The multi-million dollar costs associated with operating an Australian financial services license (AFSL) has created a barrier to new entrants into the financial planning sector, an industry report found.
The IBIS World financial planning and investment report said dealer groups need to have around $60 million to $80 million under advice needed to justify operating a license.
The figure is a significant barrier to new entrants operating on a small scale, the report said.
"Barriers to entry in the industry relate predominately to licensing conditions and achieving scale to be able to compete," it said.
"The AFS licence application requirements and ongoing licence conditions make it costly for an individual to obtain such a licence, and in most cases the licence will be held by a body corporate."
The services and equipment needed to operate a financial advice business include meeting compliance and licensing requirements, having access to administrative and investment product research services and IT requirements including client asset management software, the report said.
Paragem managing director Ian Knox said small enterprises who want to offer advice but find the costs of around $25,000 to $30,000 to start up their own practice too steep have only a few options.
The group can either join an existing dealer group or use or "rent" an in-house product or platform, he said.
The potential downside to joining an existing dealer is that the adviser will be forced to join an institutionally owned advisory group as the larger groups are the only groups that can afford to subsidise smaller advice practices.
While the downside of "renting" is that in the end the costs associated with the arrangement ends up being the same as if the advice group remained "independent".
"We meet lots of new professionals that want to be advisers but feel the only way is to 'buy' a business so that the earnings make sense against the cost base," Knox said.
However, what is never discussed, but actually makes sense, is spending the annual allocated expense of $30,000 and winning around six clients at $5,000 revenue each and the adviser has secured his own start up funds.
"No one thinks of it as an investment - yet a solicitor opening their doors for the first time is faced with the same challenge and does just that....maybe the new era of professional means we will see the arrival of these disciplines who knows," he said.
Kenyon Partners managing director Alan Kenyon said compliance issues is a big concern for licensees.
"It would seem that the heat has gone out of the FOFA [Future of Financial Advice] legislation to a large degree and so organisations that need to get bigger, if you believe the institutional hype, and so PI [professional indemnity] claims and costs and efficiencies of trying to run these mid-tier groups mean they've either got to get real small in a hurry or find a big brother," Kenyon said.
"The big would have you believe that you won't exist unless you fold into their groups, and for some I think that's true and for others I'm not so sure."
