The Australian financial adviser market is still recovering from the impact of global financial crisis 2008. To avoid such catastrophes in future, the Australian Government focused on bringing about reforms in the financial advisory market by establishing the Future of Financial Advice (FOFA). The aim of FOFA reforms is to improve the confidence and trust of Australian retail investors in the financial services industry along with ensuring that financial advice is available, accessible and affordable. However, because the financial advisors and government gave highest priority to bringing about and adapting reforms in the industry, they ended up neglecting customer needs to a certain extent. This also resulted in loss of clientele for leading players in the Australian financial advisory market. But, with the final structure of FOFA regulations in place, the industry has finally begun to show signs of recovery. The following figure gives us a recap of demand slump and growth in the Australian financial advisory industry:
Figure 1: Mapping the Demand for Financial Advisors (2010-2014): Australia
From the above figure, it can be interpreted that though during 2010-2013 the demand in the Australian financial advisory industry slumped, 2014 came as year of optimistic results. In fact, the number of people seeking financial advice reached 2.5 million in 2014, up by 1 million as compared to the previous year. This growth can be attributed to the increasing concern amongst Australians regarding their finances such as the adequacy of retirement savings, enough funds to tackle any future financial crisis and efficiency of cash -flow management.
Additionally, since the FOFA reforms have been made mandatory it has become imperative for financial advisors to offer unbiased, efficient and transparent advice. This is also one of the reasons that are propelling growth in the Australian financial advisory market. The new advisors are now focusing on delivering the right advice and the correct time and in the relevant context. All these factors have led to the Australians developing more trust and confidence on financial advisors. Research suggests that 1.9 million Australian adults (new) showed interest in seeking financial advice in 2015, as opposed to 1.5 million in 2013. With robust regulations and increasing customer interest has resulted new developments in the Australian financial advisory industry. These developments include the following-:
Figure 2: Upcoming Trends in the Australian Financial Advisory Market
These upcoming trends pose a threat to the business of individual financial advisors in Australia. For example, robo-advisors hold the potential of disrupting the financial planning industry as the ‘Baby Boomers’ in Australia prefer digitized, online solutions over traditional options. Therefore, the way forward for independent financial advisors is adopt a hybrid strategy which will be a strategic mix of both human and online resources. These independent financial advisors currently have a hold on 34% market share, they should capitalize on their leading position to embark upon aggressive acquisitions of automated and online platforms.
Talking about the target population, the financial advisors should focus upon the older affluent population who are currently driving the demand in the market. These older HNWs comprise of the largest demographic among advisors’ client bases. However, there are some challenges also that the financial advisors have to overcome. For example, cost still remains the primary barrier to growth in the financial advice market. This is because there is a huge gap between what consumers perceive the cost should be and what the advisors actually charge. The advisors can overcome this challenge by offering limited advice and developing customized advice models as per their needs. In fact, research has revealed that Australians are five times more likely to prefer limited advice at a lower cost as opposed to the traditional models at higher cost. Overall, the growth outlook remains positive for independent financial advisors in Australia.
Key Macroeconomic Factors Driving the Australian Financial Advisory Industry
The Australian economy has been on a steady progress over the past two decades, completely unaffected by any recession. The economy of the nation was benefited highly by the conducive business environment developed by an effective governance, well-established judiciary system and independent bureaucracy. With such positive macroeconomic environment, Australia became an attractive and dynamic investment destination for both domestic and foreign HNWs. In addition, the fact that Australian is an open market with low non-tariff barriers and fewer limits on foreign investment has also contributed towards making Australia a good investment destination. This has also resulted in parallel
Figure 3: Glimpse of Australian Economy
Since the Australian GDP has shown constant growth, the forecasts of Fintech sector are also positive. It is expected to grow at a CAGR of 76.36% and reach an estimated USD 4.2 billion by the end of this decade. The important factors driving this growth is the aggressive low-taxing and generous tax-exemptions given by the government. The government has also extended a twenty percent offset for investments made in the early stage up to a total value of USD 200,000. Also, the increasing purchasing power of Australians between the age groups of 18-34 are also driving consumer demand of financial advisory sector. As of 2015, Australians have, in real terms, larger sums of money to manage and invest.
Key Regulatory Trends in the Australian Financial Advisory Market
- The FOFA became mandatory as of 2014, making it imperative for financial advisors to become efficient and more easily accessible.
- The Corporations Act 2001 has imposed a single licensing regime for financial sales, advice and dealings in relation to financial products.
The publication presented by Ken Research titled “Australian Advisors and Their Clients” discusses wealth management and advisory market of Australia. The report covers robo advisory, number of Australian investors, SMSF population and distribution of prospective clients by age group. The report discusses self directed investment platforms and indentifies IFA clients. To know more on coverage, click on the link:
Ankur Gupta, Head Marketing & Communications