Will regulatory changes destroy the adviser industry?
Will regulatory changes destroy the adviser industry?
02 DEC 2021
Are advisers a doomed breed and will we see a massive exodus of advisers before the end of the two-year transition period? We don’t think so and here’s why…
The doom merchants are reading the wrong tea leaves
Every week, we see ill-informed social media blogs warning that the adviser industry is going to be destroyed by the new regulatory environment, and we will end up with a mass exodus of advisers.
These claims seem to be based on fears that:
- The new financial advice provider (FAP) regime will kill the small adviser businesses with compliance costs.
- It will be too risky to give advice; and
- We only have to look to Australia to see what occurred there.
Much of this ill-informed commentary comes from those ‘long in the tooth’ who appear to be looking backwards and yearning for the halcyon days of years gone by.
The reality is the industry is undergoing a long-signalled transition and will emerge from all this regulatory change in a better shape than before. There will no doubt be some casualties along the way and lots of rationalisation of business structures, but we will end up with a younger, more technology literate and professionally trained industry than before we started the transition.
Refuting the fears
Compliance costs will not kill the small adviser business. A one or two adviser business can become fully compliant and obtain a full FAP licence for well under $10,000 (including GST). The same business can meet all its annual compliance obligations and obtain an annual independent compliance assurance review for under $5000 pa. These costs may not have been there before licensing but consider the positive impact upon the business value by having documented systems and processes.
New Zealand is not Australia, and our regulatory environment is very different so using Australian statistics as a rationale for what will happen here is just plain wrong. Thousands of advisers have left and will continue to leave the Australian financial adviser industry because of:
- The sweeping changes resulting from the Australian Royal Commission. We have had nothing like this in New Zealand.
- The Financial Adviser Standards and Ethics Authority (FASEA) requirements where advisers (many of them approaching retirement) are required to sit complex memory retention type exams and/or obtain a degree. Our education standard is only a Level 5 qualification and there is no memory type exam involved. Anyone who puts in a modicum of effort and has a good grasp of English will be able to pass the New Zealand qualification.
A great future ahead
New Zealanders are a resilient bunch and when people see they are in a growth industry like financial services, they are more likely to ‘hang in there’ to reap the long-term rewards. There are not many industries in New Zealand where someone with only a Level 5 qualification and a willingness to work hard can be earning over $100,000 pa by the time they are only 30.
We have many advisers 60 plus and some of those will be retiring in coming years. We also have many advisers dealing with personal risk, general insurance, mortgage and KiwiSaver scheme products where their books of business are too large to prove ‘suitability’ of advice. A smart university graduate can see this and realise that entering the industry now and joining the right FAP, can set them up for riches in the future.
Mass promotion of financial literacy is not doing away with financial advisers. In fact, it is the exact opposite. A recent ASB survey showed that more New Zealanders are engaging with or want to engage with financial advisers than ever before. The message is getting out there – “See a financial adviser and sort your financial future”.
Will the approach of 15 March 2023 see a mass exodus of advisers?
We are likely to see an increase in adviser exits in the lead up to 15 March 2023, but we don’t foresee a mass exodus. Furthermore, we think that many of those who exit will do so for reasons other than regulatory changes, for example:
- Many advisers who are close to retiring age have decided to temporarily remain in the industry whilst markets are thriving, and clients are keen to invest money or take out mortgages etc. The cost of doing business during the transition period is not high especially for those who are not planning to remain. Effectively, the transition period is an opportunity to make lots of money then sell one’s book of business and retire or do something else.
- Over 60% of the adviser industry is in the region from Taupo north and the sustained Covid-19 lockdown has impacted upon many. Those who did not have large recurring revenue streams are finding it tough at present, so it gets them thinking about exiting a bit earlier or else going to work for someone else.
- There is a fear from some of study to get their Level 5 qualification, but this is largely an unfounded fear. It is only Level 5 and if the adviser moved to another industry, then the entry criteria is likely to be higher.
Our guess is the number who leave in the six months leading up to 15 March 2023 will simply be an accumulation over 2-3 years of fewer advisers exiting during this time plus a small additional number due to regulation (probably no more than 10%).
We believe there will not be a tsunami of adviser exits because:
- This is not Australia where the compliance and education costs are making it difficult for single adviser practices to survive.
- Our regulatory environment is relatively low cost.
- The licensing system caters for businesses of varying size. A single adviser business can operate in the new regime with compliance costs of under $5000 pa. This is affordable for most viable businesses.
- Advisers are adaptable and will adjust to new situations.
- The new regulatory regime is very flexible, and an adviser can earn more than in the old regime if they rejig their advice process and service proposition, and carefully embrace the right technology.
- This is still a fantastic industry where above-average income can be made with minimal capital outlay and very low barriers to entry.
Advisers who will leave will be the older ones who were going to retire anyway, or those advisers with sub-scale businesses.
Our conclusion is there will be a degree of structural change and those who take a positive approach to becoming true professionals will continue to thrive. Technology will replace some of those who depart – but we will see an influx of educated younger advisers to replace those who depart.
If you want to embrace the future and make the most of the opportunities it presents then our team can help you. Get in touch with us today for a no-obligation conversation about how we can help.