The average Australian advice practice spends 56.5 per cent of the cost of advice on administration and compliance costs, with the rest spent on engaging with the client and delivering the advice.
According to Data Storm: Exposing the real data challenges in Australian wealth management report, conducted by Marshan Consulting and CFS-owned fintech platform Elemnta, there are severe operational inefficiencies impacting practice profitability and efficiency.
Marshan Consulting director Ben Marshan tells Professional Planner the increase in advice costs being spent more on administration is due to “more independence of advice”.
“I think a lot of it comes down to this movement of, let’s call it the more independence of advice and this move away from larger licensees, where [the licensees] probably had more control over the products that [advisers] were using to implement the systems and processes that went along with that,” Marshan says.
Due to more licensee control, there was likely a more streamlined administration process. As more practices have become self-licensed, they have more flexibility and control around the products they choose.
“Each different product has a different administration process, a different application process, a different reporting process, a different revenue collection methodology, and all of that stacks up to create a much bigger administration problem for the practice,” Marshan says.
The research highlights that advisers spend such a significant amount of time and money on implementation and administration of advice which has further profound implications for client service.
These include reduced capacity, preventing advisers from taking on more clients and providing comprehensive service to existing clients.
Other implications are increased costs for practices as well as a dip in quality as advisers could potentially provide a lower quality of advice due to time constraints.
The inefficiencies also threaten the accessibility and affordability of financial advice while the demand for advice only increases. The report notes the average annual fee for advice is approximately $4250, up from $2510 in 2018.
The research referred to the problem of “system fragmentation”, when advice businesses stack up technological platforms to make their advice process more efficient and it does the opposite.
The procurement of unintegrated and ineffective technology has created a messy data system with operational inefficiencies for many advice firms.
“Everybody’s looking for the next piece of technology that they can tack on to make their advice process better, more efficient, more engaging, rather than sitting down and seeing whether or not the solution’s there,” Marshan says.
“They’ll just tack on a new piece of technology that they read about and hope that that makes it better, but it probably ultimately just exacerbates the problem.”
Furthermore, the fragmented nature of data systems poses significant cyber security risks as personal and sensitive information is being moved around.
When data is moved around manually in a less secure way to improve efficiency, the cyber risks are greater as there is more room for mistakes.
Additionally, when client data is saved on multiple tech platforms, consistency and accurate becomes much more difficult.
The report even notes “old-school” methods still being used like handwritten fact finds and file notes, often done poorly, which require further data entry.
While there is no quick fix, the research suggests there is a need for greater standardisation and collaboration across the industry.
Despite this, industry action to introduce greater integration and standardisation is more theoretical than realistic.
“The simplest solution, or the most obvious solution, seems to be some sort of data lake, or data transformation integration layer that [means] it doesn’t matter how the technology wants to set their own data stack up,” Marshan says.
“What I hope this paper does is highlights the problems that practices are actually having in reality by all this amazing technology that keeps getting thrown at them and how it’s actually, to a certain extent, making life more difficult for them.”
The problem is the government.