7 December 2020
Charge of the lite (advice) brigade
Average Australians have been the cannon-fodder of advice regulations, pricing most of them out of the market, a new report suggests. Mint Asset Management Head of Sales and Marketing, David Boyle, argues NZ can avoid the Australian carnage by shoring up the defences for ‘light’ advice...
After a multi-decade all-out assault on the Australian financial planning industry, the regulator across the Tasman sounded a, limited, retreat in November.
In a consultation paper that admits the advice market could be in real trouble, the Australian Securities and Investments Commission (ASIC) is seeking ways to repair some of the damage.
“The financial advice industry has undergone considerable change in recent years,” the ASIC paper says. “Many large financial institutions have either sold or reduced their financial advice businesses. At the same time, a number of financial advisers have either left, or signalled their intention to leave, the industry.”
All told, the Australian financial planning market shrunk by almost 15 per cent over January 2019 to November this year, ASIC says, equating to an adviser exodus of some 3,500 – or just under twice the size of the entire authorised financial adviser (AFA) population in NZ.
But ASIC is less concerned about the structural sagging of the financial planning business per se and more interested in the rising cost of advice that has priced most Australians out of the market.
“... we are undertaking a project looking at the issues or impediments industry participants face in meeting consumers’ unmet advice needs,” the Australian regulator says. “We are keen to help industry participants to provide good-quality, affordable personal advice to consumers that meets consumers’ needs.”
In brief, ASIC plans to revisit the rules that have made the provision of one-off or ‘limited’ financial advice all-but impossible in the reg-heavy Australian environment. As per current rules, Australian financial planners are obliged to treat all clients under full-blown advice provisions including extensive fact-finds and lengthy statements-of-advice.
Despite significant differences between the two jurisdictions, the Australian failure to allow cost-effective limited advice – or advice-lite – serves as an important lesson for NZ as we are about to charge into our own new regulatory landscape.
Come next March 15 the NZ advisory industry switches over to the Financial Services Legislation Amendment Act (FSLAA) regime, bringing with it an arsenal of new compliance duties to about 2,000 businesses of various sizes.
Arguably, the impending FSLAA rules have already triggered some consolidation in the financial advice space including the sale of Westpac’s financial advice business to Forsyth Barr and large-scale mergers across the insurance/mortgage/KiwiSaver advice ‘aggregator’ groups, namely: the Newpark/Share marriage; and, NZSFG’s purchase of Kepa.
Anecdotal evidence suggests many experienced AFAs plan to exit the industry ahead of the FSLAA changes.
If the NZ industry is already showing signs of an Australian-like regulatory backlash, does this likewise signal Kiwis won’t have access to ‘affordable’ financial advice?
Thankfully, FSLAA does include more provisions to limit the scope of advice, and subsequent compliance expense, upfront, especially compared to the rigid Australian legislation.
But there’s still a risk that the majority of New Zealanders, who simply want one-off or sporadic financial advice, won’t be well-served under FSLAA. Kiwis generally seek advice around key life events such as buying a first house, starting their first job, getting married, changing employment, starting a business or retirement.
In these circumstances, the ‘limited’ or ‘light’ advice concept has a powerful role to play in helping New Zealanders into an appropriate asset allocation, KiwiSaver fund (or other investments) as well as providing adequate insurance protection. Light advice could prove to be the most effective weapon in the battle to improve the long-term financial outcomes of Kiwis and the country as a whole by reducing future fiscal pressure.
However, for the light advice movement to advance we need both clear direction from government and regulators as well as innovative thinking from providers to serve the mass-market.
The recent ASIC report has shown that ‘affordable’ financial advice suffered serious, perhaps fatal, injuries in Australia under a barrage of regulations. Possibly, the regulator’s tentative truce could allow low-cost financial advice to recover.
Regardless, NZ has the opportunity to learn from the experience we have seen across the Tasman. Before we rush in all guns blazing to regulate advice, there’s still time to ensure that innocent bystanders – the vast bulk of New Zealanders looking for simple financial guidance – don’t get caught in the cross-fire.
In its recent consultation paper on KiwiSaver fees and value for money, the Financial Markets Authority (FMA) is seeking feedback from the industry on a number of areas including a strong focus on all fees not being unreasonable and the cost of advice. While the focus is on KiwiSaver today, the outcomes will cascade to all participants in the industry over time.
I believe the draft guidance still needs more detail around what value for money actually means. A useful place to start might be looking at what the UK Financial Conduct Authority (FCA) has implemented.
The FCA has recently introduced seven factors to ensure all asset managers are acting in the best interests of investors, and as a result, delivering value.
There are six elements of the FCA model that could prove useful in the NZ context, namely:
- Range and Quality of Service, Performance Net of Charges;
- Cost of Providing Services;
- Comparable Rates for Other Products;
- Comparable Market Rates; and
- Economies of Scale
Perhaps a deeper conversation between the industry, regulators and other interested parties framed around these points could improve the measurement of value, not only for products, but also gaining greater access to quality of advice.
We know most New Zealanders don’t really understand the value of advice.
Of course, there needs to be transparency around how advice is paid for, either directly or indirectly. But at the same time, the regulator – as an independent voice – could help immensely by promoting the value of advice and explaining to Kiwis why it’s worth paying for.
I implore providers and the industry as a whole to submit their thoughts on the FMA ‘Proposed guidance on KiwiSaver fees and value for money’ before the regulator issues their final orders: submissions close on December 14.
Disclaimer: David Boyle is Head of Sales and Marketing for Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement below.