There are concerns that the advice industry is in the midst of a perfect storm of rising costs that will ultimately make accessing advice unaffordable for the majority of Australians. Increasing regulatory and compliance costs, rising PI insurance and the restructuring of the licensee market are all contributing to intensify the cost pressure on advice firms. The result may mean fewer practitioners will be able to continue to offer advice resulting in thousands of job losses from the industry.
Financial advice is rapidly becoming unviable for many in the industry as changing market conditions intensify the cost burden on advisers, firms and licensees. 2019 saw 4,378 advisers exit the industry, which equated to a reduction of 15.6%.
Regulatory and compliance cost are having an negative impact of the sustainability of practices according to the FPA who have said Financial planners are being forced out of business by the rising cost of Government regulation. It said government policy initiatives such as the compensation scheme of last resort on top of multiple mandatory fees and charges were occurring at the same time as significant disruption and reform to traditional revenue arrangements for planners. It cited the cost of delivering a statement of advice (SOA) having recently been estimated at $6,500 – several times the typic fee-for-service of $2,400. As a result, advice was becoming inaccessible to most Australians. In a pre-Budget submission filed with the Federal Treasury the FPA noted that unrestrained cost increases will force the closure of financial planning businesses, reduce employment in the sector and set back the development of the financial planning profession.”
Increasing compliance costs were also cited by InFocus managing director, Darren Steinhardt, who questioned what the ultimate cost of implementing the Financial Adviser Standards and Ethics Authority (FASEA) regime would be? “The end cost of FoFA implementation was massive, (approximately $3 billion), the cost of which were absorbed by advisers and by clients. In a recent round table, Steinhardt said that while much attention had been directed to the additional costs being carried by financial advisers, the additional costs to licensees should not be overlooked.
Analysis published in the Adviser Ratings 2019 Landscape report notes that Institutional and privately-owned licensees with many advisers have experienced considerable PI insurance pressure, with premiums and excess constantly climbing. It is not unusual to see excesses over $25k and premiums above 2% of revenue. With the industry re-structuring in the wake of institutional exits from the licensee space, the subsidisation of these costs is rapidly coming to an end.
Major institutions staying in the market have increased licensee pricing significantly for the single authorised representative (AR) business with less than $500k revenue. Pricing has moved from the $20-30k for the first AR in a business to circa $45-50k. There are reports this could go as high as $80k in the near future. This means the rapid reduction in adviser numbers in this segment will continue over the next 12 months. The analysis found that institutions are rapidly extracting themselves from single adviser practices with $200-500k revenue. The alternative of self-licensing also comes at a cost with analysis suggesting the opportunity cost for self-licensing is circa $150k total cost.
The results of these cost pressures are borne out in the data. As well as adviser numbers being down, June 2019 saw a large number of licensees handing back their licences mainly due to sharp rises in costs – technology, compliance and PI insurance as we have already mentioned. The industry is changing and there will be casualties, but as Steinhardt noted at the roundtable discussion, the future for those advisers with good businesses who remain was bright because ironically there will be less advisers and higher barriers to entry. The outlook for many Australian consumers who are seeking affordable advice, however, is not as encouraging.