Back to the future

There have been a number of predictions recently about where our industry is heading and what developments we may see in the future.

In assessing the possibilities, it helps if we define where we are and consider how we got here. What were the driving forces and issues that resulted in the financial planning industry reaching its present state?

There are a number of issues to consider.

In the early 1980s, a move towards retirement at age 55 emerged together with more frequent job changes.

At retirement, superannuation had to be withdrawn. This also applied to job change, but an option was to transfer superannuation benefits to another employer. A widespread need for financial planning began to grow in earnest.

In 1983 a recession caused job losses and retrenchments, this resulted in an increased need to place funds received from super and/or termination payments.

The need for financial planning accelerated rapidly and a number of entrepreneurs from a range of backgrounds established financial planning services.

The mid-1980s

Changes to superannuation regulations in 1985 resulted in a major change in financial planning. Retention of benefits and concessional tax treatment was allowed through designated investments.

However, financial planning continued to be largely based on the sale of a product. The focus of advice changed to providing a long-term accumulation investment for retirement needs or investments designed as a source of income for retirees.

Stock market crash

Stock markets across the world suffered severe and sudden losses in value in October 1987.

Many investors faced losses of up to 50 per cent of their capital. The impact on self-funded retirees was particularly severe and concerning.

Planners were faced with widespread claims from clients and it quickly became clear that the way in which advice was given needed to be reviewed.

Late 1980s

Very little software was available for planning and advice was often based on manually combining and monitoring a number of asset based managed funds. Reviews were cumbersome and time consuming. Managed funds began to focus on providing an outcome; growth, income or a combination of the two, and closer attention was paid by planners to the suitability of recommended products for meeting client requirements.

Late 1980s-90s

Product development continued with the emergence of master trusts, platforms and wrap accounts.

Planners were able to focus on providing advice to achieve clients’ desired outcomes.

Legislation was introduced to protect clients and the electronic monitoring and tracking of investments was developed.

This period also saw the introduction of trail brokerage, which provided an ongoing source of income for planners.

Licensees were required to implement and monitor compliance requirements and audits of planners and principals were introduced.

The financial planning process over this period emerged from what began as a sales-driven business where the client was a buyer of a product to businesses where the client was a seeker of advice.

Where are we now?

We operate in an environment where the Internet has caused an explosion in financial information and some investors prefer to ‘do their own thing’, but many now feel paralysed with information overload. They seek clarification and assistance from a planner.

With changes in demand, clients are becoming increasingly involved in financial decisions. They are seeking unbiased advice and they are looking for a choice of options. This has led to a need for higher education requirements for planners and the imposition of increasing levels of competence to enter the industry.

The planning industry has reached a mature point both in the legislation that regulates it and in the way advice is offered to the public. Changes to the regulatory environment are unlikely to be major and the focus is likely to be on simplifying communication and increasing the transparency of transactions.

What brought us to this point?

The development and practice of financial planning has been in response to the evolution of investor requirements.

A clear example of this is the development of account-based pensions, which provide retirees with income, access to capital, exposure to markets and tax concessions in a single investment.

The development of master trusts, platforms and wrap accounts is a further example of the industry responding to consumer requirements.

What can we expect in the future?

Probably refinement rather than innovation.

Investments will become more sophisticated as investors become better informed. Competition will become more intense and margins will continue to be under pressure. We will also see some ‘changing of the guard’, as planners who migrated from other disciplines retire and are replaced by tertiary qualified planners who are entering the industry as a career.

The mature state of our industry may also lead to the export of our knowledge, skills and systems to other countries where financial planning is still developing.

It all points to an interesting and exciting future.

Merton Miles is an authorised representative of Fiducian Financial Services.