Advice with a price and value

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1 Page 1 of 4 What if there was a profession that helped Australian investors create wealth, reduce unnecessary tax liabilities and achieve their desired lifestyle in retirement? This is the value proposition the financial planning industry has been putting to Australian investors for the past 20 years, yet today seven out of ten Australians do not use a financial planner. Much of the problem for Australian investors has been the absence of a dollar value on financial advice. Add to this the scrutiny to which regulators, other competing professions, and the public have directed at the financial planning industry, and the Australian financial planning industry has to date failed to translate and realise mass appeal. The questioning of the value of financial planning as a profession has been justified. Collapses such as that of Storm Financial and Opus Prime have confirmed to many investors the problematic nature of the industry. Many investors feel it cannot be trusted. But a new era is dawning - one where the value and benefit of financial advice can now be quantified and where superannuation members have the power to negotiate advice fees. It is also a time where a Parliamentary Joint Committee on Corporations and Financial Services calls for an improvement in the quality of advice, the inclusion of a fiduciary responsibility into the Corporations Act and the termination of commissions and volume bonuses and is overwhelmingly applauded. But in all this progress, has putting a dollar value on advice really broken through a significant barrier? According to the Investments and Financial Services Association (IFSA) chief executive John Brogden, the research conducted by KPMG Econtech on its behalf and released in November is significant enough to convince an investor who does not get advice to do so. See video. "I believe the industry has failed in selling the benefits of financial advice," he says. "It's the first time that people are seeing a real [dollar] figure." True value of advice IFSA's recent research conducted by KPMG Econtech has found investors who have a financial planner save more than $2457 per annum compared to those people who do not have a planner. On a national level, the research found that if an extra 5 per cent of Australians received financial advice, there would be a 0.5 per cent increase in GDP due to increased national savings by 2014/2015.

2 Page 2 of 4 This increase in national savings has further knock-on benefits to the wider Australian economy, including a decrease in the dependence on foreign financing of domestic capital and the lowering of the risk premium for investing in Australia through a lower reliance on foreign investment. "The significance of this research should not be underestimated," Brogden says. "It is now beyond doubt that the receipt of financial advice is a key component in the national savings equation." According to practitioners in the financial planning industry, the significance of putting such a dollar value on financial advice should not be overestimated. "It's important that we start measuring the value of advice in dollar terms," Collins House managing director Dominic Alafaci says. "But it doesn't make sense that on the one hand there is the perception that not everyone can access financial advice but most professional advisers are flat out." He adds: "This is the first attempt at this and it's heading in the right direction but other studies have shown far bigger benefits, like the Financial Planning Association s (FPA) good advice research. I encourage them to continue their research." AMP Director Financial Planning Advice and Services Steve Helmich says ultimately such research is beneficial if it broadens the appeal of financial advice. "All of this focus and the reviews lead to an increase in confidence in financial planning," he says. Helmich says one of the problems with taking financial advice to all Australians is that for many of them, financial advice is not top of mind. He believes this is changing thanks to research such as that provided by the National Centre for Social and Economic Modelling (NATSEM) titled 'Don't stop thinking about tomorrow'. "In Australia, there's a 'she'll be right' psyche," Helmich says. "But that's changing because people are living longer." The tangible and intangible benefits of advice There is no question that good financial advice can provide fantastic benefits and outcomes for investors. This is particularly the case in uncertain market conditions. Some of these benefits are outlined by IFSA in its Value Proposition of Financial Advisory Networks paper released on 29 October In it, IFSA refers to benefits such as a reduction in risk through diversification and a better match between the risk profile of an investor and the assets in which they invest. The report states: "These factors as well as the financial discipline which comes from having a financial planner, have the potential to lift the saving of an individual. Higher savings by individuals leads to gains in household saving and hence national saving; higher national saving has important economy-wide implications."

