Like justice, financial advice today doesn’t just have to be done; it has to be seen to be done.
In the post-Financial Services Reform (FSR) world, compliance has been accepted, reluctantly in many cases, as a fact of life for financial planners. The modern adviser has become very well acquainted with the niceties of form-filling and document production, as per regulatory requirements.
From time to time the industry has won small victories in the ongoing effort to reduce the paperwork, but the trend of compliance has been inexorably upwards.
Intuitively, it might seem obvious that the cost of compliance is also skyrocketing. However, according to a report released this March by the Australian Securities and Investments Commission (ASIC), not many of the 64 financial services firms it surveyed – including eight financial planning firms – put a definite figure on the total costs they incurred in the pursuit of compliance.
“Most respondents readily admitted to not knowing the cost of their organisations’ compliance activities,” the report says.
And A Report on the Cost of Financial Services 2007 concludes there were some sound reasons why most firms remain ignorant of exactly how much they are shelling out on compliance.
Firstly, ASIC notes compliance costs are often deliberately “embedded into the everyday activities of all staff” and hence difficult to track. Furthermore, the regulator says compliance costs vary considerably from year to year with most of those companies surveyed also seeing little value in knowing how much they spend keeping up to legal specifications.
“Monitoring compliance costs would in itself incur further cost,” the report also says.
Despite the lack of accurate knowledge about compliance costs, however, most of those firms in the ASIC survey (which was carried out by research firm Chart Link & Associates) were sure of one thing: compliance was becoming more expensive.
“The majority of respondents said that compliance costs were increasing year to year, with many quoting increased costs of between 15 and 20 per cent per year, although there was considerable variation around this estimate,” the survey found.
Disturbingly, ASIC says those firms were likely to have underestimated the total impact compliance was having on their businesses’ bottom lines (see break-out box).
For example, while some staff training costs were easily identified, most of the survey respondents did not include in their estimates the ensuing loss of productivity while their employees were absent.
In particular, the study identified a wide disparity in compliance cost awareness between the eight financial planning businesses in the survey.
“A few [financial planning firms] had detailed calculations (although they did not cover all costs), while others could provide only a broad estimate, or no estimate at all,” the report says.
One large financial advisory business, for instance, estimated its annual compliance costs were at least $7.4 million. That included $2.4 million spent on staffing the compliance department; $2.3 million on board and senior management time; $1.7 million for compliance audits; and, $700,000 for putting its 1400 advisers on five training courses each year.
The same firm admitted to, but could not quantify, compliance costs generated by IT, printing documents, communicating with advisers, and lost opportunities.
For the smaller advisory firms in the survey compliance cost estimates varied from about 1 to 10 per cent of operating expenses. In nominal terms, one small financial planning business priced annual compliance costs at $830,000 while another similar-sized firm put it at only $250,000.
ASIC’s preferred answer to the compliance cost confusion, however, is not to educate the market on how to better identify and value such expenses.
Instead, the regulator proposes spending more time letting financial services firms know that it “is aware that a need exists to reduce the cost of compliance, especially with respect to areas where organisations are incurring costs as a result of perceived inefficiencies associated with the implementation of aspects of various regulations”.
DIFFERENT APPROACHES TO SEEKING CLIENT FEEDBACK
• Staff costs (compliance staff; senior management and board, legal staff, customer-facing staff, other staff);
• Training (training programs, staff time in attending training, development, management and monitoring of
• Documentation (researching, writing, printing and dissemination of documents including SOAs and PDSs);
• IT(new hardware and software, upgrades, integration into existing systems);
• Outsourcing (legal, audit, compliance consulting);
• Procedures (development and implementation throughout the organisation);
• Monitoring and recording (dedicated compliance staff and input from many customer-facing staff);
• Opportunity cost (staff time, impedin