Both the UK and Australia are similar in the sense that they are wealthy, developed democracies, with aging populations, not to mention the developed financial services. UK advisers can learn from the Australian experience with increased regulation and pension reform, Pawel Rokicki, head of UK research at Investment Trends said at this year’s Morningstar Conference.
Business has continued to be positive for UK advisers in recent years. Demand for advice, as measured by the Google search volume for financial advisers in the UK, has also been on the rise.
While the number of clients overall has decreased, the amount of money under advice in the UK has increased. This could mean that the efficiencies of individual advisers have improved over recent years.
Explicit asset-based fees in the UK market have largely replaced commissions, but not yet by fixed fees for service.
The first ‘Watershed’ moment in the UK advice market that Mr Rokicki identified was the RDR. Asset-based fees have largely replaced commissions and advisers have shifted from implicit commissions to explicit commissions (asset-based fees) – but the hourly rate has not experienced much change.
In Australia, advisers are moving away from asset-based fees to fixed price fees more rapidly than UK advisers. Part of this is due to Australia’s high net worth investors’ fee preferences shifting away from percentage-based fees.
Mr Rokicki said, “Fees based on a percentage of assets is the dominant charging method for UK advisers, while Australian advisers tend to favor charging based on a fixed dollar amount – the biggest difference is in upfront fees.”
The average UK planner derives a profit margin of four-times per client, so UK advisers seem to be successful in deriving both a healthy upfront and ongoing profit margin – more so than Australian advisers, which have been eroded away by competition.
UK advisers are increasingly focusing on wealthier, often older, clients – only about 22 per cent of UK advisers’ clients were under 50 in 2014. This has led Mr Rokicki to believe that “robo-advice” will become a more viable option in the younger segments.
The second Watershed moment he claimed was the pension freedoms that came into effect this April. Australia had similar freedoms come into effect in 1992 and, for the most part, Australian retirees are spending wisely, yet they worry they could run out of money. The average Australian spends 6 per cent of their retirement savings, rather than investing it, when they retire.
Accumulators and pre-retirees in Australia on average use 10 per cent of their retirement savings to repay debts or mortgages. A third of Australian retirees who have not seen a retirement planner expect their savings to outlast their life expectance, while those who have seen an adviser are more optimistic – 48 per cent think their savings will last their life expectancy.
Australian advisers increasingly direct retiree client money into index funds, often at the expense of cash products. Only 5 per cent of Australian retirees under age 75 use an annuity.
Less than 10 per cent of inflows for clients in later retirement stages are directed towards annuities and protected products in the Australian market, and 61 per cent of planners considered longevity risk for their most recent retiree client, but only 16 per cent say they were able to integrate it into their financial plan.