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Knowing when to quit

It is proverbial that political careers always end in failure. Does that have to apply to advisers? Well, not as dramatically as losing an election, obviously. But over the next few years the industry is set to lose a number of advisers - anything between 10% and 40% depending on a number of heroic assumptions.  

Tuesday, October 5th 2010, 12:56PM 1 Comment

by Russell Hutchinson

A life office I was working with recently were encouraged to think the number would be at the very low end based on the results of a certain recent survey. What they did was telephone a lot of advisers and asked them if they would be leaving the industry soon as a result of regulation. The problem with this is in the question - almost no-matter how you ask it, it kind of implies that if you are going to leave the industry there must be something wrong. It's almost like asking ‘are you a crook, a loser, or can you just not pass exams'. So nearly everyone said they were soldiering on.

But I am pretty certain that plenty more people will quit than said so. But not when regulation arrives - it will take a little while.

First of all, quitting is good. If you've worked 40 years in the industry, earned a good income, and done well for all your clients then that's a great achievement. But if you look around you that's not what happens - because the fixed costs in our business can be very low, and renewal commissions are pretty good, then many advisers are tempted to hang on to that income stream and keep going - often well into their 70s. What usually forces the exit is a health event. I think that's unfortunate. Also, it probably means that when the time came they don't get anything like as good a price for their books of business.

There are quite a few of these advisers out there - perhaps you are one - and we should consider seriously the question of when to quit, and most importantly, how you make the best financial choice possible.

Many advisers are looking at compliance costs as a one-off lump followed by small annual maintenance fees, and the minimum of education, especially if they think they can sit in the registered category. I don't think this will be the case. Two issues mean that your costs are certain to exceed a small annual fee to keep up your registration. The first is rising educational standards, the second, and by far the greatest, potentially, is complaints.

There will never be an easier time to achieve authorisation - or for that matter registration - than right now. That's been the mantra as companies, dealer groups, and others have all nagged you along the path towards compliance. It is true, but the future standards won't just be higher for the new folk coming after - they will rise for existing advisers too.

But the real unknown is complaints and disputes. You see, the cost of making a complaint has fallen to zero for the client, and the cost of dealing with a complaint is now a minimum of about $1,000 for an adviser. Those figures are almost the reverse of what they are right now. If that wasn't a big enough shift in economic incentive, then you can add on the effect of publicity to make sure everyone knows that they have a right to complain. Right or wrong more complaints will come. And many will be right, but the process has to be followed, and can be followed by people who are wrong too.

Advisers who have never had complaints will receive them. If you typically have one complaint a year, you will get more - but how many more? You don't know. However, it might be prudent to budget for that to at least double.

So now you have situation where it isn't just a question of paying your fee to maintain your registration or authorisation. Education and complaints costs will be much bigger. Think $3,000 to $5,000 a year if all goes well and much more if you have a couple of bad complaints. Those costs and risks are fine if you are full time - or even a reasonably serious part-timer. But add them onto the other fixed costs of practicing - say, at least $5,000, so we now have a total of $10,000. That looks big for someone with, say, $20,000 in renewals from an older, declining book of business, or a part-time brokerage bolted on to some other activity.

So if you need to quit either to enjoy retirement, or focus on a different career, you need to have a second look at the maths and factor in some higher annual costs than you may have allowed for. If that shows you should quit, then tidy up your base, talk to one of the business brokers and get on with it - some people will wait and discover their costs are higher only later.

Of course, most of you will be stayers. For you the opportunity is expansion by acquisition. You can view regulation as a gift. Previously, the barriers to practicing were so low that you were always unsure whether a person was genuinely going to leave the industry after they've sold you their book. With the new rules you can be comforted by the higher costs, and the fact that there is a public register you can check against to see if your vendor has genuinely downed tools and headed for the beach.

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Comments from our readers

On 6 October 2010 at 3:00 pm w k said:
$3k-$5k if one only practices life & health insurance. If one decides to do insurance, investments & mortgage, then the cost will be about $10k/yr, following estimates - PI ($1.5-$2k), stay reg as AFA ($400-600), dispute scheme ($400-$500) prof body membership fee ($600-800), mortgage agg fee ($5.5k-$6k) & CRM system ($1.5k-$2k) (did i miss out anything else? - cost of education left out as some may not need it). administrative costs, rental and one admin support not included yet, say give it another $70k for that. One need to be doing around $150k or $80k if work from home and do own admin to achieve about $70k annual income, and don't forget, clawbacks has not been factored in yet.
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