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.
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Comments6
"The Retail Life Insurance Industry, with thousands of Businesses, tens of thousands of employees, Billions of dollars in revenues, Tax and Insurance claims paid, has effectively been destroyed by Government and Public servant insanity, collusion or both. The Financial Planning Investment Industry, has had a reprieve due to strong Investment returns since March 2009, though these firms are buried under red tape and anti-small Business restrictions of trade, that will tip many of them over the edge within a few years. The impetus for this, will be when the Investment markets hit head winds and a catastrophic collapse of the majority of small to mid size practices will occur when we enter another Global Financial Crisis. There is insufficient fuel in the tank to carry small Business through the next cycle, the reason being, Public servants and all the leeches who are sucking the life blood out of the private sector, are not affected by down turns and they do not care, as their entire focus is on themselves and their ability to create more red tape, added cost, compliance and confusion. The Federal Government is also in no position to bale out Industries, though they are responsible for much of the chaos and uncertainty that prevails today. When you allow Lawyers, auditors, compliance and theory based guru's / consultants to fix issues, what we always end up with is a Faulty towers black comedy, though the ramifications are not funny."
Jeremy Wright 16:36 on 05 Feb 20
"Having witnessed 35 years of change in this profession - I have seen nothing as disruptive as this. We have hundreds of loyal clients who love what we do ( and we have had annual agreements for 15 years) No one is complaining about the services we offer and get paid for .... except now it takes 3 times the effort and the complexity has gone through the roof. The recent suggestion is that we should consider if a client would be better off on an hourly rate than the adjustable % based fee we charge ( and disclose). The end result of this will be regulation driven by ethical purity such that the only course of action for any adviser is to send them down the road to the industry fund/ put them solely into indexed investment options and they can hope they get the care and attention they were used to. ... what hourly rate should one charge for the office/electricity/staff/training/PI/super/and all that is required to manage the services we need to provide.I have 2 highly qualified sons in the profession - they came into what they thought was a place to build wonderful relationships so they could grow and continue to advise their clients over the years as I have done... the pressure and costs to do so will drive them out and yes - ordinary Australians will be worse off without young talented people to keep them abreast of change and steer them clear of the financial pitfalls that we so often see the unsuspecting clients fall into. - what a mess"
phil eley 16:14 on 05 Feb 20
"It is ironic that poor operators continue to operate poorly, no matter already being covered over the past 30 years by regulations and compliance requirements. Good operators will continue to operate with an ethical and proffessional approach. The only thing that increased regulatory red tape does is allow the Politicians to feel justified, and increase the costs (via actual monetary cost as well as time allocated to compliance) to the industry as a whole. As highlighted in the article, the main people to suffer will be the lower net worth investors that cannot afford advice... Let's get back to good but basic legislation, and investors receiving advice but ultimately taking responsibility for their own decisions."
Tony Garnham 16:07 on 05 Feb 20
"At what point does anyone stop and actually listen to the industry. This is just madness. Noone benefits except for the direct product floggers hiding behind general advice. WAKE UP."
crazy 15:52 on 05 Feb 20
"The FPA sat on their hands and have done little to curb any of the outrageous layering of regulation that is being blindly imposed on advisers and driving up costs. Their obvious greed and pandering to both the government and banks is a disgrace. Their comments around these topics now is a disgrace. They are merely a media commentator and do nothing to help advisers. Pathetic. "
FPA to blame 15:39 on 05 Feb 20
"Simply Great News ALLROUND!!"
BUGGERED 15:16 on 05 Feb 20