Are you Overstating Insurance Literacy?
Crash Testing New Zealand Banks

Multi-disciplinary Advice Firms

One of the possible outcomes of the proposed changes to the Financial Advisers Act is an increase in average business size. In an article by Jenée Tibshraeny at quotes Richard Klipin contemplating the rise of multi-disciplinary advice businesses. 

The proposed changes make this more likely through a number of mechanisms. While a lot of attention is focused on the licensing of the Financial Advice Business, "...licensing would be required at the firm level (for the avoidance of doubt, a sole-trader is considered a firm) " - p.62 this is not the main issue. If there were no difference in either cost or requirements for registering as a sole trader then there would be no real drive to form advice businesses.

But I think Richard Klipin is right, and there will be a strong drive.

That push is mainly provided through increasing the requirements on RFAs. One part of Coase's theory of the firm holds that as fixed costs rise then average business size rises. Another argues that if larger organisations can reduce error rates then they are more attractive. Both those factors could explain increasing scale in financial advice businesses.

Will such factors increase? The FMA fee for registration is only a small factor. The requirement for, say, increased education is a much bigger contribution to the new cost model. Even bigger than that are the business changes required to provide detailed compliant personalised advice in an efficient way. That usually requires good information technology, regularly updated and maintained. That fixed cost will push many advisers to contemplate participation in the kinds of advice businesses Klipin mentions in the article. In addition, larger organisations with good processes for ensuring compliant advice will have smaller error rates and may apply lessons learned more quickly to more advisers. 

Theoretical models are buttressed by current experience. Several commenters are already pointing out the similarity between the FAA review proposals and the existing Australian regime. That approach led to larger businesses in Australia. In New Zealand the current FAA has already led to larger businesses - consolidation has been ongoing across the insurance sector. To some extent cost sharing has explained the rise of our broker groups, and recently professional associations are joining the movement. 


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