Financial advisers are issuing client termination letters at a record rate but what are the long-term ramifications?
Bulk mailing of termination letters has become standard practice in financial planning, as the industry grapples with its mass client problem.
According to American financial planner and commentator Michael Kitces, advisers can only build successful relationships with 75-125 clients, reflecting research by British anthropologist Robin Dunbar that the human brain can’t maintain more than 100-150 personal relationships.
This is significantly less than the many thousands of transactional clients some previously had on their registers.
While client numbers have been gradually slipping since the Future of Financial Advice reforms, activity has ramped up in the past three years, triggered by the fallout from the Hayne Royal Commission.
As a result, after 10, 20 and 30 years of loyalty, clients who can’t be looked after cost-effectively are being dumped.
The institutions are leading the charge. They bore the brunt of ASIC’s ire, paying out over $3.15 billion in compensation for misconduct and fees-for-no-service, so there’s little-to-no appetite for flexibility.
Yet, many abandoned clients remain in life insurance, superannuation and investment products originally recommended by their former adviser.
The uncomfortable truth is that C&D clients have collectively contributed to the success of many advice businesses.
Dumping them en masse is a bad look for an industry trying to regain consumer trust.
Furthermore, does issuing a termination letter absolve advisers of their legal and ethical obligations, given they have been collecting a fee or commission for many years?
To quote Winona Ryder in 'Reality Bites': “The answer is… I don’t know”.
In lieu of clear-cut answers, professional advisory firms must find creative ways to meet their obligations and manage risk while serving the needs of their clients.
That means taking the focus off affluent and high-net-wealth individuals for a moment to think about everyone else. The industry already has a solution for rich people.
A broader value proposition would enable advisers to help more people, build confidence in the sector, and underpin future growth.
Part of the solution must lie in being able to legally and seamlessly transition clients from the realm of personal advice to the realm of general information.
Over time, as a client’s circumstances and needs change, they should be able to flick back and forth between both worlds, guided by their adviser.
The regulatory framework must recognise that people’s advice needs are constantly changing.
Sometimes life is simple, other times it’s extremely complex but, through it all, many want an ongoing advice relationship.
Positively, Treasury has promised to “look at how the regulatory framework could better enable the provision of high-quality, accessible and affordable financial advice”.
As part of the Quality of Advice Review (QAR), it is also seeking to remove impediments to new forms of advice.
This futuristic language is a welcome sign.
Regulators must be forward-looking.
Regulation should aim to stop the mistakes and injustices of the past from happening again but it must also seek to rectify widespread issues and inefficiencies to allow businesses operate more effectively in the future.
The best outcome from the QAR is a clear path to replacing the current one-size-fits-all approach in favour of a regime that encourages different advice propositions including technology-enabled digital solutions.
Advisers could then maintain a large number of ongoing client relationships. The nature and intensity of those relationships could change in line with a person’s needs.
Nigel Baker, founder, Scientiam; financial adviser, Arch Capital
Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.
Neil is also the host of the ifa show podcast.
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