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Financial Advice A Loss-making Business: KPMG

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12 October, 2021 by Aleks Vickovich, Financial Review

Article link: https://www.afr.com/companies/financial-services/financial-advice-a-loss-making-business-kpmg-20211011-p58yyb

Modelling by professional services giant KPMG has found the average cost to provide financial advice exceeds the price paid for that advice by 30 per cent, reigniting calls for red tape to be stripped from the troubled sector.

Research conducted by KPMG and commissioned by the Financial Services Council, seen by The Australian Financial Review, found the average cost of providing comprehensive financial planning advice is $5335 a client, vastly exceeding the average cost charged to consumers of $3660.

Regulatory compliance and pushed up the cost of providing financial advice, says KPMG partner Cecilia Storniolo.

“This research shows that advisers are not currently covering 100 per cent of their cost of production,” the KPMG report concluded. “The cost of advice charged to consumers is lower than the cost to produce the advice.”

KPMG’s analysis is based on a survey of and interviews with 11 financial services licensees, including two large corporates with more than 300 advisers under their control, eight medium-sized firms and one small boutique with fewer than five advisers. It tested the results against KPMG’s panel of financial advice industry experts.

Cecilia Storniolo, a partner in KPMG’s superannuation advisory practice and a former FSC staffer, told the Financial Review the escalating cost of doing business was a symptom of “the cost of complying with all regulatory and professional requirements”.

FSC white paper
The findings provide evidence that the rising prices attached to professional financial advice – an increase of 16 per cent was recorded by researcher Adviser Ratings over 2020 alone – have been pushed up by the escalating cost of doing business, rather than profit-taking by advice providers. It follows the Financial Review’s revelation that many of Australia’s 50 largest advice licensees made multimillion-dollar losses last year.

To reduce the cost to serve, the FSC has proposed several major amendments to the laws governing financial advice in a new white paper due for release on Tuesday.

Reiterating the proposals outlined in a green paper in April, the FSC proposes that “statements of advice” legally required to be provided to clients should be scrapped and replaced with less onerous letters, and the “safe harbours” in the Future of Financial Advice (FoFA) laws should be removed.

A previous proposal to break the legal category of “personal advice” down into “complex” and “simple” variations was abandoned following consultation with the financial services industry. Instead, the white paper argues that all advice should be personal advice – in which personal circumstances must be considered – or else deemed “general information”, where no product recommendation can be made.

Costs, time slashed
KPMG’s analysis suggested that if all three recommendations were implemented, the average cost of providing advice would fall from $5335 to $3466. It would also save financial advisers up to 32 per cent of their time and allow them to take on an additional 44 clients.

An adviser can issue 2.2 letters of advice for every 1.5 statements of advice, the research suggested, creating a cost-efficiency. The time required to complete the seven-step advice process of identifying client needs and meeting with them through to implementing and reviewing the advice would fall from 23.9 hours to 16.8 hours a client.

FSC chief executive Sally Loane said the modelling suggested the industry could save $91 billion over the next 20 years if the red tape reduction measures were adopted.

“Current regulations prescribe compliance obligations at every step of the advice process,” Ms Loane said. “They are an unprecedented driver of cost for financial advisers and consumers, and are past their use-by date.

“It is time the government modernised the current complex and costly
regulatory framework to recognise and respect the professional judgment of advisers.”

The push for deregulation comes as Joe Longo, new chairman of the Australian Securities and Investments Commission, has listed reducing the cost of financial advice as a key priority of his tenure.

 


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