Many investors have had their relationship with their financial institution disrupted as changes to the Australian financial advice landscape continue in response to the Banking Royal Commission.
BDO Private Wealth Director Lachlan Kennett said the biggest change had been a growing trend to classify retail investors or ‘mum and dad’ investors as sophisticated or wholesale investors – even though they may not have the financial literacy or capability necessary for that classification.
Current legislation allows for investors who have an annual income greater than $250,000 or $2.5 million of net investable assets to be classified as ‘wholesale’ clients. This process reduces the administrative burden currently impacting advisers.
Being classified as a ‘wholesale’ investor can make the process of seeking financial advice easier, as clients forgo the recently imposed consumer protection measures and the usual dispute resolution schemes.
“After the Royal Commission there’s been an industry-wide review by businesses as to whether they still want to be providing advice,” Kennett said.
“The industry is moving further towards a specialty profession, which is great for the client in the long run.
“It’s comparable to having a trusted family Doctor, rather than a large, faceless medical clinic where you are seen by whoever is available. Instead of financial advice being a product, these changes will see us go back to a relationship-based advice model.
“A lot of the bigger players… where advice was not a core part of their business, have decided it’s not worth the risk to continue providing advice, because there was already a lot of compliance and that’s increased further post the Royal Commission.”
Kennett said that the move towards dropping retail clients or reclassifying their high net worth clients as wholesale investors had occurred because at this higher level “a lot of that regulation drops away”.
According to Kennett, investors who have been reclassified to wholesale should review their level of investing knowledge and appetite for risk.
“The whole premise behind that is that if you are classified a wholesale client, there’s an assumed level of knowledge on investing and your personal finances,” he said.
“When someone recommends an investment to a ‘wholesale’ client, it’s assumed they understand the risks and therefore don’t need the level of explanation and protection that a retail client would.
“That is the assumption that is made, but with that assumption comes a lot more risk.”
Kennett argues that this assumption isn’t always the case, that high net worth doesn’t always equal financial experience.
“Take for example a medical specialist with a high income, does that mean that you will be sophisticated with your personal finances? No. A high salary doesn’t necessarily translate to financial sophistication,” he said.
Kennett said that while BDO had not gone down the path of reclassifying high net worth investors, many advisers had and that anyone who had been reclassified needed to consider whether this is appropriate.
A lot of advice relationships have been disrupted since the Royal Commission due to businesses opting out of providing advice and advisers moving licences, while further disruption is likely to come with significant numbers of advisers expected to leave the industry rather than meet new education standards.
“Advice relationships are highly personal and built on trust, over time. When that relationship is disrupted or lost, it can take a while to find a new adviser and build a comfortable relationship.”
Kennett said although he thinks there is still more disruption to come in the industry, the reforms are worth it.
“I think in five years’ time we’ll end up with a more professional industry, with better ongoing education requirements and a stricter focus on client outcomes.”
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