The impending financial advice law reforms will likely accentuate the divide between boutique firms and the big end of town, according to a new report, with smaller businesses set to face some tough decisions.
While many details of the Financial Services Legislation Amendment Bill (FSLAB) and the associated adviser code rewrite remain moot, the December 2017 quarter Chatswood Consulting ‘Competitor and market activity report’ says compliance costs of the new regime (expected to take effect by 2019) would fall disproportionately on smaller, independently-owned operations.
“In spite of the [Financial Markets Authority] FMA and [Ministry of Business, Innovation and Employment] MBIE combining to state at every possible opportunity that licensing will not necessarily favour the ‘big end of town’, even they cannot escape the larger economic forces that are in play,” the Chatswood report says.
The quarterly Chatswood report focuses on the insurance sector but company founder, and lead author, Russell Hutchinson, said the principles apply across the NZ financial advisory sector.
According to the report, compliance costs under FSLAB would come “in many forms” with two in particular – education and systems – set to be heavily influenced by the work of the Code Working Group (CWG), currently nutting out the details of adviser standards.
“A capital-intensive business leveraging an existing asset (think of a highly automated sales process deployed in a bank) has economies of scale – and they will enjoy more of them as minimum standards are raised,” Chatswood says. “A low tech/high touch personal financial coaching business operated by a sole professional may find that minimum standards add cost and little else to their business, and some will logically seek to obtain some of the benefits of scale through memberships of groups.”
Based on CWG communications to date, the Chatswood paper says advisers operating in bespoke businesses would face greater educational hurdles compared to those ensconced in systemised institutions.
“It is economically illogical to argue against this division, we might as well legislate that all cars must be hand-made, but the consequence will inevitably favour larger, more automated, advice businesses,” the report says.
However, Chatswood says to survive the FSLAB onslaught boutique advice firms would have to focus on their competitive advantages – namely, product choice, personalised service and local knowledge.
“More than ever they must become the big brand in a small territory – redefining their market to win locally, whatever ‘local’ means in a world where ‘territory’ can be in a global segment, that exist entirely online,” the report says.
The in-production adviser legislation – due to reach Select Committee stage this June – would inevitably push the advice business away from its cottage industry origins, the Chatswood paper says.
“At a strategic level, we are witnessing the transition point in financial advice where it becomes clear that the business is capital intensive, and the more capital you use, the less labour is required.”