Where you find the laws most numerous, there you will find also the greatest injustice, said the ancient Greek philosopher, Arcesilaus.
If we were to publish a list of all legislation pertaining to the financial services industry currently being introduced or reviewed, it would probably take up the total space allotted to this article.
Noble as these intentions may be, it could have disastrous outcomes if not handled with the required care.
In many instances, the approach appears to be: if it is not working, write more legislation. Plugging the holes in the dam(n) wall becomes a never ending exercise, until we get to the stage where we have to build a new one, at enormous cost to all.
From the adviser’s perspective, changes entail a constant review of current practices and documentation. The time consumed on this, alone, eats into production time, which impacts negatively on income.
A financial advisor is not a closet legal beagle. He or she is a financial services professional who is now expected to also be a legal expert.
Very few professional financial advisory practices are able to cope with this, and are forced to spend more money on external resources to ensure that they keep operating legally within a constantly changing regulatory environment.
An empirical study to determine the escalation in the cost of running a financial advisory practice since the introduction of FAIS in 2004 is very likely to reveal shocking figures.
Another aspect, often ignored, concerns the impact of reduced nett income. As with any other business, when times get tight, redundancies follow.
This was pointed out during a recent survey in Australia, where advisers in the risk space face a mini-RDR.
An article in RiskAdviser states:
The survey, completed by 308 risk advice business owners, found 178 small businesses would be forced to close their business either completely or partially if a level commission structure and initial advice payment of $1,200 were to be introduced.
With the complete or partial closure of these businesses, a total of 771 advisers and staff members would be made redundant, the survey claimed.
Another consideration offered by advisers in the survey is to scale down on offering clients life assurance. This obviously also affects disability cover, and adds to the existing huge gap.
The RDR proposals do not envisage capping of the advice fee, as the Australians are suggesting, although guidelines will be provided.
Two of the stated desired outcomes of the Retail Distribution Review are to:
- Support the delivery of suitable products and provide fair access to suitable advice for financial customers
- Support sustainable business models for financial advice that enable adviser businesses to viably deliver fair customer outcomes over the long term.
Unless changes are handled with great circumspection, and with full awareness of the practical impact of such changes, neither of the above will be achieved.
Clients, who are supposed to be the beneficiaries of such actions, will, in reality, be the losers in the not so distant future.