Australian Financial Advice Landscape: This Is An Abridged Version of The Full Report Published in December 2019

2019
AUSTRALIAN
FINANCIAL
ADVICE
LANDSCAPE
This is an abridged Proudly sponsored by

version of the full
report published in
December 2019
2019 AUSTRALIAN FINANCIAL ADVICE LANDSCAPE 3
CONTENTS 4
We believe in the power of advice
Letter from Vanguard’s Head of Distribution, Matthew Lumsden
5
Navigating uncertain times
Letter from Adviser Ratings CEO, Mark Hoven
6
The Australian adviser
Insights into the Australian financial adviser of today
16
Adviser movements
How the current landscape is impacting or causing adviser
movements across the industry
22
Advice business landscape
The financial advice landscape of today, and where it’s going
31
Infographics
A selection of data insights into the changing advice industry
36
Digital advice and technology
An insight into the world of “robo” solutions and adviser sentiment
towards the existing financial planning software providers
43
Investments
How fund managers and research houses are adjusting to
a world of convergence
adviserratings.com.au
4 2019 AUSTRALIAN FINANCIAL ADVICE LANDSCAPE
WE BELIEVE IN THE POWER OF ADVICE
From Vanguard’s Head of Distribution, Matthew Lumsden

AT VANGUARD, WE believe in the power of advice to help Australians
shape their financial future.
We know you make a difference to your clients’ lives. But how do you
measure it? And, how could you unleash significantly more client value to
maximise your business opportunities and increase retention?
At last month’s Vanguard Adviser Roadshow, Advice Matters, we shared re-

search into quantifying the value of advice when looking through the client’s
lens. This research is available now and is summarised in the article within.
Some of the results may surprise you.
Once you’ve read through our research you may wish to explore your specific
client segment to understand the dimensions of service that are most valued
by your clients. It’s easy to do with our Value of Advice Toolkit.
Use this toolkit in your own business to gain insights into client perceptions
and preferences. These insights could become your most powerful tool in
attracting and retaining clients. I’d encourage you to read the research and
download our toolkit today.
Amidst the uncertain world around us, we are confident that these tough
times will pass and we will emerge stronger than before. Helping clients stay
the course and stick with the plan you’ve laid out becomes more important
than ever. We look forward to partnering with you no matter the market
conditions and helping you and your clients reach your investment goals.
Because advice matters.
www.websitehere.com.au
NAVIGATING UNCERTAIN TIMES
From Adviser Ratings CEO, Mark Hoven

THE AUSTRALIAN FINANCIAL advice industry is facing a generational
change. In 2019, it was shaken by the Royal Commission, resulting regulatory
reform, and strategic exits by the major banks that had materially defined
the industry’s evolution over the past two decades.
In 2020, the industry is rapidly shape-changing into a privately-owned

world of small businesses confronted by existential challenges on all fronts.
Reversing low public trust, embracing professionalism, and re-engineering
the economics of running an advice business are some of the critical matters
that require attention before the retail wealth management industry can be
confident about its future.
For financial advisers, these are both the best and worst of times. While
many advisers are choosing to leave the industry, others see wonderful
growth opportunities amidst the tumult of change. For those who stay, there
are nevertheless many adjustments that they must make to remain compli-
ant, profitable, and effective in changing people’s lives through the power
of financial advice. For everyone – those staying and those retiring – their
resilience will be severely tested as fundamental change on this scale is
unprecedented.
Adviser Ratings’ mission is to make financial advice affordable and accessi-

ble for everyone; however, many may observe that recent changes are taking
the industry in the opposite direction. While this may be true in the short
term, we believe that innovation, application of technology, and a reinvigo-
rated industry leaning into growing consumer demand will ultimately find a
successful path.
This 2019 Financial Advice Landscape report is a unique, data-driven

snapshot of the industry from all angles. It also incorporates contributions
from more than 1200 financial advisers that have generously provided their
feedback through surveys and anecdotes. With the tremendous support of
Vanguard, we are delighted to bring you this institutional quality report. We
trust that it will help you in navigating these uncertain times.
CHAPTER
THE AUSTRALIAN ADVISER
As the disruption in the advice industry continues, our research

has shown what the average financial adviser in Australia looks
like. As the flux continues, we expect this data to change rapidly.
This will be driven by older advisers leaving the industry, and
a shrinking of advisers’ client books.
Chart 1.2
THE ‘AVERAGE’ AUSTRALIAN adviser may still be
ADVISER TYPES
most likely a male, but the rest of the data points are
shifting rapidly each and every year, and we expect this
to continue to be the case as the the industry undergoes
the largest shift in its history. As the major players exit 12%
the industry and others step up to become dominatnt
8%
forces, what will the future look like? Average FUA and
number of clients has decreased in 2019 and the shift Adviser
8%
of advisers into smaller boutique licensees has been a Types
significant change from two years ago.
72%
Value of an Adviser
Numerous studies have been conducted in the last few years
that directly measure the value added by financial advisers.
We examine four key reports published by prominent Financial Advisers 17,463
fund managers and research houses: Accountants 2,059
Stockbrokers 1,953
• Morningstar’s Alpha, Beta, and now…Gamma Inactive 2,928
(Blanchett & Kaplan, 2013)
• Vanguard’s Advisor’s Alpha (Kinniry Jr., Jaconetti,
Source: AR Data
DiJoseph, Zilbering, & Bennyhof, 2016) Note – ASIC Financial Adviser Register at November 2019 = 24,403 advisers
• Envestnet’s Capital Sigma (2016)

• Russell Investment’s Value of an Adviser (2019)
Key areas that advisers directly influence include:
1 The financial planning and the additional
Chart 1.1 wealth management services an adviser
THE ADVICE MARKET ECOSYSTEM provides.
2 Asset selection and allocation, which for an
unadvised investor is the “cost of getting it
wrong”.
2,200+
AFSL 3 Investment selection, including as Russell
Investments terms it, the “behavioural mistakes
8,800+ individual investors typically make”.
Practices
4 The systematic rebalancing of portfolios.
5 Tax smart planning and investing.
24,400+
Advisers
In summary, the direct value added to a consumer’s
2,200,000+ wealth ranges from 3.0% to 4.4% by using a finan-
Investors
cial adviser – a direct counter that advisers should
articulate in the face of regulatory headwinds and
a loss of trust in the wider community.
Source: AR Data, ASIC Financial Adviser Register
Chart 1.3 Chart 1.4

17%
NUMBER OF ADVISED AUSTRALIANS BY AGE GROUP FASEA EDUCATIONAL STATUS PATHWAY SUMMARY
2018
4% 13% 19% 26% 16%
13.9% 42%
0.20M FASEA Educational
17%
Status Pathway
0.57M 12.2% Summary
42%
0.39M 2019 FASEA Educational
0.52M 37%
0.61M Status Pathway
5.03M
Summary
2.98M
3.47M
4% 37%
2.69M
2.32M
4%
21-34 35-44 45-54 55-64 65+

Unadvised Advised
Approved degree
Approved pathway
degree pathway 17% 17%
Source: Adviser Ratings Q3 Survey, Australian Bureau of Statistics No degree pathway

No degree pathway 37%
37%
Non-relevant degree pathway 4%
Non-relevant degree pathway 4%
Relevant degree pathway 47%
Relevant degree pathway 47%

Market size
In our 2018 report, we predicted a significant exit of Source: AR Data
financial advisers from the industry following the effects

of The Financial Adviser Standards and Ethics Author-
Chart 1.5
ity (FASEA), the implementation of recommendations BIG SIX REMEDIATION FOCUS (INTERNAL TEAMS)
from the Royal Commission and changes in remuner-
ation from the Life Insurance Framework. In 2019, we 1200
forecast that the market of active advisers will reduce
from approximately 21,500 to around 15,000 in the next 1000
Number of resources
five years and $900 billion of funds under advice (FUA) 800
will potentially be orphaned or be transferred to a new
600
adviser. This is happening at a faster rate than even we
anticipated, based on: 400
• Angst around qualifications required for FASEA 200

happening well before the required deadline. The
0
government has gone some way to alleviate this AMP CBA NAB* ANZ WESTPAC IOOF
anxiety by extending this deadline to 2026 although Licensee owners
finalisation of this legislation has been pushed into

Source: AR Data and public record
2020. *Planned resource level in March 2020
• The dread that advisers are feeling about the

mandatory Ethics exam before 1st January 2021. An
imposing 3.5 hour exam is causing many to re-evaluate
their retirement plans or leave for another profession.
• The announcements made by every major bank,
particularly that of Westpac in 2019, that they are The exits in 2019 were higher than we originally forecast
exiting advice in some form (for Westpac, it is a – 14% of advisers left the industry across all age groups.
complete departure). With the decline in advisers from 28,365 in December
• The remediation work being undertaken by banks 2018 to 24,403 by end October 2019, and the continued
and the Big Four accounting firms is giving some stress on adviser business models, we feel stronger in
advisers and associate advisers a smooth exit our conviction of an advice market heading towards net
strategy (and fairly well remunerated). 15,000 advisers with >$900 billion of FUA to find a new
home in the next five years.
So where will the industry end up in the wash?
The growth in the privately-owned space is accelerating,
This year’s survey, despite an obliteration in prac- with this market now representing 58% (up from 38%
tice values (with AMP putting a stake in the ground five years ago) of all advisers in Australia, comprised
at 2.4 times revenue), indicated an estimated 17% of primarily of practices of one to five advisers.
practice owners would still entertain selling their
practices in the next 12 months. With an average The individual adviser
funds under advice of $124M per practice, in the Financial advisers have possibly the broadest and most
short term this represents a potential $190 billion challenging remit of any profession – they are the indi-
shift. vidual charged with understanding their client’s goals,
Chart 1.6
PRACTICES AS WILLING SELLERS
7.1% 4%
10.1% 5.1%
8.1% 8.1%
19.2%
35.4%
Practices as Practices as Practices as
46.4% 47.4%
Willing Sellers by Willing Sellers by Willing Sellers by
Practice FUA Practice Size Licensee Type
28.2%
36.4%
27.3%
17.2%
$5-$20 million 10.1% 1 Adviser 46.4% Institutionally Aligned 35.4%
$20-$50 million 8.1% 2-3 Advisers 36.4% Institutionally Owned 17.2%
$50-$100 million 28.2% 4-5 Advisers 8.1% Privately Owned 47.4%
$100-$200 million 27.3% 6-10 Advisers 5.1%
$200-$500 million 19.2% 10+ Advisers 4.0%
$500 million + 7.1%
Source: AR Data
aspirations, successes, tribulations, medical history, fam- Chart 1.7

ADVISER FEE STRUCTURES 2018-2019
ily circumstances, personal relationship ups and downs,
and financial standing (well, at least they should). With
100%
$1.5 trillion being managed by 24,000 of these individu-
90% Fixed Fees
als, it is important to understand the demographics and 24%
37% Asset Based Fees
economics of how they operate and the value they serve.
80%
70% 7% Hybrid - Asset Based

and Fixed Fees
Fee Structures 60%
13%
2.2 million Australians (or 12% of the population over 18) 50%
share their lives and wealth with a financial adviser. The 40%
69%
major barrier to more people seeing such a confidante is 30%
50%
trust and perceived value. Charts 1.7 and 1.8 describe adviser 20%
fee structures and levels are what the industry has been grap- 10%
pling with when it comes to value and trust, or conflicts. 0%
2018 2019
Chart 1.7 highlights the rapidly changing fee structures of Source: AR Data
financial advisers. With investment commissions extin-

guished on the back of Future of Financial Advice (FOFA),
Chart 1.8
due to perceived or known conflicts, asset-based fees have AVERAGE FEE PAID BY CLIENT 2018-2019
been in the cross hairs in 2019. This has been reinforced 12,000
by what some are saying is a key driver behind Standard 3

