Investment Advisors

INVESTMENT ADVISORS

The Financial Advice industry is about to experience massive change and this brings great opportunity.

But a massive threat to those who don’t adopt to the changing business environment.

The Future

The recommendations of the Australian Treasury’s “Quality of Advice Review” (December 2022) are good for the financial advice industry.

Firstly there is the recognition that the ever increasing layer upon layer of government regulation and compliance has choked the financial advice industry. It has driven up administration and compliance costs.

The new education requirements are not only time consuming the cost of undertaking new qualifications runs into tens of thousands of dollars per adviser. (A review of the education standards is currently being undertaken by the Federal Government).

Secondly, ASIC deterrence and enforcement actions are often considered by AFSL holders to be ‘heavy handed’ and disproportionate to minor breach of the Law. The review notes that financial advice providers fear ASIC intervention.

Thirdly, decades of operation, have resulted on financial planning businesses merging or closing. Adviser numbers have rapidly been falling from a peak of 26,500 in 2016  to 12,300 in 2022.

Fourthly, the cost of complying with the Law, in both time and expense has discouraged financial advisers from setting up their own businesses, leading to less industry competition.

Not surprisingly, the cost of a basic financial plan has become unaffordable to the average Australian.

The recommendations of the review intend to eliminate much of the regulator and compliance expense associated with having and AFSL and providing advice. The federal governments objective is simple. This is to make the required legislative changes to eliminate the impediments to making good financial advice affordable for average Australians’.

An opportunity and threat

This is the greatest opportunity and the biggest market disrupter in 25 years.

As the objective is to lower the cost of financial advice, more financial planners will be needed as more people approach retirement. Each financial plan will need to be produced on average, at a lower cost.

This simple objective is both a serious threat and a great opportunity to advisers and product providers (e.g. funds managers, insurance companies).

Those businesses that quickly adapt will grow their businesses profitably. Those that sit back and wait to see what happens will slow be crushed by using yesterdays’ business model. Their only chance of growth will be a) acquire a business that has adjusted to the new business model, b) try to catch-up before it is too late.

In our view, the proposed recommendations will offer the greatest challenges to advisory groups with the following characteristics:

1. Have high fixed overheads (e.g. rent, insurance, IT support, research, administration and so on).

2.  Low sales to support personnel. (i.e. too many people in the back-office compared with business writers and their direct sales support).

3. Rely too much on sales from inhouse products.

4.  Spend a disproportionate amount of time with low value clients.

5. Have cumbersome policies and procedures that make change difficult and add to the administration burden and cost.

6.  Are carrying too much administration, too many long term employees, who are fixed in their ways.

7.  Have too few employees with “skin in the game” (i.e. a serious amount of their own money invested in the success of the business).

8.  Companies with these characteristics are often big business and like a supertanker take miles to turn around.

THE THREAT

One can tell from many of the forecasts above, that we predict that advisors will have to become more operationally efficient and be prepared to provide services at lower costs.

This is because it is likely that the average revenue per client will fall as changes to government regulations are designed to make investment advice more affordable to the average Australian.

Despite the strength of the relationship an advisor has with their high net worth clients, the fees that the average client pays in the future will be lower than they are now. This will to some extent, drive down the fees the high net worth clients are willing to pay.

Impediments to reducing costs

We are happy to work with you to identify fixed and variable costs that could be reduced.

We recognise that some liabilities cannot be reduced. These things need to be allowed for in a lower revenue environment to ensure that the business has the reserves available to meet these obligations. For example, cost reduction is difficult if the business has an expensive property lease.

Further, long established businesses are more likely to have long term employees with entitlements to long service level. As a result, these businesses may have significant liabilities on the balance sheet. Other entitlements that need to be taken into account include, redundancy payments, pay in lieu of notice and unpaid superannuation. These are payments that you could have to make in the event of restructure and certainly if the business should close.

Directors are personally liable if the company cannot pay employees these amounts. (In fact if the company misses the quarterly deadline for payment, Directors are automatically personally liable).

So the business to needs to make adequate cash provisions to make these payments if necessary.