Advice cost burden tougher on small AFSLs

One industry veteran has estimated that the rising costs for a small licensee to service an adviser could be as high as $70,000 per adviser as a result of the increased regulations.

In a blog forecasting the future of small AFSL practices over the next two to five years, Retirewell Financial Planning director and principal Tony Gillett highlighted the disproportionate costs smaller licensees will have to bear in servicing advisers compared to larger licensees.

“You couldn’t blame anyone from wondering why any sane person, based on a risk/reward assessment within such an unfriendly business environment, would want to be the principal of a small AFSL, given that the risk/return assessment is clearly suboptimal,” Mr Gillett said.

“There is also no doubt that many AFSL principals are seriously underpricing the cost of providing an authority to their representatives. A recent estimate of the cost to the AFS licensee to service an adviser was $38,000 to 45,000 per adviser. One aligned AFSL quoted $70,000.”

Increasing costs for advice practices

Mr Gillett laid out the areas of running an advice practice where costs will increase or already have increased.

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Some of the more notable areas where costs would increase, according to Mr Gillett, include Tax Practitioner Board registrations, estimated at $1,600 compared to nil a couple of years ago.

Other big-ticket items cited by Mr Gillett included PI insurance, which costs small AFSL $40,000 per year, plus a week to prepare the submission, as well as additional costs for client renewals as was recommended by the Hayne royal commission, which he estimates could range between $20,000 and $40,000 per year.

“Implementing this new requirement for the re-signing each year of an annual service contract will cause significant additional and unnecessary costs to small AFSL businesses, which, in many cases, are difficult to pass on,” Mr Gillett said.

“All clients are already provided with a Fee Disclosure Statement (FDS) every year, telling the client what services have (and have not) been provided and what fees have been paid.

“As well, all post-2013 clients already have to sign an Opt-In Agreement every two years – that is, they must agree in writing to continue receiving the advice services provided, and to continue paying advice fees.”

Uncertainty around ‘compliant’ advice

In addition, Mr Gillett said most AFSL principals are under a great deal of uncertainty as to exactly what is needed to provide “compliant” advice.

In particular, he said there is continuing uncertainty about what must be put into a Statement of Advice (SOA) and what can be left out and still be compliant — or whether the lesser Record of Advice document will suffice.

Mr Gillett added that there are now serious suggestions that the seven “safe harbour provisions” — that when satisfied within an SOA can provide some element of protection for the adviser — are going to be removed.

As part of efforts from the regulators to protect the consumer, Mr Gillett said they have instead created a hugely complex environment of great uncertainty around the provision of “compliant advice”.

“Even the most experienced of planners worry that their 30- to 50-page Statement of Advice, which has taken a week and 10 to 20 hours to produce, will be found wanting, because they have unwittingly failed to tick all the necessary regulatory boxes, to provide a compliant SOA,” Mr Gillett said.

“This obsession with compliance, and the uncertainty which surrounds it, is a blight on the delivery of financial planning advice by sensible advisers to sensible Australians. It should be called out for the nonsense situation that has evolved.

“It has created a thriving, expensive, nit-picking industry in compliance management and provided a happy hunting ground for litigation lawyers. It’s time to introduce some common sense to standards of written advice to lower the costs of providing advice.”

Adrian Flores

Adrian Flores

Adrian Flores is a features editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].

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