Big doesn't always mean better

The recently announced mega-mergers in our industry have made me wonder is bigger better, and if so for whom? ASIC believes bigger makes their job easier. They are raising the barriers to entry for fund managers, operators of administration services (master trusts and wrap accounts) and dealers.

The recently announced mega-mergers in our industry have made me wonder is bigger better, and if so for whom? ASIC believes bigger makes their job easier. They are raising the barriers to entry for fund managers, operators of administration services (master trusts and wrap accounts) and dealers.

Unlike the USA and UK, distribution in Australia has been independent (sorry ASIC). As I have said in earlier articles, even the channels owned by institutions have been relatively independent. This has meant that the industry has accepted the “not all eggs in the one basket” tenet and nearly all advisers have been free to select product from a range of fund managers. Until recently, this has not been the case overseas.

Has this tenet been sufficiently embedded in our psyche so that it is now immutable? Or will the banks, with their rapidly increasing distribution dominance, try to impose their own product through their many distribution channels? Last year’s Money Management Top 100 Dealer Group survey showed that banks controlled 17 per cent of distribution — by number of advisers. After the CBA/Colonial and NAB/MLC mergers it will be 28 per cent. And if one of the banks snares AMP, it will be 41 per cent.

If they try to impose their own products on their new advisers, I believe they will fail for at least two reasons. Firstly, they would be bucking a worldwide trend. Choice and spread of risk are what consumers want. Even US giants Fidelity and Merrill Lynch have bowed to consumer pressure to offer other mangers’ products through their wraps and managed account services. Secondly, if forced to recommend the owner’s products, many of their better advisers would walk.

The banks are more likely to continue to segment their market and match distribution channels to market segments. At the lower end, the adviser and consumer will get no choice - all bank-owned product. At the upper end, the adviser and the consumer will get unlimited choice — and probably no bank owned product.

However, it will be interesting to see if they continue to use the multi-branding of the different distribution channels that both MLC and Colonial have done. I think that a number of advisers will walk if the banks decide to adopt a single brand. What CBA and NAB do in relation to the above points will affect the quality and quantity of those who will walk. In any event, a number of advisers will walk anyway.

This to me is all part of the ebb and flow of this industry. These mega-mergers will create many opportunities, many of which will be exploited by the new comers to the industry. There will be more diversity in distribution, in method, in delivery and the type of service provided. Both advisers and consumers will win out of this. Unless, that is, the one player in our industry that is trying to straightjacket diversity and choice succeeds.

ASIC is encouraging big. They want fewer bigger dealers. I believe they call it “regulatory economy”. Fewer larger dealers, who are totally responsible for their advisers, is more convenient for ASIC. But is it better for the consumer? ASIC would argue yes, because a bigger dealer has substance and will be more committed as they have more to loose. This argument does have some validity given recent events concerning some wayward advisers.

In the Money section of the Sydney Morning Herald on 12 April, Anne Lampe wrote an article sub-headed “System fails the ill-advised”. She was referring to failed commodity group EC Consolidated Capital and former adviser Hans Feldon. Lampe wrote this case: “..highlights the difficulty investors have trying to recover lost money if they are advised by a one-man band who says ‘so sue me’”. Feldon has declared himself bankrupt and his PI insurer has refused the claim.

No wonder ASIC wants bigger dealers of substance. But they still issue dealers licences to one-person businesses. Why? And why, in the recently released Financial Services Reform Bill (the implementation of CLERP 6), are proper authorities being done away with for advisers who are employed by a dealer. However, advisers who are independent (sorry ASIC) contractors will still be required to have a proper authority. For the pedantic, I am continuing to use the pre-Financial Services Reform Bill (FSRB) language. The reason again is “regulatory economy”, as the banks did not want the administrative hassle of issuing proper authorities to their staff.

One wonders whether ASIC is more interested in “regulatory economy” than the consumer. This dictum suits no one but ASIC and the big. It is confusing and discriminatory. This even goes to ASIC’s issuing of the one licence, the Financial Services Licence, whether you are a manufacturer, a distributor, or just give advice. And, in future, those giving advice may or may not need a proper authority depending on whether they are employees or independent contractors.

No one argued longer and more strongly than I did for the one regulator. But

I never argued for one licence. In previous articles I argued against the two tiered licensing structure (dealer and proper authority) but never for a part one tiered (or is it a part two tiered) licensing structure. What might appear elegantly simple and efficient to ASIC will be very confusing to consumers. This is what happens when vested interests are pandered to — just look at the confusion surrounding the current changes to the tax system.

ASIC as far its responsibilities to the consumer are concerned should look at what it should be doing from the perspective of the consumer — bottom up not top down. ASIC should seriously consider either scrapping proper authorities altogether and leaving the surveillance of retail advice to the ACCC, or it should issue a specific authority to everyone who is giving retail advice — even incidental advice given by solicitors and accountants.

This would allow anyone, large or small, to give advice on the same basis, and be simple for the consumer to understand. This would allow for choice and diversity. However, what do we do with a Feldon-type situation? The current licensing regime doesn’t protect the consumer, neither does the licensing regime being proposed in FSRB.

To me, it is obvious that licensing can’t provide the answer. Licensing in many ways gives the consumer a false sense of security. Another solution has to be found to this issue — maybe a fidelity fund, maybe only allow big firms to give advice. But what guarantee is there that big firms will always do the right thing?

Big has a place in our industry, just as does small and medium. ASIC should not favour one over the other. Big provides stability, whereas small provides innovation. ASIC cannot protect consumers absolutely against themselves, the incompetent and the crooks. Big, when it is crooked, can cause a lot more havoc than small can. And we have had a few examples of this over the last ten years.

ASIC, rather than focussing on “regulatory economy” should be focussing on “regulatory relevance”, to provide a stable responsive marketplace that allows for choice, opportunity and innovation. Big is not always better.