Can Rice Warner’s research for ISN stand the test of time?

While Rice Warner riled the financial planning industry with its latest research work on behalf of Industry Super Network, history will be the judge of the validity of its analysis. 

Any actuarial consultancy which is frequently used by the Industry Super Network (ISN) is unlikely to be particularly well-liked by financial planners. 

However, when that same actuarial consultancy, Rice Warner, under a 2011 commission from the ISN, produced a report suggesting the cost of Future of Financial Advice (FOFA) opt-in provisions for planners would be just $11 per client, it is hardly surprising that its subsequent research efforts are met with deep planner skepticism. 

And such was the case when, early last week, Rice Warner produced a report suggesting that advice would become cheaper in a post-FOFA environment. 

It is worth noting that the brouhaha which accompanied Rice Warner’s 2011 $11 claim on opt-in prompted the firm to issue a clarification of the methodology which led to its conclusion. Given early responses to its latest research report, it might see value in detailing precisely how it arrived at its most recent conclusions. 

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Rice Warner’s 2011 clarification responded to planner criticisms that its findings assumed opt-in would take place in the course of regular client meetings and would not require advisers to chase clients up separately, in circumstances where it was estimated that around four out of five clients were classified as ‘inactive’. 

The company claimed that with grandfathering provisions being taken into account, opt-in would only apply to new clients – meaning that advisers who adapted their business models to include annual or biennial client reviews for all new clients would be able to incorporate ‘opt-in’ processes as part of their normal client management. 

It said the cost was also calculated as the additional cost over and above what it would cost to implement key functions that would be required under an ‘opt-out’ regime, given these would have been required regardless of whether opt-in was adopted. 

With FOFA now having become a reality and with planners gearing up to meet their obligations, few planners are suggesting the Rice Warner prediction has come to fruition, with most arguing that the costs of opt-in are substantially higher and need to be viewed in the same context of the costs associated with fee disclosure. 

The media’s headline take on Rice Warner’s latest research is that, via the increased provision of more affordable scaled advice, FOFA “will result in a significant reduction in the average cost of advice from an average of $2046 before the reforms to $1163 after the reforms by 2026/2027, in 2012 dollars”. 

The financial planning industry’s response to that headline assertion was immediately dismissive – in circumstances where it ran almost directly counter to predictions that FOFA was serving to drive up the cost of advice. 

But while the predictable disagreement between the Rice Warner findings and the views of the planning industry made good headlines, it also obscured the reality that the two sides were looking at the equation from distinctly different positions. 

Financial planning looks very different to those who view it from the perspective of superannuation to those who view it from a client/advisory perspective.

Rice Warner has a long track record of providing its services to the superannuation industry but, arguably, has substantially less experience with respect to the nuances of the financial planning industry. 

This is reflected in some of the opening paragraphs of its executive summary such as: 

“On average, the price of financial advice is expected to be lower after these regulatory changes, with the reforms facilitating a shift towards less costly scaled advice and more transparent charging for complex advice.

"While increased transparency may result in a perception of higher cost for complex advice, fee for service charging is, in most instances, less costly for the client over the medium to long term than trail commissions or asset-based fees. 

“While there is a risk of reduced demand for comprehensive advice, this report finds demand for comprehensive advice will be broadly stable after the regulatory change. Increasingly, many new clients will be satisfied with simple pieces of advice targeted to their needs at different points of their lifecycle.

"Consequently, there will be a shift from full service advice to scaled advice delivered periodically throughout a client’s lifetime. Further, we expect the number of Australians taking advantage of scaled advice will grow. 

“Full service advice will still be required and provided for people with complex financial and/or family arrangements. In these circumstances, the adviser will spend considerable time reviewing the client’s circumstances and will often need to draw on deep technical experience in order to tailor a specific financial solution for them.

"This group of clients will be willing to pay fees commensurate with the scope of the advice provided.

"However, many clients will choose scaled advice, rather than commit to a holistic service. As circumstances change, many of these will purchase scaled advice several times over their lifetime.” 

In other words, the underlying presumption of the Rice Warner analysis is that most people will be satisfied with scaled advice and that scaled advice can be cost-effectively delivered by a wide range of providers.    

Some might argue it is a presumption that fails to take account of political and policy change. In the end, consultancies prosper or struggle according to their track records. Plenty of planners will stand ready to remind Rice Warner if its FOFA-related predictions prove to be wrong.