Rice Warner clarifies cost of opt-in calculation

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Rice Warner has submitted a letter to Minister Bill Shorten, Minister Financial Services & Superannuation, to clarify the analysis of its costs of ‘opt-in’ and to emphasise they are not onerous for the industry. 

The Cost of ‘opt-in’ – confusion over what is and isn’t included in our calculations
Rice Warner’s estimate of $11 per client per annum for ‘opt-in’ is the ONGOING cost, and excludes ‘opt-in’ implementation costs.  It also excludes any costs associated with other parts of the FOFA reforms.  We have also made an important underlying assumption that advisers are already in regular contact with their clients, meeting at least once every year.  Importantly, the proposed grandfathering provisions will mean that ‘opt-in’ will only apply for new clients from 1st July 2012, so the first ‘opt-in’ will occur on 1st July 2014.  Thus, advisers who adapt their business models to include annual or biennial client reviews for all new clients will be able to incorporate ‘opt-in’ processes as part of their normal client management.

 In summary, the cost of ‘opt-in’ should not be confused with:

  • the cost of contacting clients who are not serviced regularly
  • the implementation and ongoing costs of other FOFA reforms.

 How was the cost calculated?
Costs were estimated for both dealer groups and product providers.  When calculating costs, consideration was firstly given to key functions that would be required under an ‘opt-out’ regime.  This was to show a complete picture of the relevant advice processes, including areas where items required under ‘opt-out’ can be leveraged to support an ‘opt-in’ approach.  This demonstrates why the costs of many additional business processes required to support ‘opt-in’ are relatively modest (they would be required for an ‘opt-out’ scenario anyway). 

                                                 One-off                                 Ongoing

Dealer Group                      $105,000                           $110,000

Product Provider             $1,400,000                           $450,000

For an industry wide cost, Rice Warner assumed there these costs will be incurred by 25 product providers and 100 dealer groups, resulting in the following total costs:

One-off            Ongoing (per annum)

$46m                     $22m

ASIC estimates that approximately 2,000,000 people receive advice every year.  Consequently, the cost per client is $11 per annum.

Number of Dealer Groups
Rice Warner has been criticised for restricting its calculations to only include the top 100 dealer groups.  It is generally accepted by industry stakeholders that there are about 17,000 advisers operating in the market.

An analysis published in Money Management on 29 July 2010 covering 100 dealer groups shows the following statistics:

Interestingly the smallest Dealer Group included in this analysis had just 12 Authorised Representatives.  There will clearly be some advisers who fall outside the top 100 dealer groups.  However, their number will be small relative to the accepted industry total of 17,000.  Overall, it is reasonable to conclude, from the published data, that no more than 2% to 3% of authorised representatives are with dealer groups with fewer than 30 authorised representatives.

Rice Warner also notes recent media discussion regarding “small advice businesses”.  The table above shows that the average number of advisers per office/practice is around 2 so there are clearly a large number of small advisory practices.  However, this should not be confused with the number of small dealer groups.  We can only conclude that those who talk about significant numbers of small dealer groups are, in fact talking about small advice practices – and most of these operate through larger dealer groups.

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