As we leave 2022 behind and head into 2023, what is on the horizon for financial planners and the profession? Jason Andriessen CFP® provides his thoughts.

The past year has been another challenging one for financial planners; the fourth in a row. As we turn our minds to next year, keeping our clients on course is our number one priority. In fact, our success next year will ultimately be measured by the number of clients who stay the course and stick with their financial plans, despite their fear and the temptation to capitulate.

But that’s not our only priority. There is an emerging threat to some practices. While we’ve been busy servicing our clients this year, there have been policy inroads designed to solve the advice gap. Overall, that’s positive for consumers and financial planners, but it’s not all good news. The mosaic of policies is potentially laying the foundations for the systemic disintermediation of financial planners, which may cut them off from servicing everyday Australians, especially at retirement.

A SERIES OF UNFORTUNATE EVENTS

In 2019, we contended with the drought, in 2020, a share market correction and lockdowns. And in 2021, more lockdowns. In 2022, we saw inflation skyrocket, rising interest rates, another share market correction, and a significant fall in house prices.

As we look forward to 2023, the risk is on the downside. The recovery from the pandemic has been more problematic than we had anticipated. Russia’s invasion of Ukraine and China’s shutdowns aren’t helping. The Ukraine war is causing food shortages and an energy crisis, mostly in Europe.

When communities are cold and hungry, social unrest inevitably ensues. Negative real wages make things worse, and as central banks around the world seek to contain inflation by increasing interest rates, they are subduing economic growth and introducing risk of global recession.

Markets hate this level of uncertainty, so we should brace for further volatility. The good news? Periods of volatility provide the opportunity for financial planners to really demonstrate the value of their advice at a time when clients appreciate it most.

VALUE OF ADVICE

Since 1984, United States research firm, Dalbar Inc, has run an annual study quantifying the cost of imprudent investor behaviour. It’s what Carl Richards calls the ‘behaviour gap’. During periods of volatility, the behaviour gap widens because investors fall into the trap of trying to time the market or chase returns.

This year, the Dalbar study found that investment results are more dependent on investor behaviour than on fund performance. In fact, the behaviour gap was measured to be more than 10 per cent in 2021.

Closer to home, my research firm, MYMAVINS, studied 1,051 Australians over 40 to measure the value of advice for the FPA. We found that Australians with an active relationship with a financial planner are better off. They experience less financial stress, enjoy a higher quality of life, have more financial confidence, and are more satisfied with their wealth. Around four-in-five advised Australians believe that financial advice has made them tangibly financially better off.

Much of the value of advice equation can be attributed to behavioural changes, and in particular, avoiding making bad decisions. Simply making clients aware of the emotional biases they may be feeling, like loss aversion, can be helpful.

MESSAGES THAT RESONATE

How you communicate during periods of economic uncertainty and market turmoil matters. Cliches and well-worn platitudes like – ‘it’s time in, not timing’ – are inflammatory and unhelpful at best.

The most important thing when communicating with clients during volatile periods is to be proactive. Don’t wait for the client to calculate their losses; you’ll be on the back foot from the start, defending your advice and service. It’s better to actively reach out to the client and set the tone and pace of the conversation.

Try to keep your conversation or email message factual, while reminding them that volatility is a normal part of investment, and that you have planned for this together. Clarity and transparency are essential, so explain to them the reasons their investments have performed the way they have and what their investment managers are doing about it.

Your clients may be feeling overwhelmed and out of control. Empower them by reminding them of what they can control: spending and investment decisions. Give them options to explore, but present them with clear guidance.

In a recent study conducted by MYMAVINS for Fidelity International, we found that life satisfaction is driven by more than wealth and health; feeling in control, having spending confidence, and being able to envisage a positive future are all important drivers of emotional wellbeing and life satisfaction.

WISDOM OF DAVID MAISTER

The Harvard Business school professor, David Maister, put it best: “What you do with your billable time determines your current income, but what you do with your nonbillable time determines your future.”

At this stage, the Quality of Advice review proposals are just that, proposals. They must be agreed by Government, drafted into legislation, and pass through two Houses of Parliament before they are implemented. But if they go ahead unchanged, they may require us to reposition our practices for growth.

It’s true that the Quality of Advice Review proposals present real opportunities for professional financial planners. But the super funds are potentially being given an even bigger opportunity. If they embrace it, the super funds will be emboldened to provide advice again, which, along with inroads achieved this year with the Retirement Income Covenant, provide a compelling value proposition that will resonate with everyday Australians.

OPPORTUNITY FOR SUPER FUNDS

If the restrictions on collective charging of fees are removed for super funds, it will allow advice capabilities to be funded by product fees spread across the entire membership. In this way, super funds can subsidise their advice fees with product fees, potentially covering the entire advice fee.

And under the proposals, if the member is not paying for advice, the super planner does not need to be a relevant provider. This means they are not subject to the professional standards for financial planners, and do not need to meet the education requirements, or abide by the Code of Ethics. Instead, they will have a legal duty to provide good advice.

And research shows that it will probably work. A consumer study of 401 Australians conducted in September by MYMAVINS, confirms that most intend to only access advice from their super fund. Almost two-in-three (64 per cent) respondents agreed to the comment: ‘free advice from a super fund is all I need at retirement, rather than paid advice.’

Together with the new fit-for-purpose retirement products being introduced with the Retirement Income Covenant, the proposals will create a mechanism for a closed ecosystem, where super funds can retain FUM through retirement and into the retirement phase.

So, what can financial planners do to protect their practices from the potential dislocation of the market? Well, the answer lies in the Value of Advice research.

Start building into the lives of your clients earlier. The fact is, the sooner clients start planning, the better off they are. And every day Australians enjoy greater wellbeing benefits from advice than the rich.

So, by reaching out to your prospective clients earlier, when they’re in their mid-40s, you can build a professional relationship over time.

That breeds the sort of intimacy super funds can only dream about.