The industry needs smarter regulation

As a part of its wealth management series, Money Management speaks to financial planning groups and asks them to share their views on the industry in a new environment. This month, Money Management spoke to Infocus managing director, Darren Steinhardt, and Roy McKelvie, non-executive director and chair.

Money management: What are the strengths of your business and how has COVID-19 impacted it?

Darren Steinhardt: We are first and foremost an advice business, we have a proud 26-year history with an advisory network of 200 advisers around the country.

In addition to our advisory network we also have an infrastructure arm to our business. We run our own IT platform, which is a real differentiator when compared to our competitors, but for us technology is such a fundamental and vital piece of the infrastructure to the business and as such it is something into which we will continually invest.

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This technology provides us with a degree of – I suppose nimbleness – that is not necessarily available to others in the industry; for example as an IT business we are able to build and evolve our IT infrastructure to enhance operational efficiency in the face of an ever-changing regulatory landscape.

We have invested heavily over many years to build this IT infrastructure, including a digital advisory engagement solution. This solution has come into its own during the COVID-19 lockdowns; pre-COVID-19 we had around a quarter of advisers using this solution on a regular basis but post-COVID-19 this figure jumped to nearly 100%.
And as a licensee partner, we want to help advisers grow and evolve their businesses; we are good at assisting with revenue growth as well as efficiency growth, this is where IT really comes in.

MM: Is it easy to onboard new advisers right now?

DS: We want to grow with advisers that align to our culture and quality standards. We had healthy growth over FY21 Q1 welcoming an additional nine advisory practices to our network and discontinuing the partnership with one firm; we received 78 inquiries during the period and we are continuing a conversation with many of them, so there are still many advisers knocking at our door to have a conversation about potential partnership. 

However, we need to be wise as to who we welcome into our network, we are charged with responsibility of looking after now over $7.5 billion of clients’ money (and growing) and we take our professional responsibilities very seriously, so we need to make sure that we maintain the quality of advisers within our network at a high standard.

The process we adhere to when engaging with potential new advisers to our network is robust, including an interview with each member of our leadership team so they [prospective advisers] get the opportunity of speaking to the individuals they would be working with on a day to day basis (i.e. someone from the professional standards team, from research, from business services or business development team). 

So there are around seven or eight different people involved in the process, and every person has got the authority and the right to veto, if they do not feel comfortable with the prospective adviser for any reason, they have the authority to disengage.

Looking forward, I think that there will still be an opportunity for one adviser practices, but not for those small one adviser practices. If a firm is only turning over a few hundred thousand in revenue then the costs are probably going to be too high and margins too small for them to be sustainable. 

We are certainly not seeking to partner with small advisory practices, unless we can see strong grounds for growth.

MM: What is your view on regulation across the financial services sector?

DS: It is exceptionally overregulated, very much overregulated. I think the Australian Securities and Investments Commission (ASIC) does a wonderful job with the resources that it has, but there appear to be many things that it cannot do due to insufficient resources. For example, the supervision and engagement with the mid-sized to large Australian financial services licenses (AFSLs) is robust, but the smaller end of town does not receive the same attention. This raises a concern that I have around self-licensing, I fully support it, but there is a risk that self-licensed firms would become almost ungoverned or unregulated because ASIC does not have the resources to get to them.

Roy McKelvie: Sadly regulation is driven by politicians and politicians react to things that happen so what actually happens is you have well-intentioned views that the purpose of regulation is to protect both clients and, indeed, to protect the industry but the problem is that regulation is often happening in reaction to particular events. In particular, in the financial planning industry, they react to events where inappropriate things are done by people that disadvantage ordinary citizens. And when that happens quite rightly our politicians say well we need to act to protect people, and that is all fine.

The problem is that politicians seem to confuse the volume of regulation, with the effectiveness of regulation. I think all the legitimate players in the industry want and understand the need for proper regulation and in fact welcome it, as we welcome it. The issue is the volume of regulation, a lot of which is unnecessary, duplicates and/or complicates other regulation. So you have one regulator implementing and governing the adoption of its rules in a certain way, while another that has slightly different standards and expectations, requires the adoption of a completely different set of rules.

What we have now is politicians who think that if we have lots and lots of regulation we will protect people, but the people who are bad apples in the industry can fill in a form as well as anybody else; if the bad apples are really determined to do something they are going to find a way to do it.  

What I think the industry needs is the smarter regulation, it needs more effective regulation, it needs to use tools of technology to allow regulation to achieve the purpose of overarching goals to protect the citizens, to protect clients, and often this not the case. People need public policy, particularly in financial services, so we need to educate those public policymakers to make sure that we can use the technology, to drive smart regulation, regulation that does not increase the costs to the industry and ordinary citizens, and that still provides that appropriate level of protection for citizens and protection for the industry.