Maximum $11,000
of the new Code of Ethics – “You must not advise, refer or
Maximum $10,500
act in any other manner where you have a conflict of in- 10,000
terest or duty.” In short, the change to fee mix over the last
12 months has been stark, and we will see the asset-based
and hybrid fee structure continue to evaporate in 2020.
8,000
Fees have crept up slightly in 2019, with the median ongo-
ing fee increasing from $2,510 to $2,800. Average FUA, per
Chart 1.8, have increased by 2% per client, yet fees have
6,000
had a corresponding 11.5% increase. The FUA increase is
not statistically significant, but does reflect a stable equi-
ties market over the last 12-18 months. The data supplied
by the same cohort of advisers from 2018 has not shown a 4,000
significant movement in client wealth. Mean $3,555 Mean $3,613
Median $2,800
Chart 1.7 is interesting in the dynamic of compressed Median $2,510
competition as identified by the smaller box in 2019 – the 2,000
market moved to fees that are generally more consistent as

advisers and practices find their feet with respect to setting Minimum $700 Minimum $720
appropriate price levels. We expect, as specialisation plays 0

out and practice economics tighten, average client pricing 2018 2019
will start to diverge as value becomes more important. Source: AR Data
Client Numbers and Funds Under Advice Chart 1.9

STATE BREAKDOWN OF FUA BY ADVISER 2018-2019
Chart 1.9 and Chart 1.10 shows a 7% decrease in advised
customers and FUA, with the average adviser servicing
94 clients in 2019 against 102 in 2018. This reflects chang- $74M
ing dynamics in the market: $71M
$69M $68M
$66M
• A voluntary rationalisation of client bases by advisers, $60M
$63M $62M $62M
$64M
$60M $61M
$59M
as they adjust business models. $56M
• Removing the “fees for no service” clients from

$53M $52M
adviser’s books.
• Lower value or “under serviced” client’s leaving
advisers (with industry funds being the benefactors of
this change).
State dynamics reflect the type of licensees and adviser

groups currently rationalising within each region. We
anticipate the landscape will look vastly different at the ACT NSW QLD SA TAS VIC WA Australia
end of 2020, and a divergence of advised customers and 2018 2019
FUA becoming apparent, with “higher value” clients Source: AR Data
remaining with advisers (as is MLC’s new strategy) and

“lower value” clients being pushed into industry funds
Chart 1.10
or technology solutions. STATE BREAKDOWN OF AVERAGE NUMBER OF
CLIENTS PER ADVISER 2018-2019
The FUA per adviser within each licensee group de-
scribed in Chart 1.11 reflects several factors: 120
• Portion of Risk Advisers – Licensees such as 115

Synchron, Lifespan, Affinia and Millennium3 rank
lower because they have a high proportion of risk 110
advisers within their license. It is important for
product manufacturers to distinguish between 105
investment and risk-focused licensees, particularly in

the small privately-owned space. 100
• Demographic of Adviser Base – There is correlation

95
between the years an adviser has been practicing and
their quantum of FUA. The top five licensee groups 90
below where their advisers participated have an average
15 years of experience versus 12 years for the industry. 85
• Portion of Accountants and Stockbrokers –

Stockbroking businesses (which didn’t factor in the 80
ACT NSW QLD SA TAS VIC WA Australia
top 20 survey respondents this year) tend to have 2018 2019
higher balance clients given their heritage focus on Source: AR Data, ASIC Financial Adviser Register
HNWI. Accounting focused licensees such as Count

and GPS Wealth have a very mixed adviser and client
base.
Chart 1.11
• Type of Clients – Advisers within licensees that have
TOP 20 LICENSEES AVERAGE FUA PER ADVISER
(BY RESPONDENTS) a higher portion of SMSF clients will invariably have
higher than average FUA.
Garvan
In-Force Premiums
Bridges The Australian consumer has comparatively low life
insurance penetration rates compared to other coun-
NAB Financial Planning
tries in the world. As highlighted in the 2018 Landscape
Hillross Report and supported by ongoing net premium statistics
by APRA, a 2016 survey conducted by Zurich and the
Charter University of Oxford indicates the rate for income pro-
tection in Australia is 27% (global = 33%) and 25% for life
Consultum
insurance (global = 32%).
Financial Wisdom
The challenge for insurers and advisers are numerous,
Alliance Wealth
but key issues include:
AMP Financial Planning
• With life insurance being a product that is sold not
bought, the low penetration of consumers seeking
Infocus advice makes it difficult to promote the benefits of life
insurance to a wider audience.
Capstone
• Insurers’ inability to cut-through with their message.
Count Financial • A decreasing distribution model, with risk specialists
leaving the industry 2.4 times more than other
GPS Wealth advisers.
RI Advice
• The ongoing noise arising from the Royal Commission.
Financial Services Partners In our analysis into retail life insurance, we found average
retail premiums of clients were higher in states where a
Millennium3
higher proportion of risk specialist advisers were concen-
Lifespan trated (by licensee). Western Australia and Queensland
have considerably higher in-force premiums by adviser
Afﬁnia than other states. This is indicative of both concentration
of risk specialist advisers within certain licensees and
Interprac
potentially the type of higher risk occupations common
Synchron in those states (for example, within the resources industry
which has a greater awareness of and demand for income
$- $10M $20M $30M $40M $50M $60M $70M
protection, life and trauma insurance).
$80M
2019 2018
Source: AR Data, ASIC Financial Adviser Register Whilst 2019 respondents were more varied in terms of
risk expertise, there has been a general trend of de-
creased in-force premiums per adviser year on year,
which reflects the general sentiment around life insur-
ance and supported by the latest APRA statistics.
Financial advice:
What is value for money?
As household financial choices have become Vanguard’s September 2019 Research Paper, Assessing
more complex, the demand for low-cost, quality the value of advice, adds to this debate by introducing
financial advice has increased across the globe. a three-part value framework for advice incorporating
Traditional financial adviser services are therefore portfolio, financial and emotional value (Figure 1).
coming under increased scrutiny regarding what
constitutes value for money.
Figure 1. Value of advice framework
Component Description
Vanguard’s Investment Strategy Group Portfolio value Optimal portfolio construction

and client risk-taking
has developed a three-part framework • Portfolio risk/return characteristics
for measuring the value of financial advice • Tax efficiency
• Fees
incorporating portfolio and financial outcomes
• Rebalancing and trading activity
as well as emotional outcomes.
Financial value Attainment of financial goals
• Saving and spending behavior
• Debt levels
Although there is a good body of research • Retirement planning: cash flow,
determining the importance of portfolio and income, and health costs
financial outcomes when assessing the value • Insurance and risk management
of advice, very little research has been done on • Legacy/bequest/estate planning
other aspects of value. In Vanguard’s newly-released
Emotional value Financial peace of mind
research, there is strong evidence stating the
• Trust—in adviser and markets
importance of an investor’s sense of well-being when
• Success and sense
considering satisfaction with their financial adviser. of accomplishment
• Behavioural coaching
• Confidence
Assessing the value of advice
Source: Vanguard, 2019.
A large number of industry and academic studies
have sought to develop better ways to measure
the value of advice to investors. Many, such as • Portfolio value. The first dimension concerns the
Vanguard’s Advisor’s Alpha® and the Morningstar portfolio designed for the investor. Value comes from
gamma methodology1 take a normative or simulation- building a well-diversified portfolio that generates
based modelling approach. Several robo-advisers better after-tax risk-adjusted returns net of all fees,
have attempted to model the potential benefits suitably matched to the client’s risk tolerance.
of their methods using hypothetical or stylised
investors2. Academic and policy researchers Our study explored how financial advice
have contributed competing narratives as to improved portfolio diversification patterns
whether or not professional advice contributes to in self-directed investors switching to advice.
investor value 3. Advice appears to remedy common portfolio
1. See Bennyhoff and Kinniry (2018) and Blanchett and Kaplan (2018).
2. See Betterment (2019).
3. As examples, see Foerster, Linnainmaa, Melzer, and Previtero (2014), Brancati, Franklin, and Beach (2017), and Kim, Mauer, and Mitchell (2016).
errors attributable to cognitive or behavioural Most of the perceived value among traditionally
biases or lack of financial literacy. advised investors is assessed through the direct
relationship and interaction with the adviser.
We found that the benefits of advice include:
On the other hand, robo-advised investors are
a disciplined approach to equity risk-taking; the
influenced by attributes that connote transparency
elimination of large cash holdings; the elimination
and empowerment.
of home bias; a disciplined approach to active/
passive share; and the reduction or elimination
of individual stock risk (at least for the managed
portion of the investor’s assets). In these ways, Our research demonstrates the important
financial advice can help improve portfolio role emotions play in the financial advisory
outcomes for investors. relationship. In a survey of advised investors,
Read more: The value of advice: Improving we established that emotions account for around
portfolio diversification 40% of the perceived value of financial advice.
• Financial value. The second dimension

assesses an investor’s ability to achieve There are, however, important emotional
a desired goal. A portfolio does not stand on its attributes that are common for both groups
own. It is in service to one or more financial goals, of investors—such as trust, having a personal
such as retirement, growth of wealth, bequests, connection, regular plan monitoring, and saving
education funding, and liquidity reserves. time through task delegation.
One way to evaluate success is to estimate the Read more: The value of advice: Assessing the role
probability of achieving a financial goal or wealth of emotions
target at the end of a specified period. Ultimately, an
adviser should seek to improve an investor’s chance
of achieving his or her desired future spending goal.
Summary
To do this, the adviser must consider a myriad of Prior studies of the value of advice have tended to
planning-related metrics that extend beyond portfolio focus on individual elements of the above framework.
outcomes. These include financial behaviors such Some have assessed portfolio outcomes, such as
as optimal savings and spending; the assumption risk-adjusted returns and the value of portfolio tax
of debt; budgeting; insurance and risk management; efficiency, while others have estimated the impact
various elements of tax-efficient retirement planning; of financial planning strategies on forecast wealth.
and legacy, bequest, and estate planning.
We believe that the value of advice arises along all three
• Emotional value. The third dimension is an dimensions and that the relative importance of each will
emotional one: financial well-being or peace of mind. vary by investor and the advice delivery method.
The value of advice cannot be assessed by purely
Portfolio outcomes are of course foundational to
quantitative measures. It also has a subjective or
most advisory relationships. However, value should
qualitative aspect based on the client’s emotional
be defined more broadly. Our research illustrates
relationship with the adviser (or, in the case
the importance of the second dimension of value,
of robo-advisers, with the institution and its
financial outcomes which includes advice on areas
brand). Underlying elements include trust (in the
such as spending and saving, debt management, risk
institution or adviser), the investor’s own sense of
management and insurance, and so on. These metrics
confidence, the investor’s perception of success or
are just as important as (if not more so than) portfolio
accomplishment in financial affairs, and the nature
decisions in attaining financial success.
of behavioral coaching such as hand-holding in
periods of market volatility.
The importance of our third dimension, emotional
There is a distinct difference in how the various outcomes, uses survey data to estimate the emotional
attributes are perceived between traditionally component of advice. We found that it accounts for half
advised and robo-advised investors. of the value assigned to the adviser-client relationship.
Connect with Vanguard™ > vanguard.com.au
This article includes general information and is intended to assist you. Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer.
We have not taken your or your clients’ circumstances into account when preparing this document so it may not be applicable to the particular situation you or your client are
considering. You should consider your and your clients’ circumstances, and our Product Disclosure Statements (“PDSs”), before making any investment decision or recommendation.
You can access our PDSs at vanguard.com.au or by calling 1300 655 205. Past performance is not an indication of future performance. This document was prepared in good faith
and we accept no liability for any errors or omissions. ARAFAW_032020
CHAPTER
ADVISER MOVEMENTS
With 25% of the advisers in Australia either leaving the industry

