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The Real Cost of Compliance

This article appears in the December/January 2013 edition of INVESTSA

Remember the spaghetti western “The Good, the Bad and the Ugly”?

In one scene, Eli Wallach, on horseback, leads Clint Eastwood, on foot, and without water, deep into the dessert. When Eastwood is totally exhausted, Wallach drops a spade next to him and says:

“In this world there are two kinds of people – those with loaded guns, and those who dig.

You dig”.

FAnews, Third Circle Asset Management and the Institute of Practice Management recently sponsored a survey on the cost of compliance. The responses suggested that there are also two kinds of advisors out there – those who are properly prepared to take on the challenges brought about by compliance, and those who are busy digging their own graves through apathy and ignorance.

In response to the question “Who does your compliance?”, a healthy 60% of the participants indicated that they make use of an external compliance officer. Possibly the strongest motivation for this is the choice to delegate this function to an expert, while the advisor focuses on his or her own expertise. Of greater concern, though, is the fact that 14% of the respondents had not seen their compliance officer in over a year.

A major hidden cost of compliance is the impact thereof on the production time of the business. In the survey, 29% of the respondents spend between 11% and 20% of their monthly time on compliance related activities, while 31% indicated using between 20% and 50% of their time on these matters.

The harsh reality is that one cannot delegate or abdicate responsibility for compliance. While the compliance officer monitors the status of compliance, and suggests remedies, the implementation thereof, rests with the key individual.

The survey result publishes the following interesting calculation:

If we assume that most advisers work, on average, a 48-hour week (192 hours per month) and 20% of this time is spent on compliance, it comes to 38 hours per month. If this is multiplied by an average of R250 per hour (this is far too low, in our opinion) an adviser can charge in that time, then the monthly cost of compliance-related activities per adviser is around R9 500-00 per month.

The survey indicates that compliance related activities increase, on average, by 10% per annum. If one considers future demands which will emanate from the level 2 regulatory exams, continuous professional development and treating customers fairly, to name but some of the intended interventions, the future looks bleak. At this rate, we are likely to set a new record for the most compliant bankrupts in the world.

Bad news for clients is that financial advisers will need to commence recouping their compliance expenses from the client. After all, FAIS is there to protect clients and they will need to pay for the financial services rendered to them in this regard.

This, in turn, will lead to the service only being available to the very rich, which is the exact opposite outcome of one of the main drivers for regulation – exclusion of the poor from quality advice.

There is an urgent need for the industry and the authorities to have frank and open discussions about the practical implications of regulation of the industry. While it is easy to emulate what happens in Europe and Australia, the demographic and historic realities in South Africa prohibits a copy and paste approach.

Proceeding at the present pace will merely lead to the earlier demise of an industry that is crucial to turning around the dwindling real savings rate of the country.

It is time for those with the loaded guns to reconsider their options.

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