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A structural shift in the Financial Planning industry

Since the Hayne Royal Commission concluded in 2019, we have witnessed a resulting structural shift across the Financial Planning industry.  The Big Four banks have divested their advice businesses, the ongoing compliance burden and red tape are driving up the cost of advice and this, along with the education reforms, are driving many advisors out of the industry.  The mass exodus of advisors has been widely reported of late, and so far this year MLC, AMP Group and IOOF lead the way for advisor losses.

While there are many advisors leaving the industry altogether, we are also seeing a trend that in the search for greater flexibility and more independence, advisors are leaving the larger licensee owners and looking to partner up with other self-licenced planning firms or are heading down the path of applying for their own AFSL.

A must have for AFS Licensees

Professional Indemnity is a mandatory requirement for self-licensed planners and now, as we find ourselves in the toughest PI market in history in terms of the availability and cost, it is crucial that anyone looking to go down the self-licenced path or bring Corporate Authorised Representatives onto their licence, consider the PI requirements and implications well in advance.

How much time will it take me to arrange PI cover for my new AFS license?

The short answer is it will take less than the time it will take to get your new license.  However, it is important to recognise that due to the capacity issues the PI market is currently experiencing, there are times when insurers are unable to take on more risk (particularly in June and December).  With strict criteria in place for insurers regarding what risks they are willing to accept, we suggest engaging with a specialist PI insurance broker at least three months in advance to guide you through the insurer risk appetites and availability of capacity.

What information do I need provide?

Insurers have a thorough underwriting process.  Some of the essential pieces of information are:

  • Key people in the business – what are their qualifications, experience and background.
  • Nature of clients – retail vs. wholesale? Who are your top clients?
  • Revenue, FUA, number of advisors – Do these strike the right balance?
  • Statement of Advice examples
  • Previous track record – complaints register, and have you ever lodged a claim under your licensees’ policy?
  • Have you engaged a compliance provider?
  • Nature of advice and financial products being recommended – it is therefore critical to take the time to forge a well-articulated Approved Product List with clear parameters.

What limit do I need?

Per the ASIC RG126 Regulatory Guide, ASIC consider a PI insurance policy must have a limit of at least $2 million (with allowance for costs in addition to this) for any one claim and all in the aggregate for licensees with total revenue from financial services provided to retail clients of $2m or less. For licensees with total revenue from financial services provided to retail clients greater than $2m, minimum cover should be approximately equal to actual or expected revenue from financial services provided to retail clients.

How much will it cost?

Minimum premiums are generally starting at around a total cost of $12.5k, however this is for businesses with very low revenue thresholds.  We are typically seeing a rate charged of 1.8-2.3% of fee income, with the nature of investments, limit size and excesses directly impacting this.

 What if I have had a previous claim?

The best thing you can do is demonstrate clearly what happened and what systems and controls you have put in place to prevent anything of this nature happening again.  Find a way to demonstrate this in a way that does not represent a systemic cultural issue in your business.

What do insurers like and not like?

“Boring” is better for insurers.  That is, licensees giving holistic and balanced advice without trying to achieve above average returns by venturing up the risk curve. Insurers, as a general rule, are cautious of the following:

  • Authorised Rep Groups
  • Significant direct equities exposure, especially overseas direct equities
  • Managed Investment Schemes / Agri Schemes
  • Any exposure to perceived high risk alternate style investments
  • Planners with a related funds management arm (conflict / best interests’ issue)
  • Mortgage funds
  • Significant margin lending exposure
  • Elderly single principal firms

PNO’s tips for new licensees seeking PI cover:

This is a forever evolving market, and this article will no doubt be out of date quickly.  We recommend you contact us early for an up-to-date view on the current market positioning and to allow us to spend the time with you to develop a submission to insurers that will achieve optimal outcomes. Some other considerations include:

  • Engaging a compliance provider
  • Again, get onto it early – particularly if you’re not “boring”
  • Proposal forms do not tell the story. Find a way to build on this to give underwriters a clear understanding.
  • Ensure your Cyber Risk management is up to scratch

It is also important that the information is presented to insurers in a tactful manner, as if they decline the first time around you may not get a second chance.

PNO has assisted many advisors through the process of obtaining PI cover for their new AFS license.  We also assist well established firms across financial planning, funds management and corporate advisory.  We would welcome the opportunity to assist your financial services business with your insurance requirements.

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