or changing licensees each year, these statistics are key to
understanding the present and future of the advice industry. It
illustrates the decline of the banking sector, and the emergence
of the new wave of heavyweights in the advice industry.
ANALYSIS OF RECENT adviser movements reveals to 2,137, with licensees of 20 or less advisers contribut-
two characteristics starting with “F” that could be said ing to this growth – from 1,340 to 2,057. As it currently
to dominate the subject this year: flux and fragmen- stands, nearly 93% of the total number of licensees in
tation. Adviser movements both entering and leaving the country authorise 20 or less advisers.
the industry and also moving between licensees within
the industry have increased dramatically in the last 12 New Advisers Flatline
months. The formerly dominant “Big Six” wealth insti- The new qualifications regime which came into effect
tutions (AMP, CBA, NAB, ANZ, Westpac and IOOF) no on January 1, 2019 has resulted in very few new advisers
longer license the majority of Australia’s advisers, with being authorised this year.
most advisers migrating to the abundant and growing
privately-owned licensee sector. Chart 2.1 demonstrates the flatline in new adviser num-
bers in 2019, in comparison to previous years. Historical
Industry Flux – Movement Aplenty spikes in new adviser numbers were predominantly
The end of 2018 saw a massive influx of advisers the result of regulatory changes – in 2016 the accoun-
becoming authorised in order to beat the new FASEA tant’s exemption regarding SMSF advice was repealed
professional standard deadline (including relevant (meaning AFSL authorisation would be required for
bachelor’s degree for new authorisations) of Jan 1st, accountants to continue to advise on certain aspects of
2019. Over 2,000 advisers were added to the industry in SMSFs) and in 2018 when advisers rushed to be autho-
December 2018 alone. rised prior to regulations that applied to new advisers
as previously mentioned.
However, that initial gain in numbers has been all but
wiped out this year, which has seen total authorised The trend of increasing cessation (which indicates
adviser numbers decrease from 28,365 to 24,103 by leaving the industry or transitioning to a new licensee)
November 2019. This is a net loss of 4,262 advisers, of advisers has accelerated across all types of licensees
reducing the total number of advisers by 15% YTD. (institutional, aligned and privately owned) since 2015.
Advisers are also moving between licensees at a greater
rate than has been the case historically. Adviser Switching Accelerates
The increasing flux of adviser movements within the
Industry Fragmentation – industry is illustrated in Chart 2.2, which shows gross
By The Numbers adviser movements of existing advisers switching be-
Westpac exited from advice in 2019 and most other tween licensee types since 2014. We note that in every
Big Six members have announced their intentions for year since 2014 more advisers are switching out of the
further rationalisations and/or closures within their institutional and aligned licensees than are switching
respective wealth arms. The latest figures from the be- in. The strong growth in advisers moving towards
ginning of December show that Big Six authorisations privately-owned licensees has continued for the last
of all advisers now account for just 24.5% of the market. half decade and we would expect that by the end of
This figure is expected to continue to contract. 2019, more advisers would have switched into privately
owned licensees than in 2018.
In parallel to their decline, privately-owned licens-
ees are continuing to see growth in both their overall Chart 2.3 further illustrates the dramatic transition
number, and in the number of advisers they authorise. away from institutionally owned and aligned licens-
Since October 2015, the number of licensees authoris- ees towards privately owned licensees, and the gross
ing advisers in Australia has grown by 55%, from 1,374 increase in movements. This chart deals solely with
Chart 2.1
New
NEW AdvisersVS
ADVISERS VsEXITING
Exiting Advisers
ADVISERS
2014 2015 2016 2017 2018 2019 YTD Sep

3,165
2,174
2,714
1,700
1,403
1,310 1,348
1,579
New Advisers
866 877
820 787
1,128
1,037
626
577
757
601 654 630 595
531 331 368
308 295 299 271
413 403 415
341 31 2 146
0
153 164
135

413 578 400 379

Ceased Advisers
678 640 614 639 670

517 487
794 837
910 877 878
960
735
784 800
846 823
898 927
1,405
1,013 1,489
1,094
1,275
2,064
Privately Owned Institutionally Aligned Institutionally Owned
Source: ASIC Financial Adviser Register, AR Data.

Note: Data up to September 2019
advisers switching from one licensee to another in the Adviser Exodus Begins
given year, meaning the total numbers above the x-axis 2015 marked the beginning of the current trend of
are equal to the total numbers below for any given year. adviser movements away from the institutionally
Migration towards privately owned licensees has been owned and aligned licensees. The FOFA legislation
positive and generally increasing year on year since came into effect for most advisers in mid-2013. Follow-
2014. We note the acceleration in 2019, which shows ing a change in federal government and lobbying from
that by Q3, already more advisers have switched out of the big wealth institutions, amendments designed to
institutionally owned and aligned, and into privately decrease their regulatory burden were announced;
owned licensees, than in any of the previous five years. however, the amendments were disallowed by the sen-
Chart 2.2
Financial
NET Advisers
ADVISERS In Industry
IN INDUSTRY Switching
SWITCHING Between
INTO LICENSEES Licensees
2014 2015 2016 2017 2018 2019 YTD Sep
900
2,174
2000
1,700
1500 640
Switched-in
525
495 505
1000
New Advisers
500
131
0
0
-69
-26 -105

Ceased Advisers
-219 -218
500 -258
-276
-307
-341
-382
Switched-out
-436
1000
-559
2000
1500
Privately Owned Institutionally Aligned Institutionally Owned
Source: ASIC Financial Adviser Register, AR Data.

Note: Data up to September 2019
ate in late 2014. It may be that this signalled to advisers

that reforms starting with FOFA were to continue,
“THE OLD BIG SIX OF THE
and from 2015 we can see an increasing loss of adviser
MAJOR BANKS AND AMP/IOOF numbers in both the institutionally owned and aligned
ARE BEING REPLACED BY THE space, as advisers moved to privately owned licensees
NEW HEAVYWEIGHTS OF THE that potentially had licensee conditions and business
ADVICE SECTOR” models that were more attractive. Since 2015, there
has been no overall growth outside of privately-owned
licensees. The smaller decline for institutional and
aligned licensees in 2018 is again attributable to the
Chart 2.3
influx of advisers at the end of that year. Institutionally
ACCELERATION OF ADVISER EXITS FROM THE BIG SIX
owned and aligned licensees have lost more than 2,400
advisers already in 2019 alone.
500
Transition At The Top – The New Big Six 149
Net advisers gained (lost) in the big six licensee groups

So now we may ask – who are the new big players in
0
advice? Is there a new Big Six? At present the top three
licensees by number of advisers are still legacy mem- -262
bers of the old Big Six. Adviser numbers are still very
-587
fluid and are changing daily. As of mid-December 2019, -500
-758
AMP remains the largest network with 2,182 advisers
followed by IOOF with 1,465. NAB’s network is the third
largest at present with just over 1,200 advisers but is -1000
decreasing daily, and with their stated intention to fur-

ther divest and also to merge its Garvan, Apogee and
Meritum licensees next year, NAB’s adviser footprint -1500
could be dramatically reduced in the next 12 months.

-1920
This brings us to the new heavyweights of the advice -2000
sector. Though not as dominant (yet) as the traditional 2014-15 2015-16 2016-17 2017-18 2018-19
Big Six have been, these four groups are the next big- Source: FAR
gest market players. The National Tax and Accountants

Association houses the SMSF Advisers Network (SAN).
This licensee has seen rapid recent growth in the last
couple of years. The significant increase in adviser continuing to grow through 2019. It offers risk manage-
numbers in a relatively short period of time saw ASIC ment, superannuation and investment advisory ser-
impose additional conditions by consent on the licens- vices through its current network of 521 advisers spread
ee in Q2 this year. It started the year with 1,091 advisers across Australia. Finally, we have Morgans Financial
but since has thinned down to 934, making it the fourth with 504 advisers in its full-service stockbroking and
largest licensee according to numbers. wealth management network. Morgans entered a stra-
tegic relationship with CIMB Securities International
Easton Investments Limited is the next largest network, (Australia) Pty Ltd (CIMB Australia) in 2013.
currently with 721 advisers licensed through its three
major brands, Merit Wealth, GPS Wealth and The The above four networks all have more than 500 advis-
SMSF Expert. Easton announced the major acquisition ers in their licensees. They are followed by a further 10
of GPS Wealth (currently almost 300 advisers) in June groups, each with over 200 advisers which make up the
2017 and continues its desire to grow through invest- bulk of the larger adviser networks. The decline of the
ing in direct to market providers and also through the Big Six has seen the firms mentioned here come to be
provision of advisory services through the accounting the new dominant players in the advice market. How-
channel. ever, it is unlikely a half-dozen companies will come to
dominate the market as the Big Six once did. It should
Synchronised Business Services (Synchron) is one of be remembered that in today’s market, fragmentation is
the largest privately-owned licensees, and the only one the new norm.
CHAPTER
ADVICE BUSINESS LANDSCAPE
Adviser movements may be the most visible indicator of

change, but beneath the surface, the whole industry is
fundamentally changing. Understanding how these changes are
coming to the fore will be key for the advice businesses of the
future to flourish.
THE PAST TWO years has seen the most seismic shifts technology and professional indemnity (PI) insurance
ever to occur in the financial advice landscape in Austra- take it higher for larger practices.
lia, and the flux hasn’t ended yet. For the purpose of this
report, we will move beyond what has happened at the Of that $150k, we increasingly see an unbundling of
institutional end of the market, and the super funds, and technology and PI costs. For example, a good dealer
focus more on what is relevant and needs to be consid- to dealer offer or licenseae deal could secure 30% off
ered at the SME and individual practice level. While we the full Xplan rate if the practice uses every module. A
will look at areas like remediation as part of the broader self-licensed firm with no access to discounts will find
landscape, the majority of this section will refer to SME this is a major cost consideration. The other big area is
matters. PI, with premiums and excess constantly climbing. It
is not unusual to see excesses over $25k and premiums
Licensee Structural Matters above 2% of revenue. The days of subsidisation of these
Licence Pricing costs is rapidly coming to an end.
The major institutions staying in the market have
increased licensee pricing significantly for the single To attract larger practices, licensees will usually offer fee
authorised representative (AR) business with less than caps in the $120-150k range to make their offer compa-
$500k revenue. Pricing has moved from the $20-30k rable to self-licensing. They are also competing against
for the first AR in a business to circa $45-50k. There are dealer to dealer offers such as Centrepoint which offer
reports this could go as high as $80k in the near future. access to discounts and services as required. For licens-
This means the rapid reduction in adviser numbers in ees, while fees are an issue, the bigger issue is risk. The
this segment will continue over the next 12 months. days of “luring” practices on the basis of growth alone
are gone, the risk simply isn’t worth it. Licensees have
When it comes to medium-sized practices with circa been boxed into a corner of cost-plus, component pric-
$500k-$2m turnover, many in the market have moved ing; it will be interesting to see how they can introduce
to a hybrid model between flat fees and a percentage of more upside into their model, whilst being acutely
turnover while many others are flat fee only. There is aware of the self-licensing alternative.
no single model but different varieties and mixtures of
these pricing elements. No matter what model is select- PI Coverage
ed, the market is rapidly moving to an average cost of Institutional and privately-owned licensees with many
$40-50k per AR, with scaling for subsequent ARs at circa advisers have experienced considerable PI insurance
$20-30k. Licensees are conscious of the practices nudg- pressure. Some have been declined cover and it is not
ing turnover of $2m and above being tempted towards unusual to see 50-60% premium increases and excess
self-licensing as an alternative. The opportunity cost for above $25k. As a general rule, premiums are now quoted
self-licensing is circa $150k total cost. Variable costs of at circa 2.5% of turnover. This area is a major concern for
licensees.
PI insurers are generally more comfortable with the

