The financial planning industry in Australia is undergoing a seismic shift. We have mandatory exams, new education requirements, increased compliance and the loss of grandfathered revenue creating unparalleled change in the industry. People are scared, stressed and leaving.
Business valuations are down - where once there were 12 buyers for each book of business, now there are 8 sellers for every buyer. We now have around 25,000 financial advisers in Australia but almost 3000 have left in the last 6 months, and more will leave. I predict we will get down to 16,000 advisers in 2025 before recovering to a similar level as today in 2030.
In the last few months, I have had dozens of conversations with advisers and licensee heads who are trying to think what next. Many are understandably upset at this "perfect storm".
With vertical integration slowly being made untenable, many licensees are in the process of increasing their license fee (the old model of a licensee offsetting their losses with manufacturing flow doesn't work anymore).
This is causing record interest in self-licensing and I get it. But it has never been more important to take a pause before you react.
Make sure you understand all the risks and costs of self-licensing
A common view is that the cost to go self-licensed is minimal and there are players out there to help with the application and the outsourced services, particularly compliance. While this is true to a certain extent, my view is that it excludes some pretty important considerations:
- A well-funded and litigation ready ASIC will inevitably adjust its radar industry wide (with the big 4 banks / AMP nexus changing). The minimum compliance framework type approach will not be sufficient when this focus comes to the smaller licensees.
- Advisers are effectively moving from managing advice risk to also managing licensee risk - a fundamentally different skill set. Most self-employed advisers actively detest corporate bureaucracy but some of those corporate functions and skills - for example project management and risk management - are actually necessary if you want to run an advice organisation.
- Some of the key pieces of managing a licensee are the bits you don't see. Most advisers see the PD Days, the templates, the policies, the CRM and advice planning / marketing support and these are reasonably simple to outsource. On the compliance side, you can certainly have support with RM and compliance committee requirements, but will it have the depth you need in relation to incidents, complaints, consequence management, ASIC notices, figuring out issues like RG 515, ABA checks, TPB notifications, policy maintenance and the need and ability to flex to manage large scale remediation if / when needed?
- The true costs long-term without subsidisation are probably closer to $45K per adviser excluding Professional Indemnity (PI) Insurance, and $60K per adviser including PI. When looking at the costs of the outsource solution, this can appear attractive in comparison, but what happens when as a licensee you get an ASIC notice or are forced to roll out regulatory changes, or investigate instances of poor advice. What will the costs of resourcing this work be?
- The market for PI itself is fundamentally changing, factoring in the massive costs of remediation. When you lose the aggregation benefits, these costs are going to be higher, apples vs. apples. At a minimum, I would strongly encourage you to speak to a broker before making the leap.
Think about resourcing now for future regulatory change
With ASIC RG 515, the regulator is effectively saying we disagree with 75% of the advice given and the way it has been audited. Yes, this was targeted at the big 4 and AMP, but what happens if and when it is applied industry wide?
If you're a small shop, you will need a lot of support to manage compulsory changes like this, which are required to enhance and improve your advice process and audit framework. From my experience in dealing with ASIC, deadlines are usually not negotiable.
Look for scale
Over time, I believe if you do go self-licensed, in order to survive long-term, you'll need to find scale to fund future regulatory change, which will come. Currently 75% of licensees have 5 or fewer advisers. I think licensees will need to have at least 25-30 advisers to achieve a financially viable scale.
I am nothing but passionate about small business and financial advice and I completely understand the intense pressure and mood at the moment.
I am not saying it can't or won't work, only to make sure before you make the leap that you understand all the costs, all the risks and you go in with your eyes wide open.
Tangelo Strategy & Advice Consulting offers independent management consulting and strategic risk and compliance advice.