Are SOAs really the ‘silver bullet’ of cost efficiency?

In the advice industry’s bid to service more Australians at lower costs, Hayley Knight, director of Contract Paraplanning Services, has said that SOAs are not the “silver bullet” that the industry may be hoping for.

“There seems to be this notion that eliminating the SOA will solve all of our problems, yet based on research, the document costs, on average, less than 10 per cent of the advice fee,” Ms Knight told ifa.

“In reality, we already have an ASIC SOA example, which is nine pages long, yet the average SOA still remains at 50-plus pages long.

“So, I don’t believe that scrapping the SOA will have any substantial effect on the cost to produce advice. Licensees and insurers will still want to cover their bases, and that will mean a lot of paperwork.”

Last week, Financial Advice Association Australia (FAAA) chief executive Sarah Abood said that amending SOAs can alleviate the scarcity of affordable advice left by the banks’ exit from the financial advice space, enabling firms to serve a broader market.

“No one has effectively been operating in the simple, low-cost end since the banks exited advice, so it’s a segment of the market that is not being serviced at all. This [changes to SOAs alongside other QAR measures] would enable businesses to start serving that segment of the market,” Ms Abood told ifa.

In comparison, Ms Knight argued that the industry’s attention should be focused elsewhere.

“Cutting the cost to service a client will come from a combination of efficiencies, but I believe the attention should be focused on minimising the compliance burden,” Ms Knight explained.

“The SOA is an easy target when it comes to reducing cost, but in reality, savings are more likely to be minimal. The real problem, as I see it, are the sky-high licensing fees and the costs just to remain compliant.”

Expanding on this in a LinkedIn post last week, Ms Knight reasoned that with an average cost of service being between $5,000 and $6,000, alongside the average SOA fee ranging from $400 to $600, SOAs constitute approximately 10 per cent of the overall cost incurred in servicing a client.

“Even if you could completely eliminate [SOAs], which is highly unlikely … at best, you’re going to be reducing your costs by 10 per cent,” she said.

“Which is great, but is it the silver bullet? I don’t think so.”

What is more likely, Ms Knight deduced, is that cost cuts would be even less than 10 per cent, assuming that SOAs aren’t entirely eliminated.

“I feel like there’s so much focus on reducing this SOA when really we need to be looking at all the other little things around it, like the excess in documentation, red tape, compliance, and the levels that advisers need to go to make sure that they’re proving that they know their client,” she concluded.

Earlier this month, in announcing the first tranche of legislation related to the Quality of Advice Review (QAR), the Minister for Financial Services, Stephen Jones, said his red tape reduction agenda will make a “meaningful” difference in freeing advisers from the regulatory purgatory they’ve endured for years.

However, noticeably absent was recommendation nine, advocating for the substitution of the lengthy and legalistic SOAs with a financial advice record for consumers that is more fit for purpose.

Regarding the absence of SOAs from the first tranche of legislation, Ms Abood said that while she is disappointed, it’s crucial to view this as a “delay and not a no”. She also revealed that confidential discussions about the revamped SOAs are underway behind closed doors.

Providing further context to ifa last week, Mr Jones added that the complexity of SOAs is that they have tentacles into other areas of advice regulation.

“Every time you think you have something in isolation, like your statements of advice, you realise that the driver of that is the safe harbour test and the best interest duty, which we were always going to deal with in tranche two, and we can’t do one without the other,” Mr Jones said.

“We’re pretty sure we know what we want to do, but we haven’t got all [the] detail consulted. In short, every time you pick at this, you find there’s an interconnected bit that needs to be dealt with.”