“THE OPPORTUNITY COST FOR individual practice with its own licence, provided it is
SELF-LICENSING IS $150,000, run well. In the midst of the Hayne Royal Commission
OR HIGHER FOR LARGER numbers grew substantially in this segment, however,
PRACTICES” they have moderated to a normalised level of circa 40-50
per month. During June 2019 a large number of licensees
handed back their licences mainly due to sharp rises in
costs – technology, compliance and professional in- Partners, the total cost of remediation provisioned by the
demnity insurance. Some have also weighed up the risk four banks and AMP/IOOF is approaching $10.6b. This
profile should ASIC increase activity in this segment. includes the cost of determining the extent of the prob-
lem as well as customer compensation. The total bill
Compliance Shortcomings – for the industry may be substantially greater as original
Fee Disclosure Statements (FDS) estimates have been easily surpassed, and when ASIC
ASIC Report 636 was released in late November 2019. turns it attention to other institutions and the larger
It covered 30 licensees randomly drawn from small, privately-owned licensees.
medium and large licensees. The review looked at 1,496
Fee Disclosure Statements (FDS) and 373 renewal notic- Business Risk
es (RNs). ASIC also commissioned a compliance consul- In today’s climate, advice businesses are facing severe
tant to review 176 FDSs in detail to determine whether headwinds as the overall industry and individual busi-
the contents complied with legal requirements. nesses go through a very difficult transformation. At the
risk of stating the obvious, it follows that the level of
The review found that 7% of the FDSs required to be business risk is elevated and the degree of scrutiny from
given to clients by law, were not given. In 35% of the a range of counterparties is rising:
instances when a RN was required, it was not given.
• Regulators have raised their game following a public
When reviewing policies and procedures, ASIC found shaming from the Royal Commission;
that more than half of licensees did not have effective • Lenders are increasing their quality of surveillance,
processes to remind them when RNs are due or to turn monitoring covenant compliance and tightening
off ongoing fees. Given the size and standing of many lending standards;
of the selected licensees, this is a concerning outcome • PI insurers are contemplating overall system risk and
and as a result, expect this to be a significant compliance asking themselves the question should they continue
and remediation theme in the period. It will go beyond to cover this sector;
the institutions and could be a balance sheet test in the • Financial product manufacturers, now captured
privately-owned market. under the Design and Distribution Obligations
and Product Intervention Powers Act 2019, are
Notice of Non-Independence contemplating the need for proper risk assessments
In recent years ASIC has banned the use of the term on their distribution partners;
independent unless the entity meets S.923A of the Cor- • Investors in and acquirers of advice businesses /
porations Law. The Royal Commission took it further, books are going deeper than ever before on due
with a recommendation to place a warning to clients diligence;
that the practice is not independent and why. The exact • And financial advisers staying home or contemplating
wording and nature is yet to be revealed, however, the switching are asking as many questions as they are
anticipation of the recommendation was one of many being asked about the suitability and stability of their
factors moving the market more strongly into the pri- licensee.
vately-owned space.
Each of these stakeholders will assess risk in differ-
Remediation ent ways based on a range of information sources,
The institutions are all at various stages of implement- both quantitative and qualitative. As the advice world
ing this instruction, and the total estimated liabilities slowly transitions to cloud-based, connected technol-
keep rising as more work is done. According to Shaw & ogy systems with the ability to digitally capture almost
everything, the availability of new data sources and data (BID) is triggered when an adviser sees a client. For
relationships will improve effectiveness of risk manage- many advisers the average cost of this advice piece is
ment. $3,000-4,000. If that’s the case, it’s either unprofitable
or completely changes thinking on the advice offer
Practice Developments and experience.
The practice experience has to some extent depended
on the segment in which they reside. Larger practices In many cases the pending removal of grandfathering
in the large institutions have left in large numbers and and the anticipated movement to annual opt-in has
many have obtained their own licence. Overall, it’s a moved this work into the urgent category over the
feeling of gaining greater control of their destiny having past 12 months. Unfortunately, many practices in the
experienced uncertainty in their previous environment. institutional market have often experienced months
to move the client through a cumbersome pre-vet and
Practices of small to medium size have been less likely paraplanning process.
to obtain their own licence and have often joined larger,
privately owned licensees. As a general comment, prac- As a general rule, practices either upgrading grandfa-
tices coming from the institutions have been through thered clients or discontinuing the relationship would
considerable transition stress. In addition, they have expect to have a 10-15% revenue loss; however, practic-
often seen their costs rise substantially as they move es that take a serious look at their value proposition
from a subsidised model to a more user-pays model, and pricing discover that they are undercharging
particularly regarding technology and compliance. On the bulk of their client bases. The practices that go
the other side, where they came from have re-priced in through this change management exercise often
this direction as well. This means advisers departing and report increases in their revenue of 10-15% and a re-
staying in the large institutions have felt substantial cost duction in costs. Profitability often moves from 15-20%
pressures. normalised EBIT to 30-40%. This revenue and profit
uplift needs to be sustained into the second year.
On average, practices have experienced flat revenue
growth due to lower consumer confidence in advice with In very recent times the FASEA Code around Stan-
a sharp rise in costs. This has led to declining profitabili- dard 3 has cast doubt on charging models incorpo-
ty, often in the 10-20% range for normalised EBIT to rev- rating percentage-based fees, insurance commissions
enue. This has made practices seriously scrutinise costs and other areas of conflict. As a result there has
and incumbent solutions in areas such as technology. been a greater shift towards flat fees. Once again, the
businesses that invest in their value proposition and
The Business Revenue Challenge client experience often thrive through the change
Commissions and Grandfathering versus standing still.
When rebating commission or moving to a commis-
sion-free product this involves informed client consent Managed Account Margins
in some manner. The minute this occurs it triggers a Three to five years ago there was a high prevalence
conversation the practice has to hold with the client to in the privately-owned sector of licensees utilising
position their value for the fee. various entity structures to receive margin from Man-
aged Discretionary Accounts (MDAs) and managed
Many legacy product providers have begun and will accounts platforms. It’s not unusual to see licensees
continue to accelerate systems and product ratio- have 20% or more exposure in their revenue line to
nalisation programs. In addition, Best Interest Duty these sources.
In the post-Hayne era and the emerging FASEA Code Chart 3.1
VALUATION MULTIPLES FOR TUCK-IN PRACTICES
many managed accounts platforms stopped offering
these payment sources in the past two years. More pro-
gressive licensees have moved ahead of the regulation 3
Excellent
and already reduced their exposure. Should this revenue 2.5
Quality 2.5-2.9
source come to a more abrupt end, combined with high- Clean book older,
2-2.4
inactive client base
er compliance and technology costs, the impact could 2
lead to many privately-owned licensees experiencing fi- Revenue Multiple

1.5
nancial difficulties. Many larger practices exiting the in- 1-1.5
Compliance Risk Fee
For No-Service Issue
stitutions have expressed concerns about sustainability 1
of these licensees and taken control of their own destiny

0.5
through self-licensing. This hit fever pitch in the Hayne Grandfathered
Revenue
Royal Commission period but has moderated since. 0
0
Low High
Revenue Quality
Life Insurance Framework Source: FAR
Prior to establishment of the Life Insurance Framework

(LIF) in January 2018, upfront commissions were 110-120%
of the first-year premium. Under the LIF reforms this
commission rate has now reduced to 70%. Practices report on the business model. Higher quality revenue attracts a
many of the same technology and service problems with high-two multiple at present.
life insurers, therefore, many are experiencing rising costs
with lower revenue due to commission rates falling. Over- The Hayne Royal Commission placed a significant bias
all the life insurance sector is under major pressures. towards eventually moving commissions to zero, pend-
ing a review about to commence from ASIC. The entire
On January 1, 2020 we will see risk commissions move viability of rump of the life insurance advice industry
again to 60% upfront and 20% ongoing. It is fair to say will sweat on these developments. Should it occur radi-
the movement in commissions from 110-120% to current cal change would follow.
levels plus the pending education requirements has led to
a number of risk specialist advisers exiting or planning to Impact of FASEA on referral and related
exit the market. Many practices have concluded that they businesses and remuneration structures
need to charge a fee to top-up commissions to remain via- When taken literally, the FASEA guidance released on
ble. Industry analysis shows the cost base for a “cleanskin” Standard 3 would make one think all referral models
in insurance is north of $3k. Unless we see a technology are unworkable. In recent weeks more context has been
revolution in insurance to reduce the end-to-end cost of released and ASIC have agreed to take a facilitative
advice the challenges for risk specialist firms will remain. approach to licensees monitoring adherence to the code
For firms with a more holistic offer they have the ability to on January 1, 2020. As a result, businesses and referral
offset and cross-subsidise within a flat fee. The addition arrangements are currently experiencing substantial
of structural and estate planning facilitation is a growing uncertainty.
addition to the value proposition.
Trading Practices
For risk practices targeting the mass affluent a commis- The marketplace has shifted significantly with advice
sion-only model has become very difficult and exits business valuations. Three to five years ago a client base
continue. Valuations for risk-related revenue depends was seen as a whole and generally speaking the various
revenue segments carried similar valuations. This was payment terms have also shifted markedly to protect the
also underpinned by institutional buyer of last resort risks of the buyer.
(BOLR) schemes that valued all revenue equally be-
tween three-four times. When it comes to funding, many practices are still using
debt funding due to low cost of debt capital. There is
With the collapse of the institutional market, an arbi- limited supply of lenders and terms and due diligence
trary 2.5 times revenue outcome imposed by AMP, and has definitely tightened in the market. Privately owned
the pending abolition of grandfathering there is now equity funding is still in its early stages.
a stark difference in the valuation of different revenue
segments. Client Impacts
Over the past 12 months the number of dislocated clients
It’s important to note that businesses valued on revenue has risen rapidly. With many advisers triggering BOLR at
are often “tuck-ins” and the buyer is not purchasing AMP and the banks withdrawing or shrinking their salaried
them as a going concern. The institutions are rapidly channels, this has led to many clients exiting their advice
extracting themselves from single adviser practices with relationship without necessarily knowing. Some have found
$200-500k of revenue. In addition, older advisers have a new home, but many have not, representing a client acqui-
weighed up the FASEA requirements and decided to exit sition strategy for practices with strong marketing acumen
now to give themselves certainty. and branding presence. This situation is particularly acute in
regional areas, with some savvy practices advertising them-
The supply of businesses is very high and that is placing selves as a home for clients previously attached to banks.
downward pressure on valuations in this business More organised transactions such as the Westpac transaction
model, even if the revenue is of high quality. In addition, to Viridian have been the exception not the rule.
we often see new conditions and warranties to protect
the buyer against an increasing risk environment. These This whole process has brought to a head the issue of
clauses and the potential revenue clawback associat- business agreements and ownership of the client. In the
ed often stretches out for two years. Previous upfront bank channels, the bank owns the client. Previously, the
payments of 80-90% look more like 50-70%. The buyers bank used to protect its position when an adviser left
are typically above the $2m turnover mark with strong or organised themselves an orderly transition into the
balance sheets. self-employed, aligned channels. With the banks exiting
or shrinking their advice models, many advisers appear to
Due diligence in the current environment is literally be picking up previous clients without issue, however, one
line-by-line on every client looking at date compliance should be very careful assuming that will apply to them
on FDS, opt-in, last statement/record of advice (SOA/ with certainty.
ROA) and evidence of fulfillment of ongoing service
agreements There is the very serious problem of clients becoming or-
phaned through unaffordability under an adviser’s higher
A transaction involving a going concern is usually based pricing model, or by an adviser unilaterally choosing to
on a normalised EBIT basis. Valuations of well run, concentrate on higher net worth clients.
compliant businesses still attract multiples of 5-6 times.
In this type of transaction, valuation tends to follow the The Changing Shape of Advice Businesses
strategic intent of the buyer. This strategic intent could Advice Support Model
involve expanding into various markets or talent and In years past many of the institutional and larger licens-
succession depth that comes with the deal. Once again, ees offered practice development manager (PDM) ser-
This includes increased vetting of adviser background

