."

So, this year we have seen industry funds join forces with advisers – something no-one imagined would ever happen; CPA Australia set up its own advice business; and a number of non-aligned businesses team up to create large planning outfits.

Advisers have also taken to technology with gusto, pushing away the fear that robots will replace humans in the advice space. Instead, forward-thinking advisers are looking at ways that technology can allow them to provide a better service for their clients.

But it wasn't all roses – that's for sure. The Life Insurance Framework has been a major talking point, and although we now have some clarity, fears for the life insurance sector remain and uncertainty about the educational requirements that advisers will need to meet still reigns.

However, what doesn't kill you certainly makes you stronger and as the industry plants its flag firmly in the ground, announcing to the world that it is not going anywhere, the opportunity for new business models and new ways of working will ensure this vibrant industry remains strong.

There is no doubt that the aligned model is here to stay, but let's work together to embed it even further via creativity, enthusiasm and collaboration. So, as 2015 draws to a close, here is the ifa team's wrap-up of a year of transformation.

Undergoing maintenance

Revelations of scandalous advice practices might have caused a great stir in 2014, but the focus in 2015 largely shifted to cleaning up that mess.

Commonwealth Bank continued to review claims for compensation from clients who say they lost money via the bank's financial planning arm and relating to advice given as far back as 2003. Registrations for the Open Advice Review program closed in July, and by the end of August 2015, CBA had reviewed more than 8,800 cases and compensated 19 clients to the tune of $488,815. The bank also introduced additional resources, including hiring more than 100 people to the review team, as a way to speed up the overall process. CBA chief executive Ian Narev said in July that he was proud of the way CBA was responding to claims, although he also admitted it was slow.

"You've got to accept in the short term you'll wear some criticism for appearing slow, but in the long term you make sure you're putting things right," he said.

Meanwhile, National Australia Bank spent the year sorting out a compensation scheme of its own. By October, the bank's Customer Response Initiative – which commenced in February – had already paid out $1.7 million to 87 customers who received bad advice from NAB advisers.

NAB also in October began writing to customers whom it believes may have lost money due to their receiving inappropriate advice dating back to 2009. This was done using a staged process as NAB continued to review advice files. Each client had a dedicated associate who was able to answer questions about the review process, NAB stated.

ASIC said it had oversight of the initiative to ensure that it provided a fair, effective and transparent mechanism for customers to be properly compensated.

ASIC also spent most of the year adding new names to its banned list as part of the Wealth Management Project, which began in October 2014 as a way to lift the standards of major financial advice providers. The project focused on the conduct of advice firms under NAB, Westpac, CBA, ANZ, AMP and Macquarie.

The corporate regulator worked with other Wealth Management participants to address the identification and remediation of non-compliant advice. This was in addition to the work ASIC was doing to ensure appropriate customer remediation where fees had been charged but no advice service had been provided.

While the scandals involving financial services giant IOOF's research team did not involve bad advice, the allegations of front running and insider trading associated with the firm sparked by Fairfax Media reverberated within the financial services industry throughout 2015.

They also led to the Senate Economics References Committee calling on several IOOF top executives for questioning on more than one occasion. IOOF then tried to put those allegations to bed through an independent review by PwC, which reported in August it found no fundamental breakdown at the company.

However, many were still not convinced, and this prompted plaintiff law firm Maurice Blackburn to announce in October that it was launching a class action lawsuit against IOOF. The firm claims IOOF's failure to disclose possible misconduct within the company had led investors to purchase IOOF shares at inflated prices. IOOF has since rejected those claims.

"IOOF is confident that the proposed action described by Maurice Blackburn is misconceived both factually and at law. It would be purely speculative and is not in IOOF shareholders' interests," the company said in a statement.

The regulation wave rolls on

Last year, the industry experienced 'change fatigue' as it grappled with FOFA and the recommendations made by David Murray in the Financial System Inquiry (FSI), to name just two examples of regulatory change. There was to be no respite in 2015 and there was plenty to keep compliance officers – and advisers – busy. The issue that now took centre stage was, without doubt, reform of the life insurance sector.

Following the release of ASIC's scathing review of retail life insurance advice, the industry established the Life Insurance and Advice Working Group – chaired by former APRA member John Trowbridge – to discuss ways and means to improve the quality of life insurance advice.

Mr Trowbridge, who was appointed by the AFA and the FSC to oversee an industry-led think tank, proposed in March a series of reforms for the risk industry that some industry pundits said would decimate the risk advice sector.

With all recommendations submitted to Mr Trowbridge – except those from advisers – kept confidential, the industry was left scratching its head concerning from where Mr Trowbridge had derived many of his conclusions. With the help of an anonymous source, however, ifa was able to reveal that Mr Trowbridge's report mirrored much of what was recommended by the FSC in its confidential submission.

Following the release of Mr Trowbridge's recommendations, the AFA, along with the FPA, held numerous discussions with key government figures, including then assistant treasurer Josh Frydenberg, to argue why the Trowbridge recommendations would be unsustainable.

