The movement of Australian advisers has come under ASIC’s microscope. Why? And what are the implications?
As the adviser recruitment battle among financial advice dealer groups continues, ASIC has urged licensees to review and improve their recruitment practices. The warning was triggered in part by the migration of advisers caused by the closure of several dealer groups. The corporate regulator’s concerns are based in wanting licensees recruiting advisers to take extra care to ensure that representatives are properly trained and monitored, as they may have come from an environment in which there was a culture of poor compliance or poor quality advice. However, ASIC’s concerns have potentially broader significance given the major restructuring currently taking place in the financial advice industry. As the FOFA reform bears down on the industry, bringing with it increased administrative compliance costs, and many smaller dealer groups struggle to survive ramifications, the market for advisers is increasingly fluid. In addition, a number of dealer groups have been public in their intentions to grow adviser numbers in order to increase market share. This begs the question: how will market and industry dynamics be affected if ASIC were to clamp down on the movement of advisers between licensees?
ASIC’s remarks in relation to adviser recruitment have a strong policy foundation. Licensees are required to have adequate compliance arrangements, including in relation to the manner in which their representatives are monitored and trained. Breakdowns in these arrangements can cause both losses to clients and long-term reputational damage to the dealer groups with which they are associated. In an industry where reputations are a long time in being earned, it can take only a few bad apples for trust and confidence in brands to be quickly damaged. For this reason, ASIC has emphasised the need for licensees to ensure that migrating representatives are effectively screened and background checked. In addition, ASIC has urged licensees to ensure that adequate monitoring is in place and that appropriate resourcing is implemented, particularly for advice businesses which are in the phase of rapid growth.
In a sense it is no surprise that ASIC’s sights should be so well trained on the adviser recruitment issue since the catalyst for so much movement has been the regulator’s own enforcement action. In recent months ASIC has moved against a number of mid-tier dealer groups, including AAA Financial Intelligence and AAA Shares, Morrison Carr Financial Services and Australian Financial Services (AFS) Group. Large dealer groups have responded by offering homes to many of the orphaned advisers, providing continuity of service to their clients but at the same time boosting the dealer groups’ numbers and footprint. On one view this is a win-win. However, ASIC’s concerns are that the pace at which these transitions have occurred may risk being at the cost of recruitment standards.
On one view, the industry should listen carefully to ASIC’s concerns. FOFA has strengthened the regulator’s licensing and banning powers in relation to all licensees, giving ASIC powers to refuse to issue, or cancel or suspend a licence where the licensee is likely to contravene their obligations instead of needing to establish that they will contravene or have contravened their obligations. In addition, ASIC can ban individuals if they are likely to contravene a financial services law, if they are not of good fame and character, or not adequately trained or competent to provided financial services.
However, certain licensees have been quick to respond to ASIC’s concerns. A large dealer group which is responsible for taking on orphaned advisers from AFS Group has been vocal in defence of its recruitment process, pointing to an exhaustive process of due diligence before hiring new planners. The challenges for dealer groups recruiting advisers may well lie beyond issues which thorough background checks and client file audits can uncover. Even the most successful adviser who meets all the individual compliance and training requirements can be subject to external issues which surface down the track. These may include succession issues with the broader advice practice and business owners.
dinner gala Disputes as to rights of ownership of client books can emerge after advisers have transitioned to the new licensee, which places pressure on the practice and its potential profitability.
Where then do the interests of the clients feature in all this? ASIC would appear to have their interests at heart in encouraging dealer groups recruiting advisers to ensure that representatives are able to discharge their obligations in delivering appropriate advice and act in their clients’ best interests. The dealer groups would also point to rigorous screening and their own compliance processes as support for the interests of the client.
However, in signalling adviser recruitment as an area of concern, is there a risk that ASIC may create an unnecessarily defensive approach to recruitment? Orphaned advisers caught in the wake of the cancellation of their dealer group’s licence may well ask themselves how they can realistically provide continuity of service for their clients without being appointed as a representative by another firm. For the clients themselves, this represents a potential vacuum of support, where investment decisions may be delayed and losses incurred. In a worst case scenario, a gap in advisory support could lead to significant losses. All this may highlight is that there are two sides to the recruitment coin and that the swift transition of representatives in the wake of dealer group collapses should not necessarily be read as a proxy for other licensees looking to make a grab for adviser numbers.
As the music continues to play in the financial advice space, so the game of musical chairs will continue. The combined forces of dealer group expansion strategies, regulatory change and ad hoc business collapses continues to generate movement among advisers. That this movement may continue to be fluid should not necessarily be a concern from a regulatory perspective and is arguably important from a competition and consumer service perspective. However, dealer groups will need to maintain robust processes and listen to the corporate regulator’s concerns to ensure that they do not fall foul of the great adviser migration.