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The impact of FOFA — industry claims brought undone

The financial planning industry’s campaign against the government’s Future of Financial Advice reforms has stumbled, with a new report discrediting industry claims about massive job losses resulting from the reforms.

Along with the increase in compulsory superannuation to 12%, the FOFA package (kicked off by Chris Bowen, but now Bill Shorten’s responsibility) looms as one of the Gillard government’s most important long-term economic reforms, although it is currently stymied because of the opposition’s obstructionism and an aggressive campaign by financial advisers that has conned the independents into opposing the current package.

At a Sydney hearing of the Joint Committee on Corporations and Financial Services a fortnight ago, some of the industry’s most senior figures lined up to tell MPs and senators of the disastrous impacts of the FOFA reforms, and in particular the “opt-in” proposal that would end the rort of Australians paying for “financial advice” they never ask for or use.

Richard Klipin, CEO of the Association of Financial Advisers, told the committee that “6800 adviser jobs are at risk and over 30,000 jobs in total”. Craig Meller of AMP told the committee that 25,000 jobs could be lost.

The claims got the predictable media run, but the entire financial advice industry only employs just over 17,000 people. In fact the claims were so extreme even the Financial Review, which has been sympathetic to industry resistance to FOFA, criticised the numbers. Treasury called the claims “silly” when it spoke to the committee. So how on earth did two senior figures produce 25,000-30,000 figures?

The 6800 number in fact was well-sourced: it comes from a report by Rice Warner in 2010 commissioned by the Industry Super Network (a prominent proponent of the reforms) that examined the impacts of a previous version of the reforms. And you can’t blame AMP and the industry from relying on that report — it was cited in the Regulation Impact Statement for the legislation introduced last year (suggesting that the practice of cobbling together RISs from anything you can put your hands on is going strong within the Public Service).

It’s after the 6800 that the industry got creative. Claiming that losing 6800 jobs would lead to a further 23,00-plus jobs being lost implies a remarkable employment multiplier of between three and four.

Employment multipliers are tackled by Richard Dennis in his splendid paper The use and abuse of economic modelling in Australia where he nails the mining industry for claiming an employment multiplier for the industry far in excess of an ABS estimate. The financial advice industry is claiming a similar employment multiplier for itself.

What’s the actual multiplier for the financial advice industry? It’s hard to know, but a 2005 academic paper suggested that historically the employment multiplier in the whole financial sector was about 1.5 in Australia; it was a little lower in Japan, and a little higher in the US.

But the whole argument is now moot, because Rice Warner, commissioned by ISN again, has updated its March 2010 report to reflect the final package.

As a result, they’ve significantly altered their assessment of the employment impacts of FOFA. On a business-as-usual case, their modelling suggests industry employment would grow by about 1300 by the mid-2020s, but under FOFA employment would fall by 3000 by the mid-2020s — after experiencing a surge to 20,000 in the next few years.

Why the change in estimates since two years ago? The report’s author says they underestimated current industry employment back then, but more importantly the reform package itself has changed, and now no longer includes a crucial ban on insurance commissions.

However, the industry will change, the report finds: the initial surge in financial adviser numbers will be brought about by clients switching from commission-based advice to fee-for-service advice, but that will unwind after 2017. And while total commissions and fees under FOFA will remain about the same proportion of GDP, the structure of the industry will change — there’ll be less “full service” advice from advisers living off commissions, and more “scaled advice” based on fee-for-service and one-off requests for advice. The average cost of advice will drop, but the overall number of advice requests will rise, because people will seek more one-off or occasional advice.

Most of all, there’ll be a significant transfer of wealth, from the financial advice industry into the superannuation of ordinary Australians — $130 billion by the mid-2020s, the report finds, with resulting implications for the call on pensions in those years. And that, of course, is what the opposition of the financial advice industry — backed by the big banks and AMP who profit off it — is really all about.

That $130 billion is the killer figure, ultimately: even assuming a massive hit to employment in the financial advice industry of the magnitude claimed by the likes of AMP, there’ll be a massive injection of wealth into Australians’ savings.

As Dennis points out, claims of jobs impacts by industries rarely acknowledge that change in one industry will always see changes in other industries, with concomitant employment impacts. That $130 billion in additional wealth will be available to Australian business for investment, and will reduce the call on future budgets for pensions, generating benefits right across the economy.

The other problem for the industry of course is that they are now stuck with the outcome of this report. They themselves cited the previous version as part of their campaign against FOFA. Now they’ll have to live with the revised version that makes clear the enormous benefits that will flow from the reforms.

11
  • 1
    sickofitall
    Posted Monday, 6 February 2012 at 1:22 pm | Permalink

    Shorten has something to do with it? Doomed to failure. Agreed it’s important. But don’t give that tool anything.