through use of professional background screening
“MANY MORE PRACTICES
companies, and an increasingly forensic approach to
ARE EXPLORING LOWER reviewing past advice files. The costs for this additional
FIXED COSTS THROUGH due diligence is substantial, both in terms of time and
PARAPLANNING SOLUTONS the fees paid away to third party service providers.
OFFSHORE”
Well known privately-owned licensees are getting
flooded with enquiries but are also terrified of getting it
wrong. This has driven a material improvement to the
vices. As the institutions exit or substantially rationalise, level of background screening of new personnel. This
this role has gone with the associated cost reduction. greater attention to the threat of importing risk through
Yet the challenges, opportunities and problems haven’t recruitment and authorisation commenced earlier in
changed, and many more substantial practices have 2017 when the government introduced the Banking Ex-
sought private sources for business solutions. With ecutive Accountability Regime (BEAR) and concurrently
many advisers exiting but wanting to stay involved this the Australian Banking Association (ABA) launched its
privatisation will become a more dominant trend. We Conduct Background Check Protocol. While the BEAR
can expect to see more experienced advisers remaining and the ABA response were intended for banks, it has
involved in the industry but contributing in non-advice spread the standard into the advice industry and now
business functions, either directly employed by the prac- thorough vetting of authorised representatives is a more
tice or working from within consulting firms. common practice.
Practices are structured in different ways however, many Trainee Advisers

have moved towards an advice team, or pod model, with When the Professional Year was brought into the FASEA
a principal adviser, paraplanner/technical resource and adviser entry framework there was clearly a vision
a client service officer shared with another pod. The it could work in a similar manner to the accounting
weight of compliance requirements, practice transition profession. In accounting they have a long established,
and associated technological change has tested the cohe- well-resourced approach, however, this is completely
siveness of the typical pod. new to financial planning. The institutions would gen-
erally have been expected to have the financial capacity
More and more practices are exploring revenue growth and organisational precedent to bring decent volumes of
with lower fixed costs through paraplanning solutions trainee advisers into the industry in this manner. Howev-
offshore. The more successful cases treat the offshore er, with their rapid departure, it falls onto the shoulders
staff like a member of the team and establish a daily op- of the privately-owned licensees that are concurrently
erating rhythm through the pod structure. The success- dealing with a myriad of other (expensive) issues, drain-
ful practices also place a premium on the skilling and ing their ability to step-up in this important area.
development of the resource.
Risk / Compliance Teams
Onboarding New Advisers The suite of legal and regulatory obligations that licens-
Recommendations from ASIC report 515 and the Royal ees must now meet are extensive and growing as new
Commission around performing more thorough due requirements follow from the Royal Commission. At the
diligence before onboarding new advisers have been same time, consistent with its new “Why Not Litigate?”
picked up already and major change has occurred. mantra and in pursuit of earlier findings emerging from
prior industry reviews, ASIC has ramped up surveil- Seaview Consulting report big spikes in transaction
lance and inspections across the board. volume. This shows no sign of abating.
When a licensee receives a request for information Data and Automation

and may have compliance concerns about a particular Leading practices are increasingly seeing data as a major
practice, the licensee seeks to stay heavily involved asset in their business. In addition they are seeking
via a three-way interaction between the licensee, the best of breed technology solutions that have open API
external expert and the regulator. The implications are interfaces with other software solutions. Data silos and
too significant for the licensee not to take an active role. disparate systems continue to have a major impact on
It’s increasingly becoming the case that licensees in all efficiency, cost and the client experience. Automation is
segments will spend what’s required to rectify the issue, only possible through an open source technology stack.
however, depending on the circumstances seek recov- Solutions such as XEPPO are increasingly supporting
ery. For example, for the FFNS investigation, practices this type of environment and in fact seek to connect data
can expect requests for reimbursements where the from accounting, mortgage broking, general insurance
fee is over certain thresholds ($2,000-$3,000) and the and other open API solutions to form one view of the
evidence shows absolutely no activity can be demon- client across an integrated financial services approach.
strated.
Notwithstanding the benefits of leveraging data more
For smaller licensees there is genuine risk if the ex- holistically, there are also risks to control. In July 2019 we
penses escalate. Weak balance sheets and cash backing saw the continuation of substantial changes and penalty
represent genuine risk under these compliance themes. increases for privacy breaches. Reporting is now man-
datory and the penalties could easily put a practice out
Technical Services of business. Within the institutions, practices have been
With the reduction in institutional investment in the able to leverage off the broader focus on data manage-
industry have come reductions in technical teams. With ment, privacy and cyber security within the broader
ever-increasing complexity in advice and pressure on organisation. For practices operating off their own steam
more sophisticated value propositions, the demand in this area, having a top quality technology partner
for these services has risen. The value of a strong focused on this area is now an essential versus a “consid-
technical team within a licensee will become an even eration”.
more compelling proposition for advisers in transition,
however this is likely to be a rare commodity. Instead, Approved Product Lists
the solution will shift to accessing teams held through We have seen an increased prevalence of ASIC prosecut-
platforms, product providers, and the fast-growing ing Best Interests law. As a general rule, licensees have
dealer to dealer sector. chosen to broaden their approved product lists (APL) in
response. On top of this trend, as practices experience
Due Diligence Teams higher costs they tend to look very hard at costs through-
Three to five years ago many of the large institutions out the value chain. As a result index investing, ETF’s
had their own internal transactions teams to enable and LIC’s continue to grow. Older, expensive managed
succession planning and part book sales within the funds have attracted increased scrutiny and turnover as
system. These teams have reduced to very low numbers, the adviser reviews a client under best interests. This
and are more dealing reactively to exits. The transaction has placed high pressure on incumbent investment
market has moved private in big volumes. Groups such managers with soft performance and potentially higher
as Forte, Radar Results, Centurion Market Makers and margin on their back versus front book.
CHAPTER
INFOGRAPHIC SECTION
The full Landscape Reports contains hundreds of graphs

illustrating how the financial advice landscape is changing.
For this version, we have developed new insights that are
specifically relevant to the adviser market.
Chart 01
DISTRIBUTION OF PRACTICE
SIZE BY TYPE AND NUMBER OF 2-5 advisers 6-10 advisers
PRACTICES 6-10 advisers
1 adv
iser
2- ers
ad
5
vis
Instituti
on
Alig
1 adv ned
iser
1 adviser
6 - 10
rs
advise Pr
iva
te
adv - 5
Institution
rs
ise
2
Aligned
Private
Chart 02
DISTRIBUTION OF PRACTICE
SIZE BY TYPE AND NUMBER
OF ADVISERS
6-10 advisers 21-50 advisers
1 adviser 11-20advisers
2-5 advisers
11-20 advisers
adv
50+ rs
6-10 advisers
vis 5
ers
ise
2-
21-50 advisers
Inst
ad
ituti
on
1 adv
iser
2-5 Aligned
advisers
Priv
ate
1 ad
viser
50+ rs
ise
adv
Institution
6 -1 ers
adv
advis 0
ers
advisers
2
0
is
Aligned
11 -
50+
Private
Chart 03 Chart 04
ADVISER DISTRIBUTION BY LICENSEE TYPE ADVISER DISTRIBUTION BY FUA
Type Distribution FUA Distribution

100%
90%
80%
70%
60%
50%
$10-$20M
40%
30% $100-$200M
20%
10%
0%
Advisers Practices Licensees $5-$10M
$50-$100M $20-$50M $200M+ $0-$5M

Institutionally Aligned Institutionally Owned Privately Owned
Chart 05 Adviser FUA by # of Clients

ADVISER DISTRIBUTION BY FUA AND NUMBER OF CLIENTS Adviser FUA by # of Clients
250+ clients
250+ clients
200 - 250 clients
200 - 250 clients
150 - 200 clients
150 - 200 clients
100 - 150 clients
100 - 150 clients
50 - 100 clients
50 - 100 clients
25 - 50 clients
25 - 50 clients
1 - 25 clients
1 - 25 clients
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
$0-$5M $5-$10M $10-$20M $20-$50M $50-$100M $100-$200M $200M+

$0-$5M $5-$10M $10-$20M $20-$50M $50-$100M $100-$200M $200M+
Chart 06 Chart 07
Adviser DistributionBY
ADVISER DISTRIBUTION by PRACTICE
Practice Size and TypeAND TYPE
SIZE Adviser DistributionBY
ADVISER DISTRIBUTION by Licensee
LICENSEESize and TypeAND TYPE
SIZE
50+ advisers 50+ advisers

21-50 advisers
21-50 advisers
11-20 advisers
6-20 advisers
6-10 advisers
2-5 advisers
2-5 advisers
1 adviser 1 adviser
0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%
Institutionally aligned Institutionally owned Privately owned Institutionally aligned Institutionally owned Privately owned
Practice Distribution by # of Clients

Chart 08
ADVISER DISTRIBUTION BY LICENSEE TYPE AND NUMBER OF CLIENTS
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1-25 clients 25-50 clients 50-100 clients 100-150 clients 150-200 clients 200-250 clients 250+ clients
Chart 09
1 adviser BY YEARS
GENDER DISTRIBUTION 2-5 advisers 6-10 advisers
OF EXPERIENCE 11-20 advisers 21-50 advisers 50+ advisers
Gender Distribution by Years of Experience
20+
11-20
6-10
2-5
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Female Male
Chart 10 Region Distribution by # of Advisers per practice

