A brief history of financial planning

The Wallis report

Before the Wallis report in 1997 financial planning was reserved for wealthier individuals and offered predominantly by accountants.

The Wallis committee looked at meeting the financial planning needs of future generations that would include an aging and technologically advanced population.
The report recommended reorganising the regulatory environment to promote;

  • confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
  • fairness, honesty and professionalism by those who provide financial services; and
  • fair, orderly and transparent markets for financial products;

As a result APRA (Australian Prudential Regulation Authority) was established on 1 July 1998 and regulates the financial sector. APRA’s purpose is to;

Balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, promote financial system stability in Australia.

ASIC is another consequence of the Wallis report and was established on the same day as APRA. Its role is to administer the Corporations Act 2001 which regulates financial services. ASIC is the financial services watchdog.

Rippoll enquiry

Financial disasters like Storm and Opes Prime resulted in the Rippoll enquiry which looked at the role commissions, conflicted interests and other factors played in the disasters. Their key recommendations were;

  • a prospective ban on conflicted remuneration structures;
  • a fiduciary duty for financial advisers to act in the best interests of their clients; and
  • an adviser charging regime with options for consumers when paying for advice.

FOFA (Future of Financial Advice

In response to the Rippoll Report, the Government announced the Future of Financial Advice (FoFA) reforms on 26 April 2010 which gave effect to most of the Rippoll recommendations.

The stated objectives of FOFA are;

to improve the trust and confidence of Australian retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice

FOFA became mandatory on 1 July 2013 and was voluntary from 1 July 2012. The legislation amended the Corporations Act 2001 and introduced:

  • A prospective ban on conflicted remuneration structures including commissions and volume based payments.
  • A duty for financial advisers to act in the best interests of their clients, subject to a ‘reasonable steps’ qualification.
  • An opt-in obligation that requires advice providers to renew their clients’ agreement to ongoing fees every two years for new arrangements.
  • An annual fee disclosure statement requirement for post 1 July 2013 clients.
  • Enhanced powers for ASIC.

From 1 January 2019, new education and training standards apply to financial advisers as part of the professional standards for financial advisers.

The Hayne Commission (Misconduct in the Banking, Superannuation and Financial Services Industry)

The Hayne Commission made 76 recommendations and laid out the six principles below;

  • obey the law;
  • do not mislead or deceive;
  • be fair;
  • provide services that are fit for purpose;
  • deliver services with reasonable care and skill;
  • act in the best interests of the client. 

According to ASIC, as at 31 December 2022, the major banks and AMP had paid or promised to pay $4,416,195,480 in compensation for financial advice related misconduct. All four big banks exited the “Wealth” business, and no longer provide financial planning advice to retail customers.

In March 2017, the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 commenced and introduced reforms to the Corporations Act 2001 (Corporations Act) to raise the education, training and ethical standards of financial advisers. From 1 January 2019, new education and training standards apply to financial advisers. These plus other onerous requirements saw many advisers leave the industry. According to Aleks Vickovich in the Australian Financial Review (April 2023), more than 12,000 financial advisers have retired or handed back their registration since the financial services royal commission, representing a 43 per cent decline in the size of the workforce in just five years.

QAR (Quality of Advice Review)

As advisers left the industry there was a concern Australians would no longer have access to affordable financial advice. Firstly, it can take weeks or even months before a comprehensive statement of advice is ready. Secondly, research conducted by KPMG and commissioned by the Financial Services Council found the average cost of providing comprehensive financial planning advice is $5,335 a client, while the average cost charged was $3,660. The more advice they give the quicker they go out of business. According to Adviser Ratings, only 10.1% of consumers saw a wealth adviser in 2022, down from 13.9%, four years previously.

QAR was designed to ensure that Australians have access to high quality, affordable and accessible financial advice and it made 22 recommendations. In essence the  review recommended that the government open up new avenues for financial advice that are cheaper and subject to less rigorous legal obligations.

The government response comprises three streams

  • Stream one – removing onerous red tape that adds to the cost of advice with no benefit to consumers
  • Stream two – expanding access to retirement income advice
  • Stream three – exploring new channels for advice

The real future of financial advice

The real future of financial advice will be dominated by AI (Artificial Intelligence). Already Finchat has a financial planning digital assistant that responds to normal voice. Finchat.io has over 60,000 financial products that can be analysed in detail. At their launch a few months ago they only had 800 products.

Even chatGPT3 (the free version) is able to work out and explain how much you need to contribute to meet retirement goals. It does make a small mistake and it is these errors that make users cautious. Future versions will probably be very accurate allowing users to get instant answers it would have taken weeks to get from an adviser and at a fraction of the cost. While GPT-3.5 only scored in the 10th percentile of the bar exam, GPT-4 scored in the 90th percentile with a score of 298 out of 400. Newer versions seem to be making huge strides.

GPT-4 aced the SAT Reading & Writing section with a score of 710 out of 800, which puts it in the 93rd percentile of test-takers.  It scored in the 99th to 100th percentile in the 2020 USA Biology Olympiad Semifinal Exam. ChatGPT achieved 60 percent accuracy on the notoriously difficult US Medical Licensing Exam, without clinician Input.

AI will know far more than most advisers, be able to access information immediately and do projections instantly. Only people who demand a human be in control of everything will hesitate.