  • 2
    Jimmy
    Posted Monday, 6 February 2012 at 1:35 pm | Permalink

    Sickofitall - Yeah didn’t he do a terrible job with disabilities?! Not.

    Fee for service is the only way to go for financial planners, better for clients & will get more respect for the industry as it brings them in line with other “professionals”. I have no doubt some financial planners will leave the industry but it is only the ones who got into the industry when you needed no qualifications, have built up a nice amount of “funds under management” and now make a tidy sum doing very little off commissions.

  • 3
    Ramsay Andrew
    Posted Monday, 6 February 2012 at 2:02 pm | Permalink

    The report was commissioned by Industry Funds so doesn’t that make its “findings” about as credible as a Gina Renehart commissioned report on the mining tax? Not saying that AMP’s views are correct but this is no independent study and lacks credibility.

  • 4
    Bill Hilliger
    Posted Monday, 6 February 2012 at 2:12 pm | Permalink

    And yes the media nowadays never analyses these ambit claims of job and industry losses. Journalist wouldn’t know how to apply a credibility test on anything that comes their way.

  • 5
    GrainOfSalt
    Posted Monday, 6 February 2012 at 2:13 pm | Permalink

    I’m going through the full Rice Warner report now and as usual it’s full of inconsistencies and wild assumptions. Surely the fact that it was commissioned by the ISN and finds exactly what the ISN wanted it to find is cause to regard it with some scepticism? Yes 25,000 job losses seems excessive but Bernard why are you taking such potentially conflicted research as the gospel truth? You question the findings and motives of the retail planning sector but assume whatever the industry fund sector says is beyond reproach.

    The whole argument is now moot because Rice Warner has updated its report”…?! So that’s it then - whatever Rice Warner’s ISN-commissioned research says must be fact?

  • 6
    AR
    Posted Monday, 6 February 2012 at 8:23 pm | Permalink

    Job losses in the finance industry? That’s a problem?
    BRING IT ON!
    Let them do something more useful, like unpick oakum or follow Good Soldier Schweik’s profession (before conscripted for WWI) - there’s plenty of scope in the excruciatingly trendy inner city areas which they probably infest.

  • 7
    c d
    Posted Monday, 6 February 2012 at 9:37 pm | Permalink

    The superannuation pool is something everyone wants to get their hands on. So the only wealth transfer will be from planners to industry superfunds. It’s just transferring from one pack of parasites to another. I wonder who will next have the ear of the government of the day and manage to carve off their piece of the pie. Probably the real estate industry.

  • 8
    John
    Posted Monday, 6 February 2012 at 11:48 pm | Permalink

    FOFA…I had to laugh at the acronym. In Portuguese it means ‘soft one’.

  • 9
    Peter Ormonde
    Posted Tuesday, 7 February 2012 at 7:49 am | Permalink

    I would actually be far more concerned if the finance scammers just quietly sat in a corner and did nothing about the reforms. I expect vested interests to squeal like stuck pigs. I demand it. Or we’re missing the target.

    And of course it’s the job losses and the future of the kiddies they’d be worried about… oh yes indeed. Deep social consciences this lot.

  • 10
    cannedheat
    Posted Tuesday, 7 February 2012 at 2:44 pm | Permalink

    @AR: we’re talking financial advisers here not investment bankers and the like. I’d hazzard they are more active in the burbs than the inner city. Nice that they are screaming.

  • 11
    Dogs breakfast
    Posted Thursday, 9 February 2012 at 2:15 pm | Permalink

    Yeah, the louder the scream the better off we all are.

    How about a comparison of the subsidies to the car industry and how much each job costs, as opposed to the fee banditry in the finance industry and how many jobs that costs.

    It may be hard to swallow the thinking around paying government subsidies to the car industry adding up to tens of thousands of dollars per worker, but compared to these rorts, which must amount to much much more given their long time impact on people’s wealth, the car industry looks like a great investment.

    At least there we would end up with cars produced. In this case they are being paid to produce nothing.

    Whilst the first world inevitably becomes more service based, so many of these services either never produce anything, like this, or are taken up in defending the indefensible positions of industry (PR, Spin merchants, lobbyists) or suing other productive SME’s (the legal industry) or to fulfill the miasma of taxation legislation requirements (Accountants of most forms). These are high paying and crucially unproductive services in the majority of cases.

    The trend to service industy employment will be as unsustainable as every other bubble before it if government doesn’t lead the way.

    This appears to be a happy beginning.

    And yes, I have my doubts about Shorten, more than once he has looked like he was going to bend over in this reform. Let’s hope his input is minimal.

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