REGION DISTRIBUTION BY NUMBER OF ADVISERS PER PRACTICE
50+ advisers
21-50 advisers
11-20 advisers
6-10 advisers
2-5 advisers
1 adviser
0% 20% 40% 60% 80% 100%
Metro Regional
Chart 11
PREFERRED PRODUCTS BY PRACTICE
Preferred Products by Practices
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Listed SMSF Model Managed Life Managed Model Structured Annuitie s Bonds Margin Loans Direct
portfolios funds Insurance accounts portfolios products lending property
(using managed (e.g.MDA/ (using direct
funds) SMA/IMA shares)
Chart 12
FASEA REQUIREMENTS BY LICENSEE TYPE
FASEA Requirements by Licensee Type
Privately owned
Institutionally owned
Institutionally aligned
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Approved degree pathway Relevant degree pathway
Non-relevant degree pathway No degree pathway
Chart 13
FASEA REQUIREMENTS BY LICENSEE SIZE
FASEA Requirements by Licensee Size
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 adviser 2 - 5 advisers 6 - 20 advisers 21 - 50 advisers 50+ advisers
Approved degree pathway Relevant Degree Pathway Non-relevant degree pathway No degree pathway
CHAPTER
D I G ITA L A DV I C E T E C H N O LO G Y
The current providers of technology solutions have improved

their service, but the new age of advice means that they need to
evolve solutions to not only meet the needs of advisers, but to
help those advisers service their clients.
The Case For Digital Advice their goals, understand what’s important to them so that
Fallout from the Royal Commission has led to a loss of they feel heard, counsel them through difficult situa-
trust in financial services and institutions are abandoning tions, and offer them unique opportunities to better
their advice businesses. Advisers are leaving the industry in their financial position.
droves and customers are being orphaned.
The Emerging Digital Smart Tool Providers
It seems like the perfect role call for the digital advice in Australia
sector. Save the orphaned clients, attract new consum- In September 2018, Adviser Ratings launched its Smart
ers with funky services, help rebuild trust in the sector. Tools register to promote the emerging Australian com-
What a heavy load to carry for such a young upstart munity of personal digital finance tools selling directly
community, but it is worth dreaming. to consumers, or put another way, business to consumer
(B2C). This register currently features over 45 different
Most Australians don’t receive any advice because it’s providers spanning a range of capabilities, with several
either too expensive, they don’t think they need it, they new ones added during 2019.
can do it themselves, they don’t trust advice or don’t see
any value. Digital advice is seen as a solution to these With the trust and reputational issues currently faced by
problems. the traditional face-to-face advice industry potentially
also impacting this start-up community, together with the
Digital advice will give the large portion of Australians mass migration of consumers online, it seems a time of
free or low-cost access to services that will scale with both great challenge and opportunity for these providers.
their needs. Some of these consumers will ultimately
find the technology lacking and look to outsource their In November 2019, Adviser Ratings conducted a survey
financial management to an expert adviser. This same of smart tool providers and major institutions to deter-
person may have never thought to seek an adviser if they mine the state of play in this local industry, whether
had not had a digital service that highlighted to them there were opportunities for these two groups to work
just how many factors need to be considered. Ultimately, more closely together (the “hybrid” approach) and
this will mean the right types of consumers are seeking where the technical and functional development of
expert advisers – those that will benefit the most from these capabilities is heading.
more sophisticated services.
Smart Tool Business Focus
Growing the Customer Pool There is a definite shift from B2C towards B2B2C in the
As an industry, superannuation is often seen as a gate- past 12 months, which is understandable given the chal-
way to advice, where those consumers engaged in their lenge for any start-up firm running a pure consumer-fo-
finances because of superannuation are often thinking cused business to quickly build brand, reputation and
about retirement, have mature balances, and make com- a commercially viable customer base. Prudently, these
mercial sense for financial advisers. But how do these businesses are switching their focus towards partnering
people get help between the ages of 20 and 50? Digital with larger businesses to capture more secure revenue
advice allows the industry to shift down the curve, serve streams and, in some cases, investment partners to help
the masses, and grow the size of the market. fund further product development.
The arithmetic element of advice is better done by Despite the growing influence of the aspirational mil-
computers. They can crunch numbers faster and more lennial, the customer base of the current crop of digital
accurately. Where advisers excel is helping clients define finance tools is relatively balanced across the age demo-
Chart 5.1
graphic. This may be skewed by the heavy concentration
SMART TOOL BUSINESS MIX
of investment solution tools that are primarily targeting
100%
100% B2C
B2C
75% B2C,
75% B2C, 25%
25% B2B2C
B2B2C the older DIY investors with established wealth.
50%
50% B2C,
B2C, 50%
50% B2B2C
B2B2C 25%
25% B2C,
B2C, 75%
75% B2B2C
B2B2C
100% B2B2C
B2B2C
100%
It is natural as this sector evolves and matures that the sophisti-
cation of the offerings will increase. Partly this is consumer-led
26% 22% 15% 11% 26%
or partner-led, because technology allows it, and also because
2019
2019 26% 22% 15% 11% 26%
it makes commercial sense to own a greater share of a custom-
er’s wallet through higher margin, more ongoing services.
Every business measures their performance differently,

2018
2018 40%
40% 18%
18% 14%
14% 5%
5% 23%
23% particularly fintech start-ups compared with institutions.
For the majority of these smart tool providers, it is all
about gaining a foothold in a new world with extremely
0%
0% AR Data Q4 20%
Source: 2019 Survey
20% 40%
40% 60%
60% 80%
80% 100%
100% scarce capital and resources. The businesses surveyed were
generally equally split in relation to considering themselves
ahead, behind or in-line with their expectations of business
Chart 5.2
SMART TOOL SERVICE OFFERINGS performance. Of more interest was the focus on growing
subscribers and B2B partners as the most important busi-
General Information / DIY General Advice ness KPIs, with the underperformers simply not as quite
Personal Advice - comprehensive
General Information / DIY General
PersonalAdvice
Advice - scaled advanced with both as the more successful firms.
Personal Advice - comprehensive Personal Advice - scaled
Operational Changes
19% 31% 8% 42%
Future
19% 31% 8% 42%
As smart tool providers expand into the scaled and com-
Future
prehensive advice space, they will come under harsher
and more prescriptive regulatory obligations consistent
with all licensed advice businesses – 58% of the survey
respondents are increasing the risk and compliance
34% 27% 12% 27%
Now
Now 34% 27% 12% 27%
resources within their business, either through new hires
or repurposing existing staff. This increased investment
is also necessary if these businesses hope to successfully
0% 20% 40% 60% 80% 100%
0% 20% 40% 60% 80% 100% partner with established institutions, many of whom are
either doubling down on investment into compliance as
Source: AR Data Q4 2019 Survey well as suffering from the fallout of the Royal Commis-
sion and various ASIC investigations.
By their very nature, digital businesses generally rely

heavily on algorithms to increasingly automate deci-
sion-making and investments without the intervention
of any human. These algorithms can be simple, and with
the advent of machine learning, increasingly complex.
They may be operating at any stage of the customer
engagement cycle: as part of a dynamic fact-finding
Chart 5.3
There are new and innovative technologies surfacing
CHALLENGES TO PROGRESS FOR SMART TOOLS
more frequently than ever. They offer automated text
generation for advice documents, virtual client meet-
Building brand /
awareness ings, automated compliance, and more. Unless you are
Partner uptake
one of the lucky firms who have simplified their core
(eg. adviser, accountants)
processes, these add-ons will only add complexity on top
Subscriber uptake of, and magnify the issues with their primary systems
and processes.
Generating sales
Building scale Making Technology Work For Advice

/ capacity
Businesses
Other Dealer groups have typically chosen to be the provider of
Dealing with additional
technology to their advisers, negotiating scaled contracts,
compliance obligations and administering custom services. Some groups have
Finding the right staff gone down the path of offering their advisers choice,
a panel of approved vendors from which advisers can
Licensing / regulatory
approval implement their own solution. Trying to implement more
Product quality / diversity
than one system, each playing significant roles, introduces
risk to data integrity. This risk can be managed, but an ad-
Dealing with license viser will need to ensure there is always a single source of
0% 10% 20% 30% 40% 50% 60%
truth and that the source is always the most up to date set
of data. This can be particularly difficult when multiple
Source: AR Data Q4 2019 Survey systems are each used as points of data entry.
Advisers displaced by the closing of AFSLs as a direct or

indirect result of the Royal Commissions are now joining
process; converting the fact-find and risk profiling ex- smaller groups or starting their own AFSL. This market
ercise into a risk-based investment portfolio; to the way dynamic creates an opportunity for technology vendors to
customer queries are handled. pitch their wares. But as smaller clients, the commercial
terms are less favourable compared with those offered
And while automation invites risk, it also improves to larger dealer groups. And the cost of ongoing admin-
efficiency and aligns with the expectations of customers istration and expertise required to manage a system like
who want to be delighted with their online experience. Xplan is often underestimated, resulting in significant
frustration.
Advice Technology
Advice is costly to provide. Meeting know-your-cli- The SOA has been a challenge for the industry for many
ent (KYC) requirements takes time, generating advice years. It can be difficult, timely and expensive to produce,
documents is mostly inefficient, data feeds are incon- and it can mean very little to the client once it’s been pad-
sistent or error-prone, implementation is still far from ded out with a series of disclosures that provide neither
straight-through-processing (STP) ubiquity, and the clarity nor context for the client. A digital SOA will result
provision of ongoing services is largely a manual process in a much more client-friendly means of communicating
with some technology to provide reminders and check- strategic recommendations, the reasoning, the conse-
lists. quences and the fees.
Chart 5.4
But this is downstream. Upstream problems need to be
ADVISER SOFTWARE NPS
addressed first – information about the client, their finan-
cial products, their goals, potential products of benefit to
the client, and strategic recommendations. The combi- COIN -69
(Temenos)
nation of Open Banking and digital design principles
that have made it easy enough for three-year old children CCUBE -38
to use apps on their parents’ tablet will lead to a much
X-Plan
-31
better view of a consumer’s financial world. Big data will (IRESS)
help advisers understand their clients, allowing them to

Salesforce -31
anticipate their needs.
Midwinter -29
This era of automation will not make advisers redun-
dant. Just as mutual funds disrupted the stockbroker, Adviser
Logic
-25
diversified funds and platforms reduced the need for an

