The Cost of Regulation

With regulation of investment advice drawing close, industry participants are now getting a better handle of the costs of compliance.  Unfortunately the educational requirements have yet to be finalised.  These appear to change depending on how much political lobbying goes on.

The non institutional aligned advisers are concerned that banks in particular will have significantly lower compliance costs per adviser than for example an independent adviser working in small professional practice.  The argument that the bank provides a stronger financial framework and provides stronger support for its advisers has little credibility.  The sorry saga of ANZ/National Bank advisers loading up their clients in the non performing ING DYF and RIF funds is testimony of how poorly the investment advisers were supervised, and shows that the investment screening process used by senior management was severely lacking.  One other major bank used the same investments in its client’s portfolios, but limited exposure to 12%.  Strangely they received little flack and if they paid out any compensation to their clients the veil of secrecy regarding any settlements was kept extremely tight.

What sort of costs and the levels of cost are expected to be faced by advisers? The Ministry for Economic Development has released a discussion paper on the fees that would be payable under regulation.  The proposed fees will depend upon the way in which an adviser has arranged their adviser firm.   For IFA members with their own adviser firms, many people use a limited liability company with the adviser and spouse as the shareholders, and the adviser as company director.   The company will need to be registered as a “financial service provider” as will the adviser.   The proposed approach requires the owners and directors of financial service providers to have checks of their criminal records as part of the registration process.   This will mean that both the adviser and their spouse (if a shareholder or director) will both have their criminal record checked.

So, for a typical one-adviser practice where the adviser intends to become authorised, the likely initial fees (GST inclusive) may be: Financial Service Provider registration of company  ($350), Criminal history check of shareholder of company  ($35),Criminal history check of adviser/director of company  ($30), Consumer Dispute Resolution contribution ($30), Initial application fee  ($750), Base minimum annual supervision fee ($250).  For a small practice the total initial fees to Government agencies is estimated to amount to $1,795.  The second year cost is estimated at $470.

On the other hand, Qualifying Financial Entities such as banks, their initial cost is expected to be only $4,630 with an ongoing annual charge of $1,140.  In other words three small financial advisory businesses combined would pay more than what a large organisation such as a bank would with largely unqualified investment advisers.

While we welcome regulation of the industry and have been pressing for it since 1995, investors need to be aware that it will not automatically ensure that all advisers are qualified and will be working in the best interests of their clients.  A large proportion of advisers will be working within organisations that are Qualifying Financial Entities.  They will only be able to utilise products sourced or administrated by their employer.  As a consequence the investment choices that they could offer in comparison to an independent adviser, may not necessarily be the best ones available to meet the needs of the investor.