3 Page 3 of 4 While measuring the tangible value of financial advice focuses on the impacts the above benefits can have on an individual's finances, there are other benefits to advice. "Financial benefits provide soft benefits as well, like peace of mind that you really can't measure," Alafaci says. IFSA's report concurs with this point: "Financial advisers seek to assist individuals in navigating the current economic climate and provide strategies for safeguarding wealth. More importantly, the support from a qualified financial planner may provide reassurance to individuals about their financial situation during these challenging financial times." Case studies on the value of advice Case studies that demonstrate the dollar value financial advice has provided to clients is a very powerful vehicle. The FPA, which represents the majority of Australian financial planners, recently named the winners of its Value of Advice Awards which highlight the tangible benefits of financial advice. The winners provided real-life client scenarios and the strategy they devised to assist these clients. Strategic Wealth Management Solutions financial planner Peter Wilson was the winner of the Wealth Accumulation and Protection category. Wilson put in place a strategy for a client who had recently launched a new business and had no less than seven children to provide for. Because his client was a US citizen, Wilson had to be cogniscent of Australian and US law and therefore called on the advice of experts in this area. As a result, the strategy Wilson recommended for his client meant the client saved $54,000 in interest savings simply by moving the couple's cash savings into an offset account and accumulated $13,250 per annum by using the wife's concessional super contributions. In the pre-retirement planning category, Landmark Financial Management planner Paul Little stood out for the strategy he devised for a couple who required an income of $72,000 per annum after tax and indexed, plus up to $30,000 available for travel and to finance the lifestyle they desired in retirement. Little achieved an extra $35,000 for the couple by managing their capital gains tax through the use of concessional super contributions and an extra $10,000 by rearranging the couple's assets in superannuation. FPA chief executive Jo-Anne Bloch noted the importance of such awards. "Only three out of 10 Australians seek professional advice and yet these case studies show the very valuable benefits of securing advice in many different situations," she said. Reviews and relevance This year has been significant for the financial planning industry in pushing a new way forward. It has been included in three major reviews that affect the Australian financial services industry - the Henry Tax Review, the Jeremy Cooper Review on superannuation, and the Joint Parliamentary Committee on Corporations and Financial Services.

4 Page 4 of 4 While the first two are yet to roll out their recommendations, the recommendations from the latter headed up by Bernie Ripoll were released last week. This extensive nine-month review focussed on the collapse of Storm Financial, but mounting evidence accumulated from the over 400 submissions received by the committee also called for improvements in the quality of financial advice provided in Australia. One of the key recommendations addresses the issue of the provision of financial advice that is not in the best interests of the client. "The committee has therefore recommended the Corporations Act be amended to explicitly state that advisers hold a fiduciary duty to put the interest of their clients first," Ripoll says. The recommendations also called for an end to payment from product manufacturers to financial advisers, the establishment of a professional standards board and the tax deductibility of financial advice. The response from both financial planners and other industry associations is positive. "The fact is that some financial advisers and accountants have been seduced by commissions and that has influenced the advice being given," Alafaci says. "Those days are numbered." Australia's largest financial advisory network AMP has been working towards to meeting the standards of a new operating environment for some time. "AMP fully welcomes the move towards greater transparency in the way consumers pay for financial advice," AMP Financial Services managing director Craig Meller said. "We are supporting all of our financial planning practices to transition to a fee-for-service business model from 1 July In addition we have advised all investment and superannuation product manufacturers, whose products AMP planners are authorised to sell, that they will no longer be able to include direct remuneration to planners as part of their product pricing." The Association of Superannuation Funds of Australia s chief executive officer Pauline Vamos said: "We believe that such changes would be good for both the industry and consumers. In particular, the changes recognise the need to separate product recommendation from financial advice. The essence of this for the average Australian worker would be that they could obtain financial advice free of the fear that they would be subject to what is essentially no more than a sales process."

5 7 researched benefits of financial advice Nov 2009 Increase Decrease Page 1 of 1 1. Provision of an individual wealth management strategy 2. A reduction in risk through diversification 3. A better match between an individual's risk profile and asset selection 4. Financial discipline 5. An average increase in personal savings on average of $2,457 per annum 6. At a national level, the ability to reduce the dependence on foreign financing of domestic capital, lower the risk premium for investment 7. At a national level, increased national savings has the potential to reduce the current account deficit. Remaining finances mean higher investment and capital stock gains, in turn supporting gains in GDP. Source: Investment and Financial Services Association Value Proposition of Financial Advisory Networks 29 October 2009.