Other -8
adviser to manage asset allocation or manually rebal- Software
ance portfolios, and low-cost index funds disrupted the -70 -60 -50 -40 -30 -20 -10 0
‘fund picker’, continued technological advancement will Source: AR Data Q4 2019 Survey
force the adviser to get even closer to the client, to better

understand their needs. The computers may do more of
the arithmetic work. This will be a good thing for advis-
ers and consumers. launch its financial planning software (and its investment
platform) out to external financial advice groups.
Financial Planning Software Competitive
Landscape Clearly there has been some notable corporate action
The most essential system for advisers is the financial in this category over the past 12 months, with the recent
planning software that dominates their desktop, is inte- moves by Bravura and Morningstar bringing their sig-
gral to professional service delivery to clients, and is relied nificant balance sheets into a sector, until now, generally
upon by both front-line advisers and their support teams. lacking the institutional investment to challenge Xplan’s
The available offerings fall into two categories: dominant position.
1. Mature, established and institutionally owned;
2. Independent challengers. Until recently, newcomers have tried to challenge Xplan
by doing well what it does poorly, aiming to create an im-
The first category is represented by Xplan (IRESS), Coin proved user experience and modern user interface. These
(acquired by Temenos), Midwinter (acquired by Bravura), attempts have often failed to replace what Xplan does
and AdviserLogic (acquired by Morningstar). Another do very well – manage the end-to-end advice process in-
new entrant is global CRM giant Salesforce, which is put- cluding fact find, product research/comparison, financial
ting pressure on the incumbent software players where modelling, SOA production, compliance and data feeds.
the need for a better CRM has high priority. While each individual element may not be best of breed,
it’s a difficult set of assets to include in a single system
The second category is represented by CCUBE, Advice from day one.
Intelligence, and FinPal (built on MSFT Dynamics).
Another player that arguably fits in this group is Fidu- However, with technological advancements reducing
cian, an ASX-listed diversified wealth business seeking to the cost to develop better digital capabilities, along with
greater access to data via APIs and the imminent Open Xplan has long had an integration with MoneySoft so that
Banking regulations, the barriers to creating a truly com- advisers can better offer cash flow management advice
petitive and comprehensive product are lowering. to clients, and to help with collecting fact find data. It has
also been working with SalesPreso for over 12 months on
Further, the leading UK software Intelliflo will soon be a digital SOA. The biggest challenge with a digital SOA
entering the Australian market. In 2012, Xplan launched is not technical, but rather the quality of the data inputs.
in the UK and has since taken 10-15% of the market, in Each granular detail of the client’s current financial posi-
part due to local acquisitions. Intelliflo is the leading tion must be recorded as a unique piece of data, and accu-
provider there with approximately 40% market share. rately. Each piece of advice must be held to the same data
With the UK being Australia’s closest peer in terms of reg- standards. Manual data entry will likely be quite onerous,
ulatory frameworks for advice, and with a unique value while automation of the advice will be particularly help-
proposition built around helping advice firms to integrate ful, since it will be by default stored as structured data. A
multiple technology solutions, the Intelliflo arrival pres- strategy worth watching as the more innovative, advice
ents at face value as a legitimate challenger to Xplan. focused, tech-enabled businesses push into this space.
Acquired by Bravura, it is fair to ask whether the future of Adviser Sentiment Towards Software
Midwinter is intended to serve the independent adviser as Providers
a direct client, or perhaps the focus will be on integration The strikingly negative sentiment expressed by advisers
with their wealth administration platform. Midwinter towards the adviser software providers in Chart 5.4 suggests
also has one of the strongest reputations for providing something desperately needs to change, and the corporate
intra-fund advice solutions to super funds, which would activity in the sector described earlier is warranted as a
suggest a strong alignment with Bravura’s super clients. supply-side response. And on the demand side, advisers are
making their feelings felt. However, the ultimate power to
Morningstar is often thought of mostly as a research busi- change the status quo rests mostly with the licensee for as
ness, but they have significant data and technology assets. long as the dealer group construct remains.
They also have a direct-to-consumer service for self-di-
rected investors. The acquisition of Cuffelinks and more While these are disappointing results, they are not materi-
recently of AdviserLogic suggests an intended strategy to ally different in trend to our 2018 survey.
be more things to more customers. Embedding content,
research and data generated by Morningstar, along Most software deals, pricing and configurations are struck
with other investment solutions, into the AdviserLogic at the licensee level. By definition, those arrangements
platform does add value to the adviser CRM experience are negotiated to favour the licensee in providing support
and may be a compelling proposition in the market. Add of its entire universe of authorised representatives. This
to this recent work done by AdviserLogic in collaboration may cause problems for larger licensee groups with a
with Basiq (data solutions company co-funded by NAB greater diversity of practices, as the central arrangement
Ventures and Westpac’s Reinventure) to create automated may not suit everyone. The emerging trend of licensees to
fact finding, and again more recently announcing digital unbundle modules, create panels of suppliers, and allow
SOA capabilities, it looks to be an exciting time for this advisers to acquire best-of-breed combinations could be a
relatively young provider amongst the established CRM cure albeit at higher cost.
providers. Bringing some of this technology through to
the self-directed channel could help create a marketplace Adviser software is possibly the most sensitive area for
where consumers can find advisers using AdviserLogic as an adviser in terms of impact on work productivity and
a conduit between the two. effectiveness. If the software is not performing this has a
material impact on their personal business and likely to of offering. Across the board though, advisers recognised
generate a more emotional survey response. and rewarded the software providers for strong adviser sup-
port. We think this is particularly important at the moment
The mass migration of advisers around the industry ensures with high stress levels reported amongst advisers.
that they are placing greater expectations on their existing
software providers to help them in their hour of need. For adviser support, the ratings were generally influenced
by the speed of response and the willingness to listen as
Conversely, advisers arriving at new licensees are being much as the quality of the technical support. Innovations
compelled to switch software providers (among other en- like chat were appreciated by some, however this was
forced changes) and may not be getting the best onboard- underwhelming for others if that service was not support-
ing experience as software BDM teams are unable to stay ed by a team that was immediately accessible in the event
abreast of the adviser movements and can be overwhelmed of more serious issues arising. Maintenance conducted
by the pace and volume of change amongst their client on weekends should take into account the fact that many
base. advisers are working through on behalf of their clients
and need system access.
Best interest duty is stress-testing adviser software to have
the best data, research, and product and scenario compar- Support involving training and on-the-ground assistance
ison capabilities to enable advisers to meet their obliga- while onboarding advisers into new systems was im-
tions to clients. Failure or inaccuracies in any of those portant and even more so where multiple modules were
components could expose an adviser in the event of audit purchased and the software is designed to support a more
or ASIC investigation, and these concerns were acknowl- end-to-end workflow.
edged in some of the comments provided by advisers in
the survey. There was very little commentary about client experience
and no news in this case is generally bad news, given the
The hope that full-service challengers to Xplan would acknowledged lack of investment in the front-end for
emerge has not materialised, and the simpler start-ups most providers. Advisers who questioned the underlying
like Advice Intelligence and CCUBE have promised much data in the system or the accuracy of the generated fore-
but taken too long to get out of the starting blocks. When casts from modelling modules did not have the confi-
combined with Temenos withdrawing Coin from the local dence to show clients the output.
market, advisers could not be blamed for feeling let down
by this sector. Naturally there were plenty of comments around func-
tionality. The best CRMs were Salesforce and Adviser
Drilling deeper into how advisers have assessed the Logic. The strongest modelling capability went to Xplan
individual software offerings, the dissatisfaction largely and Midwinter. Workflow management was CCUBE.
extends across all areas investigated. Not a single named SOA generation was a big disappointment, with advisers
adviser software provider scored above 75% (3.7/5) for any complaining that the templating systems were compro-
component with most averaging around 65%. That’s a mised by difficulties in achieving compliant reports, in
solid C report card at best. many cases requiring them to use their own templates
outside the system. And finally with comparison tools,
The patterns are clear too that Xplan is recognised for the becoming a more important feature with greater focus on
comprehensiveness of its offering but equally criticised for best interests duty, the quality of the data was paramount
complexity and cost of implementation, while the other and the ability to compare more than two products at the
challengers are a mixed bag largely due to incompleteness same time raised as a desired improvement.
CHAPTER
INVESTMENTS
Although the investment landscape has been shifting for many

years, the current stripping of advisers from the marketplace
will allow fund managers to focus their energy on doing what
advisers need most – help in providing advice for their clients.
Investment insights can at least be considered to be longer duration drivers

Industry Snapshot – Net Fund Flows than the previous two:
Last year was an extremely tough year for most. Market
growth may have nudged up year-on-year funds under • Asset allocation trends (e.g downweighting of
management (FUM), but in many cases this only hid Australian equities in preference for global equities)
sub-economic inflows or worse, net outflows. Industry • Portfolio construction trends (e.g less constrained,
wide FUM growth attributable to net inflows (“organic higher conviction investment management, or shifts
growth”) for pooled investment products was a mere between blended and core-satellite approaches)
$3.8bn. This represented an organic growth rate of 0.6%. • Shifting risk profiles / investor lifecycle stages (e.g
Unless your product suite was long fixed interest ($10.1b, superannuation assets shifting further towards
7.9%) or global equities ($2.3bn, 1.2%) the chances are pension phase driving more income oriented and
that, excluding market movements, you shrank in 2019. defensive strategies)
• Insource / outsource trends (e.g the degree to which
Drilling down a level, which strategies did better or advisers and investors choose to invest directly vs
worse than their overall asset class average? Was it only outsource to professional investment management).
the smaller “niche” strategies that grew strongly? Did
any of the larger “core” strategies perform well? Because of the inherent subjectivity of this process it is
important to test opinions created here with investment
The strongest organic growth amongst larger “core” style strategy “tailwind” analysis. That is, which investment
strategies came from Global Bonds, Global Infrastruc- strategies are supported by the “mega” trends and
ture and Hedged Global Equities. Small “niche” fixed change drivers sweeping through the industry.
interest strategies generated the highest organic growth
rates over the year. Negative organic growth occurred Double, Double Toil and Trouble
within a mix of core and niche strategies. In 2019 intermediary focused investment managers
experienced a Macbethian brew of coalescing and
The numbers tell us what is happening but not why. intensifying technological, demographic, market, and
That tends to be where the “art” (experience, market environmental ingredients. The bottom line is this: the
knowledge) takes over from the “science” (hard data). marketplace is becoming more demand and less supply
The key question is: which of these growth signals driven. The rules of the industry (which we construct-
should be considered short term (and discarded) and ed on our terms to suit us) are being busted apart and
which can be relied upon as being indicative of a medi- rewritten by (and therefore moving in favour of ) our cli-
um or long-term trend? ents, the customers. In marketing terms product “push”
is giving way to product “pull”. Force feeding (pushing)
The first knockout filter should be adviser / investor heu- product through investment advisers to produce foie
ristics – to what degree might performance chasing / loss gras sales magic no longer works. Attracting (pulling)
aversion based on recent returns be driving flows? The customers to you by offering differentiated, higher con-
next filter is related to the first – to what degree might viction product backed by brand and service is the new
changes in cash rates be altering the relative attractive- black. A willingness to accept a number 1 trim on SMA
ness of being, or not being, in other asset classes and pricing helps too.
strategies?
Relevance Deprivation Syndrome
From here it gets much harder to attribute change. But It is not hyperbole to say that the bulk of active man-
the following factors, if identified with high conviction, agement within Australian intermediated retail focused
NET ASSETS (% OF) NET FLOWS (% OF)
Chart 6.1
AUSTRALIAN EQUITIES – ACTIVE STRATEGIES INVESTMENT PERFORMANCE
83%
2017 / 2019
2017 (as at December 2017) 2019 (as at December 2019)

Active Strategies Carve Out Active Strategies Carve Out 37% 39%
n= 333 strategies n= 360 strategies

24%
FUM = $136bn 14% n=5%307 strategies

2 Year Net Flows = +2.2$bn Very Low Medium
FUM
High/
= $116bn
Very Low Medium High/
Organic (non-market) CAGR = 1% /Low VeryNet
1 Year HighFlows/Low
= -10$bn Very High
NET ASSETS (% OF) NET FLOWS (% OF) NET ASSETS (% OF) NET FLOWS (% OF)
76%
83%
19% 5%
-15% -7%
39%
37%
24%
14% 5%
-78%
Very Low Medium High/ Very Low Medium High/ Very Low Medium High/ Very Low Medium High/
/Low Very High /Low Very High /Low Very High /Low Very High
Source: Morningstar Direct, Milestream

