Education implications

There is no dispute that education has many benefits to the individuals involved and to society as a whole. The question is though:

1. What will the impact of the education standards proposed by FASEA (Financial Adviser Standards and Ethics Authority) for financial advisers have on the quality of financial advice?

2. What impact will these increased barriers to entry have on the financial planning industry?

The recently proposed education pathway is an active step towards fulfilling one of the components of a profession; will very likely result in making a relatively large portion of financial advisers and support staff not meet education requirements and the correlation to quality advice is debatable.

The proposed education standards will have immediate and undesired impacts on competition, cost and access to financial advice and possibly, and quite ironically, lower quality standardised advice.

Impact on financial advisers

In the early 2000s education requirements (then PS146) were introduced. These new education standards saw many advisers and support staff with and without relevant university degrees enrol into courses such as the graduate certificate and diploma of financial planning aligned to Tier 1 and 2 of the Australian Qualifications Framework (AQF). These were most likely paid for by their employer or they went into further debt. After completing these courses they then received the “golden ticket” to becoming a financial adviser.

This education path was also viewed to some extent as the road to the industry building trust and as a move towards greater professionalism. Fast forward almost a couple of decades to 2018 and the industry is still in flux about what level of professionalism has been achieved and what the appropriate level is and, therefore, it seems that we may be experiencing a slight bout of deja vu with the introduction of the new Corporations Amendment (Professional Standards of Financial Advisers) Act 2017.

It is therefore understandable that those who have heavily invested their time and money to complete a degree such as economics, commerce etc, in addition to all the necessary financial planning courses and continuous professional development requirements and commitment to the financial planning profession/industry, would be angered to say the least with the prospect of having go back to school again as their current qualifications and prior work experience no longer ‘cut the mustard’.

This may in fact cause many to decide to exit the industry therefore potentially losing many high quality financial advisers.

Possible implications of increased barriers to entry

Market consolidation and reduced competition

The higher education proposal creates another and higher barrier to entry and impacts new entrants as well as incumbents. Economic theory tells us that as barriers have the effect of reducing competition through the creation of monopolies and oligopolies and, all things being equal, may cause a rise in prices and profit margins, therefore possibly increasing the cost of advice and reducing the demand for advice and its accessibility. The decrease in competition can also impact quality as there are fewer alternate advice providers.

The introduction of the higher education standards combined with high set-up and ongoing costs of running a licence could be the accelerant that transforms the industry from going down a path of a competitive marketplace to one less competitive with higher costs, little choice and no guarantee of higher quality advice.

Increased cost of standardised quality of advice

Financial institutions are either disposing of their financial advice channel(s) altogether or are merging and acquiring existing licences with the aim of building larger financial advice businesses to take advantage of economies of scale and provide large scale standardised advice processes and possibly standardised financial advice, enabling them to effectively compete on price initially and reduce competition. However, the combined effect of existing advisers leaving the industry and the migration to larger licensees who can subsidise this education may remove the need to compete on price and see the cost of advice actually rise.

Reduction in self-licensing

The trend of financial advisers moving to self-licensing may have been slowed dramatically with the introduction of new education standards. The possibility of a mass exodus of financial planners and subsequent increase in supply of client books for sale creates the opportunity for first mover advantage to purchasing such books at a discount. The discounted cost of the book can then be offset partially by investing that saving to upskill and control a key and now even more scarce pool of resources: yes, financial advisers (currently about 25,000).

The increased cost and commitment to new education standards may have substantial impacts on smaller boutique businesses in terms of potentially losing talent to larger practices or institutions that have a competitive advantage via being able to subsidise the cost of this education to their financial advisers, including the cost of compliance. Some dealer groups may see this is an opportunity to repackage their offer to attract new and existing financial advisers by also offering subsidised education at the cost of further squeezing their profit margins.

However, the cost of this option may be too great for some AFSLs to pursue, considering that the average cost of a degree may be $40,000 per adviser not including the cost of continuous education and lost time for study leave etc, with the added risk of advisers leaving their licensee once they have completed their degree.

Nikolas Kloufetos is principal of Advice Compliance Support