Is forced internal consolidation of advice practices healthy?

Australia’s two largest financial planning companies – Insignia Financial and AMP Limited – have employed a common strategy as they look to drive more efficiency into their operations – the internal consolidation or exit of small practices.

AMP Limited made its tactics clear over 18 months ago as it moved towards its so-called contemporary advice model, and the similarities of the Insignia (IOOF) model were made clear by the company’s chief executive, Renato Mota, last week.

The essence of the AMP and Insignia strategy is to consolidate smaller advice practices to create larger entities with, as Mota put it, a reduction “in our cost to serve”.

The strategy has been significant to AMP and Insignia but it is not unique with firms such as Count Financial having financially supported mergers of advice firms within its framework and, in some instances, external acquisitions to grow advice firms.

This is the same strategy which has been employed by Insignia with Mota referencing the firm having “facilitated over 50 intra-group acquisitions and mergers” as part of its adviser succession plan.

The strategies being employed by AMP, Insignia, Count and others is acting to fundamentally alter both the texture and facbric of a financial planning industry which, for decades, has been made up of many one, two or three planning firms operating under the licensing umbrella of the majors.

This was something noted to Financial Newswire by WealthData principal, Colin Williams, who said small practices had been a mainstay of the industry for a long time.

The strategy also appears to run counter to the Federal Government’s policy view of the financial advice industry which is that it should not be dominated by large players.

This was made clear by Federal Treasury assistant secretary, Financial System Division, Mohita Zaheed who said the Government wanted competition and did not want it dominated by major players.

Zaheed explained the Treasury position while explaining the rationale behind the proposed structure of the compensation scheme of last resort (CSLR) and suggestions that the exlusion of small players via the $1,000 minimum levy threshold risked creating moral hazard.

Zaheed said there were two sides to the views expressed to Treasury – one view was around moral hazard the other was around how you were structured – “whether you held your own license, or whether you were an authorised representative and could be paying the fees because your licensee passes that through

“It a balancing act thinking about the costs which are imposed on very small financial advice licensees and mortgage brokers because, as a system, we want competition we don’t want a system that is full of major players and doesn’t have small players.

“And the regulatory costs generally hit the smallest players the hardest but it is a balancing act between that and ensuring there are sufficient incentives and disincentives in the system for misconduct,” she said.