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.