The financial advice industry is facing thousands of job losses as practitioners are forced out of the industry by increasing regulatory and compliance costs from rising professional indemnity (PI) insurance rates and restructure of the licensee market, a newly released Adviser Ratings (AR) report reveals.
The report said 4,378 advisers quit the industry in 2019, a loss of 15.6%, as changing market conditions and the cost burden on advisers, firms and licensees rapidly made the profession nonviable.
In addition to dwindling adviser numbers, by June 2019, several licensees had handed back their licences, mainly because of sharp cost rises, eg of technology, compliance and PI insurance.
“There are concerns … the advice industry is in the midst of a perfect storm of rising costs that will ultimately make accessing advice unaffordable for the majority of Australians,” the report said.
An analysis published in AR’s 2019 Landscape Report showed institutional and privately-owned licensees with many advisers had experienced considerable PI pressure from constantly rising premiums and excess.
“It is not unusual to see excesses over $25,000 and premiums above 2% of revenue,” the AR report said. The industry was re-structuring in the wake of institutional exits from the licensee space and subsidisation of those costs was “rapidly coming to an end”.
The Financial Planning Association of Australia Ltd (FPA) said in a pre-Budget submission regulatory and compliance costs were forcing financial planners out of business.
Government policy initiatives, eg the compensation scheme of last resort, added to multiple mandatory fees and charges on top of significant disruption and reform to planners’ traditional revenue arrangements.
The estimated cost of delivering a statement of advice was $6,500 – several times the typical fee-for-service of $2,400, making advice inaccessible to most Australians.
FPA warned unrestrained cost increases would force the closure of financial planning businesses, reduce employment in the sector and set back the development of the financial planning profession.
The cost on the authorised representative (AR) business was also rising rapidly. AR cited InFocus MD Darren Steinhardt, who said the end cost of FoFA implementation, which had been absorbed by advisers and clients, had been “massive” at about $3m and he questioned the ultimate cost of implementing the Financial Adviser Standards and Ethics Authority (FASEA) regime.
Major entities staying in the market had significantly increased licensee pricing for single AR businesses with less than $500,000 revenue and licensee pricing was expected to go as high as $80,000 in the near future after rising from $20,000-$30,000 to about $45,000-50,000. “This means the rapid reduction in adviser numbers in this segment will continue over the next 12 months,” the AR report said.