Bowen reforms death knell for mid-tier groups?
Dealer groups owned by product providers could prosper while mid to large-scale independent planning groups struggle to survive under financial advice industry reforms announced by the Rudd Government this week.
Stewart Chandler runs a consulting business called AFSL Compliance, having formerly been head of compliance for Securitor and St George Bank Financial Planning. He said the reforms announced by the Government represented a "free kick to the large product providers with product-owned dealer groups", such as Westpac/BT, Colonial First State, MLC, AMP and AXA, but presented a challenge for mid to large-scale independently owned planning groups.
Most dealer groups with any significant scale have high costs and varying levels of planner productivity. Dealer groups owned by product providers have the advantage of being able to be run as loss leaders for the greater good of the parent company, while independently owned groups do not have that luxury. Volume rebates from product providers have underpinned the revenue of many mid to large-scale independent groups, and provided much of the incentive for advisers to sit together under the one banner.
Dealer groups would need to replace volume rebate revenue either with new white label arrangements with product providers, higher licensee fees charged to financial advisers or through cutting costs and therefore services, Chandler said.
"Whichever way they turn they become less competitive compared to the product-owned dealer groups, which don't rely on [volume rebates] for their existence."
This was a "great opportunity" for product-owned dealer groups to increase their market share.
Meanwhile, product providers have been given the opportunity to become price competitive against their industry fund and self-managed super fund competitors.
"They will have to cut out trail commissions, which are about 25 per cent out of their product fees, and basically they have given nothing up - the cost is being borne by financial advisers," Chandler said.
"They [product providers] also don't look like the bad guys as it is government imposed."
He said product providers would also be "happy to compete" on factors other than volume rebates; factors that have less of an impact on their bottom line.
"These are massive competitive advantages all gained at little cost by the banks, AMP and AXA," Chandler said.
But both institutionally owned and independent dealer groups would need to reconsider their value propositions in light of the proposed reform. Chandler said in a world without commissions and volume rebates, financial advisers might "question the benefits of being aligned to any dealer group at all".
He expected financial advice practices to "gradually leak away from the dealer groups and set up their own licences".
"The cost is not prohibitive, the fear of [Financial Services Reform] has subsided, there is greater freedom over product selection and practices can market themselves as independent."
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