Australia’s financial advice industry sits at an uneasy crossroads, where complex fee structures, aggressive product distribution and a growing pool of “sophisticated” investors combine to create conditions that look ripe for the next major blow-up. Over the past few years the sector has shifted away from old-style commission-heavy models after high profile inquiries, yet many of the same incentives and structures remain in place, simply repackaged. At the same time more Australians now qualify as sophisticated or wholesale investors under rules written more than 20 years ago, which means more people are exposed to riskier products and lighter consumer protection.
Behind the scenes many advice businesses still earn extra revenue for steering clients into particular products, funds or platforms, often through fee-sharing, referral deals or vertically integrated structures where the adviser and the product provider sit under the same corporate umbrella. These payments can range from ongoing trailing fees on managed accounts to commissions on margin loans and cash products, and they are technically disclosed but buried in complicated documents that few clients read closely. Retail scandals, such as the collapse of investment schemes that threatened over $1 billion in retirement savings, highlight how these conflicts play out in practice while the separate sophisticated investor market operates with lower standards and fewer obligations on advisers despite handling much larger sums.
Policy-makers and regulators are trying to limit the damage after it occurs, most visibly through the Compensation Scheme of Last Resort, which is already dealing with growing claims and funding shortfalls. The government is asking industry and retail super funds to pay a special levy for the 2026 financial year and is even canvassing the idea of bringing self-managed super funds into the funding pool, a move that looks politically sensitive and far from settled. Yet expanding who pays into the pot does not address why the compensation is needed in the first place and it risks becoming a permanent Band Aid over deeper structural issues around conflicted remuneration, product design and weak accountability for poor advice.
The broader system appears to be drifting towards a model where conflicts of interest are accepted as inevitable and simply disclosed, rather than actively removed. Some industry players argue that conflicts can be managed with transparency, suggesting changes such as clearer branding rules so clients can easily see when an adviser’s recommended product is owned by the same parent group. Others, including many in the conflict free advice camp, push for a cleaner structure where advisory firms receive fees only from clients with no product linked payments at all. Meanwhile the explosive growth of managed accounts, which have more than tripled to around $256 billion in just a few years, has prompted the corporate regulator to check whether licensees are genuinely managing conflicts and governance or simply funnelling money into in house products.
For sophisticated investors the risk is heightened by regulatory gaps. Once someone meets the long standing thresholds, such as annual income of at least $250,000 for two years or net assets of $2.5 million including their home and super, they lose many of the protections that apply to retail clients even though the classification often reflects asset inflation rather than deep investment expertise. Wholesale advisers typically face looser obligations and fewer qualification requirements yet can earn substantial commissions or referral fees without a formal best interest duty, which leaves clients with full downside risk and limited recourse when things go wrong. Calls from the regulator to lift or index the thresholds have gone unanswered, largely due to concerns from start ups and fund managers about restricting their investor base, so the wholesale market keeps expanding without a corresponding lift in safeguards.
Looking ahead, the sector appears to be edging towards another cycle of high profile failures unless there is a genuine shift away from conflicted revenue and cosmetic fixes. If the focus stays on how to fund compensation rather than how to prevent misconduct, the industry looks likely to repeat the same patterns identified in multiple inquiries over decades, including fee-sharing, vertical integration and blurred boundaries between advice and product manufacturing. Indexing sophisticated investor thresholds, simplifying disclosure so clients clearly understand who benefits from each recommendation and moving towards client paid advice models all look like practical steps that could reduce systemic risk, but none are guaranteed or easy. Until then, both everyday and sophisticated investors may need to assume a higher level of caveat emptor in a market that keeps proving it struggles to manage its own conflicts.
