Registration of Advisers - beware of unintended consequences
Recently we approached the issue of individual registration of advisers. There has been promotion of this by the FPA and a number of other interested parties. As we noted, we don’t have a direct interest in this because we do not provide personal advice to retail or wholesale clients.
But we have an indirect interest because we are vitally interested in a strong and viable advice profession.
Imagine for a moment there were no advisers. What options would be available for Australian families to achieve their personal goals, to the extent these can be met financially.
The options would be either a DIY investment approach or simply outsourcing investment outcomes to a product issuing institution such an industry fund or private company. A moment’s reflection – and a lifetime’s experience – tells you that receiving expert advice makes it more likely that goals are articulated clearly, prioritised and achieved.
So how does this bear on the proposal to replace the current AFSL based structure with individual registration?
To contextualise this, ASIC, in their funding levy publication from June note that there are 3,051 AFS licensees which provide personal advice through 22,652 advisers.
Well-meaning actions or regulations frequently have unintended consequences – think introducing rabbits for fur and food, cane toads to control canefield pests, or the unexpected benefits accompanying the blood pressure reducing drug Viagra. I’m sure you have your own favourites.
So what might be the consequences if (i) personal registration replaces AFSL responsibility for personal advice or (ii) the current, evolving, regime continues. There are a number of areas we might want to consider. I’ve chosen a few:
The capacity to systematically create and deliver financial or other advice,
The cost of those services
Access to Professional Indemnity insurance
The impact on the regulator and other statutory bodies
Development of Advice
In the event of individual registration, organisations will continue to make a business of providing the services current AFSLs offer, but without the licensing element. The FPA assumes that “Licensees will continue to be needed to provide business development services, technology, education and many other services that give value to financial planning practices”[1]. Except they won’t be licensees, they will be service providers on an “all care no responsibility” basis like the many current providers of education or software today.
An individual, registered adviser will be personally, legally liable for the service they provide so may be more likely to spend extra time and money reviewing those aspects of their operations that impact on their compliance with regulation including technology, advice templates, platform features, investment selection and building their own portfolios.
Proponents of individual registration say this is the whole point. Personal responsibility will bring with it better advice. But the overhead of managing the practice may make it impractical to deliver to more than a handful of clients.
Currently the licensee is responsible for developing and monitoring the creation of advice and must have sufficient resources to do so. They have the economies of doing this for a group of advisers not at a single adviser level.
The counter argument in favour of individual licensing says that making individual advisers personally responsible will keep their mind focused on delivering better advice. In addition, continuing the current AFSL regime could result in the development of a new set of vertically integrated organisations, smaller than the banks and insurers but nonetheless primarily product issuers.
Costs
If individuals become responsible for every aspect of the service they provide, will this lead to a market of subscale individuals each getting their own legal advice, compliance services, configuring technology, research and so on? The costs of this could be huge. Larger, we would think, than the current arrangement where licensees take this responsibility. One way in which individual advisers will manage costs may be to avoid seeking advice or compliance services and only use free CPD for education. That hardly bodes well for high quality services. And of course, the cost of obtaining this level of support could be highly challenging for young new entrant advisers.
Alternatively, if the current regime continues, in an effort to manage costs in a margin challenged business, Licensees themselves may skimp on services partially under pressure from advisers to cut costs. But at least they have a pool of advisers to spread them over.
PI Insurance
It’s been challenging for licensees to get PI renewed at reasonable premiums over the past year or so. Individual insurance policies might be an altogether harder challenge. So one consequence of individual registration might be a steep increase in cost per adviser, not least from the administration costs of underwriters and brokers of servicing 22,652 policies not 3,000.
The Regulator and other Bodies
ASIC operates on a cost recovery model now and those costs are rising well ahead of inflation. If, instead of having first recourse to 3,000 licensees they focus solely on 22,000 advisers, the cost per adviser is likely to rise steeply. These costs will be transferred immediately to advisers through the ASIC funding levy. It’s also possible that ASIC costs might rise in unexpected areas. For example, it maintains a register of advisers currently. Would ASIC, instead of licensees, be required to maintain 22,000 separate records of training?
It’s also hard to conceive that other costs such as FASEA, which to date has been funded by the banks, AFCA, the Code Monitoring Body and the Compensation Scheme of Last Resort could be lower under individual registration than under the current AFSL regime. The administration of 22,000 accounts by all four of these regulation bodies would be a substantial cost.
We need to be careful that the focus on ethics as a reason for individual registration doesn’t have unintended consequences which detract from achieving the profession’s fundamental purpose of assisting clients to achieve their personal outcomes.
Creating advice for retail investors is almost the definition of mass customisation. A general, systematic analysis of investment markets plus tax and other considerations needs to be married with a detailed understanding of a family’s personal goals. Then implementation needs to be systematised. Doing this requires a systematic approach throughout and one where the responsibility for each step is clear. Will individual registration make this a more likely outcome?
Conclusion
The advice industry is undoubtably undergoing a period of significant change. The royal commission, the deinstitutionalisation of advice, new regulation, generational change and the impact of managed accounts and new technologies are all changing the advice landscape. Further reform can be positive, but as outlined above, careful assessment of the potential impact of mooted changes is needed if the industry is not to find itself dealing with negative consequences that were foreseeable.
[1] Dante de Gori quoted in Money Management 18 June 2020 p 17