Financial planning licensees defy ASIC's expectations

Despite some media reports to the contrary, Mike Taylor writes that the top 20 licensees in the financial planning industry emerged in reasonable shape from ASIC’s review of financial advice industry practice.

A little over a year ago the Australian Securities and Investments Commission (ASIC) created a minor stir among the 20 largest financial planning dealer groups by imposing on them an extensive and time-consuming questionnaire.

The questionnaire was so extensive and the imposition on the dealer groups considered so time-consuming that ASIC’s actions were later the subject of interrogation by the Federal Opposition during Senate Estimates Committee hearings.

ASIC (as any good regulator should) drew a number of important conclusions from the questionnaire responses, but if it had decided to share some of the parameters of its research with officials within the Department of Treasury they might have found it useful in making a sound judgement on the cost impacts of the two-year ‘opt-in’.

What the ASIC research found was the top 20 licensees covered just over 13,000 individual advisers – 66 per cent of whom were authorised representatives, with the remainder being employee representatives of licensees.

The ASIC data also revealed the top 20 licensees combined had a total of 4.6 million clients, of which almost 1.5 million were identified as active.

It said the estimated average size of a client’s assets was around $131,000.

So what might the Treasury officials dealing with the Future of Financial Advice (FOFA) changes have gleaned from this information? Well they may have started from the premise that opt-in represents a formidable task in circumstances where, overall, the average planner in a large dealer group has only one-fifth of his/her clients who can be deemed active.

What they might also have gleaned from the information is what every financial planner already knows – finding and keeping high net worth clients is no easy task when the average client’s assets stand at around $131,000.

Despite some reporting to the contrary, the ASIC questionnaire tended to assess the financial planning industry as one which was improving and overcoming many of the issues which had caused it reputational damage in the past.

It made clear, for the most part, that the large dealer groups were fulfilling their obligations with respect to planner education, approved product lists and advice audits.

While the ASIC analysis steered well clear of any self-criticism, many of its findings with respect to breach reporting and common standards and interpretations suggested many of the problems perceived to exist in the financial planning industry were owed to its own approach.

However, the result also reflected the fact the questionnaire was primarily focused on the situation in 2008/09, and therefore highlighted continuing deficiencies with respect to adviser remuneration and other issues subsequently addressed by way of the Parliamentary Joint Committee of Inquiry into the financial planning industry (Ripoll Inquiry) and the subsequent Future of Financial Advice legislative proposals.

However, the ASIC questionnaire succeeded in confirming other research published this year, including in Money Management, that sales continues to be a focal point with respect to adviser recruitment and remuneration.

The ASIC analysis stated: “The majority of licensees filling out the questionnaire indicated that they remunerated their advisers based on the volume of financial products sold. This remuneration included ongoing commissions, up-front commissions and volume rebates.

In fact, it is this element of the regulator’s research which should prove most interesting for those seeking to impose new business models and remuneration regimes on the industry, because it clearly revealed the revenue sources which prevailed in 2008 and 2009.

It showed 53 per cent of advisers were being paid by way of ongoing commissions, with 28 per cent being paid by way of up-front commissions and 6 per cent being the beneficiaries of volume rebates.

ASIC concluded the top three revenue streams for licensees were linked to volume sales paid by fund mangers or product providers.

ASIC said while the proposed FOFA changes might radically change the remuneration models, it expected “all licensees to carefully manage the conflicts caused by such remuneration structures”.

It added, “We note that disclosing conflicts of interest may not be sufficient and that licensees should also consider how they actively avoid conflicts of interest”.

The ASIC analysis makes much of the regulator’s view that financial planning dealer groups represent gatekeepers for the industry and suggests this extends to recruitment of new advisers.

“Given the problems that a poor adviser can bring to a licensee, it is important that they are effectively screened and their background checked,” the analysis said. 

However, while noting some inconsistency in the manner in which the top licensees undertook reference checking of new advisers, the ASIC analysis said nearly all the top 20 licensees conducted police checks.

ASIC suggested there needed to be a uniform approach adopted across the industry, and said it was “seeking to do this through our current review of the ‘Bad Apples’ project, which was originally carried out in 2007”.