On 25 June, Mr Frydenberg – with the support of the AFA, FPA and FSC – unveiled the Life Insurance Framework, a set of reforms for the risk insurance sector. The reforms have a commencement date of 1 July 2016. However, the reforms themselves – while significantly better than the proposals in Mr Trowbridge's final report – angered many within the advice community.

In September, former prime minister Tony Abbott was ousted by Malcolm Turnbull and cabinet saw a significant reshuffle. The change in the government's leadership team saw Mr Frydenberg move portfolios to be replaced by Kelly O'Dwyer, both as the new Assistant Treasurer and Minister for Small Business. This appointment brought a new wave of optimism among advisers that there might be a chance for the reforms to be less onerous.

Meeting with Ms O'Dwyer, the AFA, along with other industry associations, sought to convince the newly-appointed minister of the adverse effects the reforms will have on advisers and what they will mean for consumers in the future. But any hope of the reforms being altered seemed short lived when the government – having remained muted up until October – published its official response to the FSI.

The government's response agreed with Mr Murray's stance that the interests of consumers and financial firms need to be better aligned when it comes to retail insurance advice, and it stated that the government would adopt the Life Insurance Framework to achieve that. Some breathing room was given to the industry, however, when Ms O'Dwyer announced the framework would be implemented by 1 July 2016 rather than by 1 January 2016, as originally proposed.

On 6 November it was announced that a consensus had been reached between the AFA, FPA and FSC for "important improvements" to be made to the LIF proposals. The changes, while not affecting commission rates, would see the clawback period reduced from three to two years. But it would seem that the government would still hold the possibility of level commissions over advisers' heads should a review by ASIC in 2018 find no substantial improvement in the quality of advice.

However, reform within the life insurance sector – while definitely a dominant issue, both for advisers and for headlines – is only a small piece of the financial services puzzle when compared with the government's response to the FSI.

Agreeing with all but one of the 44 recommendations made by FSI chair David Murray, the government said it would take a number of measures to improve the financial services industry – including ones to address adviser education.

With the Parliamentary Joint Committee inquiry into lifting professional, ethical and education standards making its recommendations late in 2014, it seemed that more stringent education requirements for advisers will be a proposition for sooner, rather than later.

This, however, proved not to be the case and the topic remained sidelined for most of 2015, only resurfacing in the government's long-awaited response to the FSI. What we know for sure is that the government plans to introduce legislation by mid-2016 to lift professional standards that would require advisers to hold a degree; pass an exam and undertake continuous professional development; subscribe to a code of ethics; and undertake a professional year.

The government has also agreed to frame amendments to ensure that financial advisers adequately disclose their relationships with associated entities. Further, it agrees to rename "general advice" in order to improve consumer understanding. At the same time, the government said it would consult on the development of accountabilities for issuers and distributors of financial products and ASIC's product intervention power.

"While consumers are responsible for the consequences of their financial decisions, they should be treated fairly. The financial services and products they purchase should perform in the way they are led to expect," the response said. "Recent history provides a number of examples of product and advice failures. While the circumstances of each case differ, problems have arisen when commercial incentives have overridden consumer interests."

The government has provided its official response to the FSI, but naturally, it remains to be seen how proposed legislation will shape the industry subsequently.

Searching for scale

At the very beginning of 2015, M&A experts Steve Prendeville and Paul Tynan told ifa the year was primed for a level of business activity never seen before.
Now, looking back over the business transactions of the past 12 months, it is fair to say the two consultants were right on the money.

In 2014, the industry saw the beginnings of a new trend. Non-aligned dealer groups and boutique firms started to merge to achieve greater scale and reach.
This year has seen that trend continue, but on a much larger scale. Just two weeks into January, Australian Unity saw out the first acquisition of the year, having acquired Paul Harding-Davis' group, Premium.

Mr Harding-Davis, at the time, said one of the catalysts behind the decision to merge with Australian Unity was a desire to compete against vertically integrated organisations.

"It became clear we would need to either engage in mergers and acquisitions of our own, or invite a like-minded organisation to partner with us, to enable us to compete in a predominantly vertically-integrated world," he said.
In May, the industry saw the emergence of another non-aligned powerhouse in Western Australia as non-aligned licensee WealthSure joined forces with Sentry.

According to Sentry, the merger delivered the combined group an adviser network of more than 300 advisers and a total of $5 billion in funds under advice, making this one of Australia's largest non-institutional dealer groups.
"We are confident that the opportunities provided by the new broader organisation will have strong appeal for all financial advisers seeking a non-aligned licensee that offers value for money, has a dedicated, experienced, stable management team, financial security, infrastructure and the scale to proactively support their practices in the post-FOFA era," Sentry managing director Murray Hills explained.

Meanwhile, in July, non-institutional licensees Beacon Financial Group and Risk and Investment Advisers Australia (RIAA) joined forces. Under the terms of the merger, RIAA joined the Linchpin capital group of companies – Beacon's parent company – in the process growing its advice network to more than 200 advisers nationwide.

The merger of Fortnum Financial Advisers and Netwealth-owned dealer group Financial Planning Services Australia (FPSA), announced in August and completed in October, was another perfect example of two groups looking to achieve scale and size in the advice market.

