As advisers deal with client portfolios shaken by market shocks and massive disruption to the way they work, it should be a fait accompli that the COVID-19 crisis is by far the biggest challenge facing the industry in 2020.
Research from Investment Trends, however, paints a different picture, with compliance still rated the main business challenge for advisers.
According to an ongoing study by the researcher, 59 per cent of planners cited ‘Disruption from COVID-19’ as one of the main business challenges they are dealing with. This was second to the ‘compliance burden’, which was cited by 68 per cent of advisers.
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“The compliance burden has been one of the top things that advisers have been calling a challenge since the Future of Financial Advice reforms were announced,” explains Investment Trends Research Director Recep Peker. “It’s been continually top of mind for advisers over the years since 2014.”
The real issue with this data, Peker says, is what the compliance concern means for advisers.
“Fifty-five per cent of financial planners say the key challenge for them is providing affordable advice to those who need it,” he explains. “Advisers recognise that a lot of people need financial advice – late last year there were 2 million people looking for it – but there are cost and restrictions so they are not able to service the clients they want to.”
Investment Trends has been tracking how financial planners are adapting to the post-COVID-19 environment and will join forces with Professional Planner for an extensive study on advice business continuity and how the industry is coping with extraordinary levels of change.
Earlier this week ASIC took a step towards easing the compliance burden by allowing advisers to provide limited advice on early access to superannuation without statements of advice, as long as the client is charged less than $300.
While broadly welcomed by industry, the changes are problematic for advisers concerned about the viability of providing compliant advice for roughly an hour’s pay. According to Investment Trends providing scaled advice takes between three and four hours.
The costing issue is not a new one to advisers, Peker says, with the compliance burden making some parts of the advice delivery process less than profitable.
“Historically financial advisers only break even on the upfront fee and make their margin on the ongoing charges,” he says. “Last year, however, and for the first time since we started covering this, instead of breaking even planners lost an average of $500 on the upfront part.”
If the upfront cost of advice isn’t profitable, it’s reduced to being a loss leader for advice businesses that rely on the ongoing piece. As Peker notes, however, compliance pressure applies to both ends of the remuneration structure.
“Because the cost of providing the ongoing advice is going up as well the margin advisers make from that ongoing relationship is also compressed,” he says.
“For most financial planners client retention then becomes critical from a margin perspective,” Peker adds. “Every client you retain… that’s where the revenue comes into your pocket.”
Part of the reason the compliance burden is still rating higher than COVID-19 in terms of disruption is that advisers have seemingly latched onto technologies like Zoom to maintain their businesses.
While advicetech and regtech solutions have not done enough to ease the compliance burden so far, Peker says the industry has been successful in leveraging technology to adapt to the current crisis environment.
“The great thing for financial planners is that 60 per cent say they were prepared for the disruption from a technical and internal operations perspective,” he says. “Thirty-nine per cent of advisers said they were unprepared but they’re adapting, while only 1 per cent reported that it’s causing major disruptions. That reflects the technology that advisers have been putting in place to become more efficient.”
Three quarters of advice principals now say that every single member of staff can work from home, Peker says, and 97 per cent of advisers are still holding client meetings.
“At the end of March 83 per cent of advisers said they were conducting all meetings online,” he says. “From a client servicing perspective, many advisers are not allowing the virus to get in the way.”
Responses to this survey will be used as a basis for future articles and research in this publication.