Financial advice reforms must cut red tape: Koda Capital

31 Oct 2022

Any regulatory overhaul of the battered financial advice industry must focus on reducing red tape and getting the implementation right, or policymakers risk repeating mistakes of the past.

That’s the view of financial advice firm Koda Capital, which supports some aspects of proposed reforms in the Quality of Advice Review, but wants a more focused approach to executing changes.

An interim paper released by reviewer and Allens partner Michelle Levy urged the federal government to reform regulation of the sector and impose a requirement for advisers to provide “good advice”, rather than adhering to a best interests duty. The review also said general advice should not be caught by the regulatory net, and that superannuation funds could play a bigger role in providing personal advice to members.

Koda’s chairman Steve Tucker said while the idea of providing good advice made some sense, there were risks around how industry players would implement such a requirement.

“I like the idea of good advice but I don’t like the idea of how people might implement that because we’ll just end up back where we started,” he cautioned. “The board, directors or the adviser will say how do we prove we’ve given good advice and the answer is we’ll ask our lawyer to advise on best way to do that, the same thing we did with (Corporate Law Economic Reform Program) and (Financial Services Reform Act). The defence that the company directors are looking for is something that says this is black and white, we did the right thing because we did a risk analysis, we documented everything, put disclaimers everywhere and there’s your 200 page (statement of ­advice).”

Mr Tucker, who formerly led National Australia Bank’s MLC before co-founding Koda in 2014, said the financial advice industry was taking the final steps towards becoming a “true profession”, after a wholesale shift away from a model of pushing products and earning commissions.

But with access to financial advice becoming a vexed issue and the cost rising due to hefty compliance requirements, he believes change and some personal accountability is required.

“I am concerned about the level of paperwork, the red tape and the cost and challenges that brings in terms of people getting access,” Mr Tucker said. “We’ve got to continue to focus on this development of professional standards and structure around an industry … the single most important aspect is the idea that the individual will be accountable for doing the right thing.”

Koda’s chief executive Paul Heath echoed that view.

“The notion of moving towards advice which requires professional judgment versus advice which is proven by a tick-a-box exercise … that’s a good thing. The industry needs to take a degree of responsibility,” he said. “The complication in our industry is you can give a client very good advice and they can still not make money or lose money (which) creates a complexity in how you demonstrate good advice which perhaps doesn’t exist in some of the other professions.”

Ms Levy is due to hand her report to the government in December. The proposals have already sparked a mixed response from sector participants including Industry Fund Services, which said it didn’t support deregulation of general advice. AMP, however, has tentatively backed the changes.

Koda focuses on providing independent advice to high-net-worth customers and not-for-profits, managing more than $10bn in client funds. It has aspirations to double that figure over the medium term.

It’s perhaps unsurprising Mr Tucker believes Koda’s independent partnership model, which promotes staff having equity, is the way of the future.

“The independent model was seen as a virtue-signalling dalliance. That’s absolutely not the case and we are now at the cusp of this new profession,” he said.

“Ultimately you could see in five or 10 years’ time that the big institutions have a strong relationship with advice businesses but they either decide to become advice businesses or product providers rather than both,” he said. “Banks will come and go.”

Mr Tucker also doesn’t believe the model, which sees a parent entity providing licence and other services to a network of advice firms for a fee, is sustainable.

“There is no room for another layer … of business model. I don’t think that business model ultimately survives,” he said.

Mr Tucker and Mr Heath do think super funds should provide simple advice to members, as proposed by the Levy review.

The private wealth industry has seen a flurry of activity as international firms have swooped into the local market.

The arrival of New York-based firm Merchant Investment Management in Australia in recent weeks follows a busy three years in the sector, as several ­global groups emerged with holdings.

In 2019, US firm Focus Financial snapped up a stake in Escala Partners and earlier this year Crestone was acquired by investment and private banking house LGT, managed by the Princely Family of Liechtenstein.

Koda in May agreed to sell a minority stake to the Milstein family-backed advisory and capital firm Emigrant Partners, marking the US-based company’s 19th such partnership ­globally.

That alliance helped facilitate Koda’s merger in October with Redwood Wealth Alliance, which delivered it a presence in Western Australia.

Mr Heath said Koda viewed WA as an “under-served market” given its representation of public and private companies and wealthy investors.

While Koda now has a foothold in WA, it is not embarking on an acquisition-led strategy. “Organic (growth) is still the primary focus for us,” Mr Heath said. “We will do M&A if it offers up the ability to either access a talent pool, access a market that we wouldn’t otherwise be able to access, and fits culturally.”

Asked about the potential for an initial public offering if conditions become more favourable, Mr Heath said he didn’t believe advice firms or other professional services organisations were suited to public markets.

“That’s because of the quarterly earnings calls and the requirement to try and manage these firms without the ability to really think long term,” he said.

Mr Heath said the availability of “sophisticated private capital” meant firms like Koda now had more options for accessing growth capital.



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