"We decided to partner with Fortnum because we wanted a group with the technical, compliance, practice development, business coaching and investment skills to support our advisers, but also a group that shared our commitment to championing a strong IFA market," Netwealth joint managing director Michael Heine said.

Fortnum's managing director, Joel Taylor, said the merger of Fortnum and Netwealth's FPSA operations would expand Fortnum's footprint nationally – particularly on the eastern seaboard.

"Our principal practices enjoy being a shareholder and having a say in the direction of the AFSL but with the added benefit of scale, support and a collaborative relationship with other like-minded advisers," he said.

While this year, mergers between non-aligned dealer groups kicked into another gear, the financial advice sector also experienced a series of new entrants looking to reshape the market.

These included the joint accounting body CPA Australia, which launched a financial planning business in June.

CPA Australia said the new business will "shake up" the advice sector by setting up a "pure and transparent fee-for-service" advice business operating within the Corporations Act definition of "independent" advice. CPA, however, is just one of the organisations that broke into the advice sector this year. In July, stockbroking firm Shaw Stockbroking also moved into the space, rebranding as Shaw and Partners as part of a three-year strategy to expand into providing holistic financial advice services.

Shaw and Partners has since made a raft of appointments, hiring advisers from institutions such as Macquarie and UBS to establish a non-aligned advice business.

Another new trend to emerge this year has been the entrance of international players. According to Mr Prendeville, this trend can be expected to become more pronounced as the value of the Australian dollar drops, making it cheaper for groups to overcome the steep costs of licensing and compliance.

The rise of a new venture backed by Italian wealth manager Azimut, which is headed by former CBA and ANZ executive Paul Barrett, was the most notable.

With Azimut's backing, Mr Barrett's business, AZ Next Generation Advisory, has made a raft of acquisitions throughout the year, including CBA-aligned firm Eureka Whittaker Macnaught and ANZ-aligned Pride Group.

Having acquired five businesses this year, Mr Barrett told ifa his business will also be looking to make several new acquisitions in the future, across both the bank and non-aligned sectors.

As we head into 2016, the industry looks set to continue on a similar path, especially as groups look to compete with the size and scale of bank-owned licensees. But with the international players looking to enter the Australian market, it is fair to say the advice industry could expect to experience greater disruption in the near future.

Learning to work with robots

2015 was a year of digital unravelling for many companies as the industry inches closer to viewing robo-advice as a normal part of business. But others are still unsure of what to make of the machine-like newcomers – are they with advisers or against them?

Of course, it depends on which company you ask. Zurich Financial Services' new digital tool is designed to help advisers create customised "self-assess" surveys for their clients. Launched in September, the Wealth Index tool lets clients test their preparedness and literacy across different aspects of their financial position.

In October, Myonlineadvisers announced it had struck a JV with US portfolio stress-testing expert RiXtrema to bring its technology to the Australian marketplace.

Myonlineadvisers chief executive James Sutherland said,
"Until now, robo-advice platforms have been seen as the enemy of the planning community because they could see customers opting out in favour of low-cost online advice solutions.

"Now, planners will be able to leverage the growing client appetite for efficient online support to their firm's advantage also. Ultimately, we believe this simple plug-in will enable planners to provide better, more efficient service to more clients, allowing them to increase their accounts under management and drive revenue."

Others have not been as clear about which side of the robo-advice debate they sit on. Back in May, non-aligned financial services provider Spring FG announced it had acquired digital wealth management tool Digifi Group in a bid to expand into the robo-advice space. In the following months, Spring FG rolled out fintech platform Spring247, which enables users to consolidate lifestyle and investment assets data within a single dashboard.

Also jumping on the bandwagon was financial services consulting firm Mercer, which announced only that it was "preparing" to launch an online advice platform. Mercer financial advice leader Michelle Smith said robo-advice is now an essential part of the Mercer planning business.

"To deliver advice in the scaled world, you have to automate and you have to have a technology solution," she said.

National Australia Bank would certainly say so too. The bank had some worried earlier this year when it became the first major bank to produce a computer-generated advice service, NAB Prosper.

The free platform, which was rolled out to 40,000 customers in October, asks specific questions related to clients' current financial situation and future goals, and provides them with a "tailored, personalised assessment" for super and insurance – and possibly for debt, cash flow, investments and estate planning in future releases.

Commenters on the ifa website expressed some concern, fearing NAB's new service is the latest step in an industry-wide move that will replace financial planners with automated services.

"All of the big product companies are gradually taking advisers out of the picture, and switching to direct distribution methods," went one comment.

However, in an interview with ifa, NAB's executive general manager for wealth advice, Greg Miller, said it is unlikely that digital advice could one day replace advisers since there are still plenty of clients with complex financial situations.

NAB Prosper is also designed to spark the idea of financial advice in those clients who are not currently seeking it.

"NAB Prosper for us is a new way to get to those customers that haven't been seeking advice through our normal channels for the last few years we've been in the advice business," Mr Miller said.

"We really thought that there was a whole lot of other customers out there that could really do with the benefit of education and information about financial advice. So our view was that our digital online approach would be a really good approach."