Beware the discount licensee

A recent survey found the cost of servicing an adviser by a licensee is $48,000. My own experience suggests an efficient licensee offering core services and without a practice management component can do a decent job with minimal profit margin for around the $35,000 mark yet many licensees have offers that cost significantly less than this. This should be cause for concern on a couple of fronts.

Firstly we need to look at what is behind the recent collapse of a number of independent licensees, enforceable undertakings against licensees both big and small and the increased supervision requirements placed on several low cost licensees?

ASIC is undoubtedly making licensees more accountable than previously. Digging deeper, I would argue many of these licensees have run into trouble because they were not supervising (or screening) their advisers well enough.

Due to this lack of supervision and/or initial quality screening unfortunately some advice practices that were not up to scratch have flourished and ultimately clients were disadvantaged. Where licensees compete on price they must cut corners to survive and they lower their entry standards to grow their adviser numbers in an attempt to boost revenues. They also cut back on supervision for their advisers. They simply don’t have the resources to properly ensure advice standards are maintained.

Ultimately when some of these advisers do the wrong thing the whole group gets punished by bad press, greater regulatory scrutiny and perhaps ultimately loss of their license altogether. This has been a common story in recent months amongst dealer groups of all sizes. So….. beware the discount licensee.

The other way a licensee can keep their fees down is to subsidise their license via other revenues. Commonly in the past this has been by volume bonuses and other product revenues. These have been rightly deemed conflicted payments by the regulator and going forward will be banned.

If license fees of vertically integrated groups do not rise as a result of volume bonuses being banned to match the rest of the market the question needs to be asked whether the advice in these groups is still conflicted by product.

The Senate has been asking this very question recently with an enquiry underway. Advisers in vertically integrated groups will need to think very carefully about how they are personally accountable to the new best interest test when making their recommendations. ASIC's recent actions against CBA and Macquarie show large institutions and their representatives are no longer too big to sanction.

All licensees have been re-examining their business models due to FOFA. In the independent space many have been sold in recent times due to conflicted groups believing they could not survive without product subsidy.

The consolidation of the industry in this manner concerns me. However it concerns me even more that many more independent groups are coming up with their own products to circumvent legislative change and boost their advice revenues via product ownership.

The only groups remaining who are not substantially owned by product or planning to own in house products are catering to the very upper end of clients. This has resulted in only the very wealthy being now able to receive quality advice free from product subsidy and conflict.

While the aim of FOFA sounded noble surely it has already largely failed in many of its stated outcomes before it has even started? FOFA will largely fail due to commercial reality that the cost of compliance is now beyond what pure advice businesses catering to the majority of Australians can pay and still add value to their clients at a fee they can afford.

The irony is the cost of compliance has risen to protect consumers from conflicted practices largely driven by product sales yet now only by conflicted sales can the mainstream advice industry survive at all!

Many independent advice groups also in the past have used limited managed discretion account (MDA) models within wraps and platforms to help contain advice costs.

This was done to avoid compliance costs of producing hundreds of advice documents. Again legislators have recently decided to protect consumers by making advice more expensive and making MDA’s unviable to the average advice practice due to the licensee capital holding requirements.

Again licensees are responding to circumvent the legislation and as I write this building their own funds to enable adjustment of portfolios at product level rather than an advice level. This will save money for large groups and effectively allow the MDA concept to continue but again the effectiveness of the legislation has to be called into question. It adds complexity ostensibly to protect consumers but will it actually achieve its aims or just add further costs and conflict to the advice process?

Fundamentally I believe the regulatory environment is failing us as an industry and more importantly consumers at large. It is failing because the cost of advice has been a secondary consideration to many other political and commercial agendas.

Advice businesses will innovate and survive for one simple reason: people badly need financial advice and enough will pay for it regardless. Sadly though, to survive, provision of financial advice has become more complicated, more expensive and more compromised by conflict.

I believe the solution lies in quality independent advisers.

Entry standards have been strengthened to the industry but there is a lot further to go. When advisers are all skilled, client focused advice professionals who are remunerated in a manner that is free from conflicts of interest poor advice should be a rare exception unlike currently where ASIC sanctions abound.

PI premiums would fall rather than steadily rising if advice was better, supervision costs of licensees would drop rather than being forced upwards by advice failures and constant compensation payments. Compliance hurdles such as statements of advice, and regulation such as the new restrictions on managed discretionary accounts could be dramatically reduced instead of becoming ever more onerous. This would allow quality advice to be available for all to afford and the resulting scale would reduce costs still further.

We need strong visionary leadership for the financial advice industry starting in Canberra. It needs to begin with incentives and recognition for advisers who eschew the trend and run conflict free independent advice businesses.

The incentives would involve a reduction in compliance burden and hence an ability to provide conflict free advice more cost effectively.

About Jason Bragger

Jason Bragger CFP is principal of Brisbane-based financial advice firm Dolfinwise and a member of the Financial Planning Association’s policy and regulations committee.

He has a background in applied mathematics and gained several years actuarial experience at National Mutual/AXA, as well as completing studies in macroeconomics at Monash University, before commencing his advisory practice in January 2000.

He also serves as Vice President of Riverside junior rugby club in Brisbane and plays cricket with the ‘mighty Muddies.’