For each pair of charts (net assets (% of) and net flows (% of)) the left-hand side shows the share of net assets for that particular category. The chart on the right shows the
share of net flows each category
NET ASSETS (% OF) garnered in the previous
NETtwo years.
FLOWS If a category was “pulling its weight” its % of net flows were in line with its net asset %. If it were gaining
(% OF)
favour relative to other categories its % of net flows captured was higher. If it were losing favour relative to other categories its % of net flows captured was lower.
76%
19% 5%
investment management is suffering a crisis of relevance. • Investors no longer expressed a strong preference
-15% -7%
Some asset classes, most notably Australian Equities, against large cap strategies. Large caps were in strong
are experiencing an outright buyer’s strike, particular- net outflow but not disproportionately to their
ly those variants offered in the “traditional” unit trust dominant share of net Australian equities assets.
-78%
structure.
Very Low Medium High/ Very Low Medium High/
Relative to their share of net assets, mid and micro
/Low Very High /Low Very High caps did well (garnered a disproportionate share of
The 2019 results for Australian Equities revealed differ- net flows). Small cap strategies on the other hand
ent insights: were savaged. Active (alpha seeking and outcomes
• Organic (non market) growth (as measured by sector based) but low conviction small cap strategies (n=36)
aggregate net flows) had shifted from anaemic but fared the worst of any cohort – only two strategies
positive (+$5bn over two years @ a CAGR of +1.5%pa) (3% ) were in economic inflow last year (net flows >=
to negative (-$6bn over one year @ CAGR of -3%). $50m).
• The steady stream of investors leaving alpha seeking • Within active strategies all levels of conviction were
strategies became an exodus (one year net flows of deserted (not just very low and low conviction as was
alpha seekers was $-9.3bn). the case in 2017)
Chart 6.2
• Only 22 (8%) of all active strategies generated an
PREFERRED PRODUCTS NON-SUPER
economic inflow – meaning 92% of active strategies
were either in outflow or generating “uneconomic”
Life Insurance 75%
levels of inflow.
Listed 67%
Model Portfolios
57% Our conclusion is that buyer behaviour within this sec-
(Managed Funds)
tor has again shifted.
SMSF 49%
Managed Accounts 36% Adviser Preferred Products
In this year’s survey about approved product lists, we
Annuities 31%
specifically asked advisers to focus on the product types
Model Portfolios
(Direct shares & ETFs) 29% / structures that they favoured or preferentially recom-
Managed Funds 26% mended to their clients. Putting aside life insurance for
the purposes of this chapter, the most notable feature is
Bonds 19%
the domination of listed in an absolute sense (66% of all
Margin Lending 14% respondents) and the combination of model portfolios of
listed, managed funds and managed accounts (repre-
Loans 11%
senting 57%, 35%, 29% respectively).
Direct Property 9%
Structured Products 7% The former confirms the rising tide of interest for building
0% 10% 20% 30% 40% 50% 60% 70% 80%
portfolios with a fast-growing range of listed investment
vehicles, but it also represents leakage from the traditional
Source: Adviser Ratings Q3 2019 Survey investment platforms as advisers can construct these port-
folios directly or through the various trading platforms that
are welcoming this intermediated attention.
The strong response to model portfolios and managed

accounts confirms the growing appeal of outsourcing
investment management to professionals in line with
advisers re-thinking how they run their businesses more
efficiently and where they can add most value to their
clients. Taking up the rear is the traditional managed
fund (only 26%), which doesn’t spell the end of collective
investment vehicles merely the way they are packaged.
Drilling into the listed category provides few surprises,

where we see a continued love affair for direct shares
together with the explosion of interest in ETFs with
BetaShares, ETF Securities and van Eck joining industry
giants Blackrock and SSGA in the local market.
Meanwhile, we are about to see a change in demand for

LICs from the adviser community. Under new FASEA
code of ethics obligations, January 1, 2020 signals an end Fragmentation & Proliferation (of
to a carve-out from FOFA that was granted in 2014 by the structures, gatekeepers and marketplaces)
Coalition that exempted LICs and LITs. As such, fund Recent fragmentation has completely changed the
managers launching these products have been able to game. There are more planning groups that matter,
offer attractive incentives to advisers to promote to their more adviser types that matter, more researchers /
clients. This ending of commissions will apply to both investment consultants that matter, more investment
retail and wholesale investors, and to advisers and stock- platforms that matter and more investment struc-
brokers alike. It captures the extra stockbroking fees an tures that matter.
adviser may earn for a traded LIC/LIT or the stamping
fees from an IPO, unless these extra payments are rebat- Fragmentation and proliferation now mean crafting
ed in full to the client. the product design and distribution strategy requires
much more nuance. Yes, in some respects the over-
mFunds are growing in presence on ASX if not mate- quoted “Retail is becoming more like institutional”
rially in terms of invested capital. Nevertheless, fund view is correct. Getting your fund through an invest-
managers continue to launch new offerings and build ment committee and / or an investment consultant
their presence in this market. and into a multi-asset SMA is certainly looking a lit-
tle more like institutional deal making than old style
Convergence of Value Chain Functions retail. But a pathway to achieving success in the listed
Value chain hopping is now almost de rigueur as rapidly market looks nothing like that. And nor does the
contracting margins demand attention and rapidly low- increasing importance of bottom up brand building.
ering barriers to entry create opportunities in other parts
of the chain. The side effects of this behaviour, taking on Research Houses
new conflicts of interests and alienating existing custom- Our focus is primarily on investment research
ers with competing business models, are now seen as houses and super fund researchers. Arguably these
necessary evils for staying in business. They have moved are not comparable, however the push by industry
from risks to be avoided to risks to be managed. super funds into the third-party adviser channel
means that they are now crossing over. Nothing has
Unsurprisingly, “convergence” behavior is most prev- changed in this category in terms of new players,
alent in those components of the value chain with the although little-known Australia Ratings is making
largest margin – investment management and invest- some noise about growing beyond credit ratings
ment advice. on retail bonds and qualitative ratings on cash and
bond trusts.
The recurring flaw is of course business models.

“FRAGMENTATION AND User-pay revenue alone has never been enough for
PROLIFERATION NOW MEAN research houses to make an adequate return on in-
CRAFTING THE PRODUCT vestment; advisers will simply not bear the full cost
of broad coverage qualitative investment research.
DESIGN AND DISTRIBUTION
It’s not surprising then that the most obviously
STRATEGY REQUIRES MUCH (but perhaps not most insidiously) flawed business
MORE NUANCE” model – pay-for-ratings – remains as entrenched
as ever, although Morningstar stands alone with a
“pay-to-license-ratings” model. And, it’s arguably
Chart 6.3
going nowhere in a hurry, with ASIC itself moving
RESEARCH HOUSE NPS
to a partial pay-for-surveillance model. Nor is it sur-
prising that this model continues to be a sore point
amongst a meaningful proportion of the advisers.
Lonsec 22
What is surprising is how assertively a number of
research houses are pursuing a relatively new form
Morningstar 14 of potentially conflicted revenue – basis point linked
investment management revenue – via in-house con-
structed SMA product and / or investment consult-
Zenith 3 ing. This move is yet to raise the ire of fund managers
(as it did when van Eyk launched Blueprint back in
Chant West 2003) but it hasn’t gone unnoticed by advisers and
-15
may yet prove an issue in this channel. The point
with advisers appears to be this: we may grumble
Source: Adviser Ratings Q3 2019 Survey about you being conflicted, but we will accept the
situation if focus is not lost. This is the concern em-
bedded in the following comment, which is represen-
tative of a number of survey participant’s views:
“I have the feeling they [research houses] are becom-

ing more dependent on selling product these days
than research. They need to concentrate on what
they are good at and have a dominant position in the
market for and keep it as research”.
Business models aside, research house processes and

focus remain much the same although the following
recent changes are evident:
• A greater focus on investment consulting relative
to research.
• A greater focus on portfolio construction and
reporting tool development relative to research
and ratings development.
• A greater focus on listed product and managed
account product research.
• A greater focus on investment product fees and
expenses, both absolute and relative to peers.
• A greater focus on a fund manager’s ability to sell
and support their investment products (which
reduces business risk and minimises the risk of
low FUM products being pulled out of rating’s
processes).
CONTACT
Mark Hoven, CEO | 0413 614 640 | [email protected] | www.adviserratings.com.au

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2019

This is an abridged Proudly sponsored by

WE BELIEVE IN THE POWER OF ADVICE

From Vanguard’s Head of Distribution, Matthew Lumsden

At last month’s Vanguard Adviser Roadshow, Advice Matters, we shared re-

Because advice matters.

NAVIGATING UNCERTAIN TIMES

From Adviser Ratings CEO, Mark Hoven

In 2020, the industry is rapidly shape-changing into a privately-owned

Adviser Ratings’ mission is to make financial advice affordable and accessi-

This 2019 Financial Advice Landscape report is a unique, data-driven

THE AUSTRALIAN ADVISER

As the disruption in the advice industry continues, our research

We examine four key reports published by prominent Financial Advisers 17,463

fund managers and research houses: Accountants 2,059

• Envestnet’s Capital Sigma (2016)

Chart 1.3 Chart 1.4

21-34 35-44 45-54 55-64 65+

Source: Adviser Ratings Q3 Survey, Australian Bureau of Statistics No degree pathway

Relevant degree pathway 47%

financial advisers from the industry following the effects

• Angst around qualifications required for FASEA 200

anxiety by extending this deadline to 2026 although Licensee owners

finalisation of this legislation has been pushed into

• The dread that advisers are feeling about the

$5-$20 million 10.1% 1 Adviser 46.4% Institutionally Aligned 35.4%

$20-$50 million 8.1% 2-3 Advisers 36.4% Institutionally Owned 17.2%

$50-$100 million 28.2% 4-5 Advisers 8.1% Privately Owned 47.4%

$100-$200 million 27.3% 6-10 Advisers 5.1%

$200-$500 million 19.2% 10+ Advisers 4.0%

$500 million + 7.1%

aspirations, successes, tribulations, medical history, fam- Chart 1.7

70% 7% Hybrid - Asset Based

financial advisers. With investment commissions extin-

by what some are saying is a key driver behind Standard 3

competition as identified by the smaller box in 2019 – the 2,000

market moved to fees that are generally more consistent as

appropriate price levels. We expect, as specialisation plays 0

Client Numbers and Funds Under Advice Chart 1.9

• Removing the “fees for no service” clients from

State dynamics reflect the type of licensees and adviser

remaining with advisers (as is MLC’s new strategy) and

• Portion of Risk Advisers – Licensees such as 115

investment and risk-focused licensees, particularly in

• Demographic of Adviser Base – There is correlation

• Portion of Accountants and Stockbrokers –

HNWI. Accounting focused licensees such as Count

Vanguard’s Investment Strategy Group Portfolio value Optimal portfolio construction

• Financial value. The second dimension

Connect with Vanguard™ > vanguard.com.au

With 25% of the advisers in Australia either leaving the industry

2014 2015 2016 2017 2018 2019 YTD Sep

413 578 400 379

678 640 614 639 670

Privately Owned Institutionally Aligned Institutionally Owned

Source: ASIC Financial Adviser Register, AR Data.

2014 2015 2016 2017 2018 2019 YTD Sep

Privately Owned Institutionally Aligned Institutionally Owned

Source: ASIC Financial Adviser Register, AR Data.