The convergence of regulatory adjustments, open data, and tech acceleration is likely to create a catalyst for a much-needed transformation in Australia’s financial advice sector, according to a discussion at Thoughtworks’ recent Investech breakfast panel.
The impact of Australia’s financial advice reforms, including FoFA (Future of Financial Advice) and the Hayne Royal Commission’s recommendations, has had unintended consequences for consumer and the industry. Designed to ensure advisers act in their clients’ best interests, the burden of compliance saw median financial advice fees jump 40% in the three years to December 2021, to $3,529 per year. This increase is pricing out the majority of the 41% of Australians interested in accessing financial advice – with only 10% now using a financial adviser, down from 13.9% in 2013.
Financial advisers are also quitting the profession in record numbers. Adviser Ratings forecasts numbers will stabilize around 12,000 by 2026 – less than half the 28,000 financial advisers in 2019. Fewer advisers are available to service growing consumer demand (at the right price), making a compelling business case for technology to fill the gap and provide personalised advice – at scale. In the era of open banking and distributed ledger technology, transaction automation guided by AI may hold the key to reducing the cost of providing compliant advice to those currently missing out.
With almost 50% of Generation Z (those aged 18-24) keen to start investing in financial markets, now’s also the time to meet the expectations of the next generation of wealth-builders. And fintechs, superannuation funds and banks are paying attention. Because if the Quality of Advice Review’s recommendations are adopted when handed down by Michelle Levy at the end of 2022, banks may have an opportunity to re-enter the wealth market – and super funds may also be able to offer personal advice.
Reimagining personalized advice
As we explored in Making investment equitable - democratizing financial insights in the digital era, technology has opened the door to mass market adoption of low cost or ‘free’ investment trading apps like Sharesies, Stake and eToro. It’s also given investors access to increasingly sophisticated asset classes – including cryptocurrencies, real estate, debt and NFTs. According to 2022 ASIC research, Australian shares, cryptocurrencies and residential investment properties are now the main asset classes held within individual investment portfolios.
For advisers, technology has the potential to fix a growing point of friction resulting from this democratization of asset access – providing a holistic view of their clients’ wealth. Australians now hold on average 2.3 investment accounts in addition to their super across a broader range of asset classes. This adds to the complexity of information gathering to ensure advice is in the client’s ‘best interest’.
But for consumers, technology hasn’t yet done much to improve the financial knowledge of the mainstream investor. Instead, professional financial advice is increasingly perceived as a ‘luxury good’ for the wealthy.
We know that appropriate, tailored financial advice can make all the difference to an individual’s future wealth creation and financial security. And Australians deserve better. So where do we begin?
Here are three opportunities to consider.
1. Engage new investors with education
Where are the 90% of ‘unadvised’ Australians getting their investment guidance? There’s certainly no shortage of wealth content out there – but it can be challenging to navigate, and younger investors quickly get bored with ‘Wealth management 101’.
The least experienced investors are more likely to turn to their personal networks (family and friends) and social media, according to a recent ASIC survey. 41% of investors say they’ve accessed information via podcasts and platforms like YouTube, Facebook, Reddit, TikTok and Instagram – and 10% say they’ve turned to unregulated ‘finfluencers’ on YouTube, TikTok or Instagram. TikTok's #moneytok has 11.8 billion views.
Consumers are looking for support to make better investment decisions, and financial service providers have a responsibility to counter misinformation from these ‘Fin-tokkers’ on social media by publishing genuine and relevant financial education. This creates an opportunity to tap into the channels where clients are already searching for information, and provide relevant and useful guides to wealth and investing on YouTube, or via podcasts. Data can also be used to improve customer experience by personalising access to financial literacy for more Australians.
2. Augment human advice with data-powered robo-advice
The ASX’s adoption of distributed ledger technology paves the way for aggregating consumer data, and the Consumer Data Rights (CDR) infrastructure for Open Banking will see consumers become increasingly comfortable sharing their financial data. This could help bring compliance costs down for financial advice, and power the next iteration of robo-advisers.
While robo-advice supports over 14 million clients in the US, it’s still relatively under-used in Australia. But with the rise of exchange-traded funds (ETFs), that could change quickly – with one industry player estimating it could become a $60billion industry here.
Amazon recently invested in Indian fintech Smallcase, which offers intelligently weighted baskets of shares and ETFs to reflect a theme – such as gold or electric vehicles. It already has 3.2 million users keen to build their wealth through low-cost, long-term and diversified portfolios.
Ethical investing is emerging as an important theme for robo-advice and ETF investment platforms – particularly for younger investors. In Australia, 20% of ETF investments with Sharesies are in ESG-related funds, and eToro research indicates investors aged 18-34 are twice as likely as those aged 55+ to always consider ESG factors when making investment decisions.
Tech tools can help advisers filter options based on diverse factors including investment themes like ESG preferences, and also provide greater transparency of sustainable reporting amidst growing concerns of greenwashing. Importantly, when advisers have AI tools to generate data-led insights in real-time, along with tech automating transactions, they’ll have more time available for building relationships and providing valuable advice.
3. Leverage the Investech ecosystem
Australia has a strong financial services sector with diverse Investechs and wealth partners ready to work together. There is no need to reinvent the wheel when so many platforms already exist. For example, Wells Fargo decided to partner with tech start-up SigFig in 2016 to develop a new robo-advisory solution for its wealth advice team – rather than build its own capabilities.
SigFig now reaches a third of North American households through its partnerships with major banks. In Australia, low-cost trading platforms like SelfWealth already partner with advisers to power portfolio management, while South African start-up, EasyEquities, partners with banks to make share trading easy. Its Australian business has now partnered with DriveWealth, enabling local users to invest in the US equities market.
Although the final impact of the Levy recommendations is yet to be known, we do know the industry has become increasingly fragmented over the past decade – and there will be a growing shortage of financial advisers in Australia. At the same time, it’s likely superannuation funds, banks and neobanks may start circling that talent with interest.
Meanwhile, consumers will expect more choice and more personalised experiences. And technology will need to bridge this gap – combining seamless investment platform experiences with data-driven insights, automated investment implementation, real-time reporting, and human advice.
One critical risk remains: how do we avoid unwinding all the progress that has been made to protect consumers? As technology adoption accelerates to meet the growing need for guidance, we still need to ensure quality, appropriate advice is provided – without remuneration conflict.
If you’d like to discuss opportunities to digitize access to advice as well as investments, Thoughtworks can help. Get in touch.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.