The rapid shift in financial advice from being dominated by the larger institutions to being flush with smaller and mid-size licensees has drastically reduced the amount of capital backing in the industry and placed undue risk at the feet of consumers, according to the head of researcher CoreData.

Andrew Inwood says the retreat of ‘tier one’ licensees like the big four banks and AMP has left a massive hole in industry’s funding and its ability to meet compliance benchmarks, while the lower tiers aren’t being monitored closely enough by the corporate regulator.

“For almost half the industry there is almost no capital keel, the risk sits with the consumer,” Inwood says. “Smaller businesses can’t afford the compliance costs or have that capital buffer if something goes wrong.”

Recent data from the Professional Planner 2020 Licensee Owners List shows the percentage of advisers licensed by the traditional ‘big five’ (CBA, ANZ, Westpac, NAB and AMP) shrinking from around 40 per cent to 15 per cent over the last five years.

Inwood says the advice industry is “completely fractured” now, and is more aptly described as being separated into four industries.

“You’ve got a handful of tier one licensees that have over 500 advisers each, there’s 6928 in that cohort in total. Then you have tier two with between 100 and 499 advisers that have a total of 6023,” he explains. “Next is tier three, which is 10 to 99 reps and has 5600 advisers, and lastly you have the tier four with only 1 to 9 advisers and that entails about 2500 businesses.”

Inwood will speak at the Professional Planner Digital Licensee Summit on Tuesday.

The researcher founder believes the tier one group, which now includes AMP, IOOF, NAB, the NTAA, Easton Investments and Synchron, get all the regulator’s attention. The others on the list are under far less scrutiny, which is dangerous considering the disparity in resources.

“Everybody else is effectively operating in an unobserved environment because the regulator doesn’t have the capacity,” he says. “It’s far from a flat playing field.”

Professional indemnity insurance can’t necessarily be relied upon as a safety net for consumers when things go wrong, according to Inwood. Like any insurance, there is a risk that claims won’t be paid out.

A low capital bar

As it stands, the financial requirements of AFSL holders set out in ASIC’s Regulatory Guide 166 sets a relatively friendly benchmark.

Essentially, entities must have enough money to provide the service and meet cash flow needs, have adequate risk management systems, be solvent and have assets that exceed liabilities.