While the Hayne royal commission still has many months before the interim report is due, it is becoming increasingly likely it will recommend the separation of financial product manufacture and the provision of financial advice. The government will agree.

This will have implications for the financial advice sector and will increase the cost of advice. The big four banks and AMP currently dominate these activities and are likely to vacate the financial advice space. Their adviser networks are supported by the holders of an Australian Financial Services Licence (AFSL). These include but are not limited to: millennium3 and RetireInvest (ANZ Bank); Commonwealth Financial Planning and Count (Commonwealth Bank); Garvan and MLC Advice (National Australia Bank); Securitor and BT Select (Westpac); and AMP Financial Planning and Hillross (AMP).

These licensees may be incurring losses, but meet the ever increasing and costly compliance requirements, while providing an Approved Product List (APL) for their aligned adviser networks. The reward is fund flows generated by adviser networks landing on platforms owned by the banks and AMP, the manufacturers of financial products.

A financial adviser needs to either hold an AFSL or be an authorised representative of a licence holder. Individually, this is an expensive exercise and the main reason for the adviser networks.

Regardless of the royal commission, there are several reasons why the cost of financial advice will increase going forward. Future compliance obligations will grow and be even more costly. The ageing of advisers and increasing education requirements will see reducing numbers. Higher education standards will likely affect the number entering and exiting the industry. The pool of financial advisers will shrink, but demand for advice will continue to increase. The result, a higher cost to the investor.

Over the past decade, the growth in expenditure on Compliance and Human Resources (HR) has dwarfed that of any other operating division in most companies. The royal commission has called to account the failure of both. The breakdown in corporate culture and individual behaviour exposes deficiencies in HR. Complacency and arrogance are the result of those demanding, instead of earning respect in the workplace. In a "clubby" environment this can be toxic. This is a central HR issue and has clearly not been addressed in many instances. This creates frustration and ultimately whistle blowing. In the wake of the royal commission, every company should have an independent investigation into their compliance and HR operations, for the shortcomings do not stop at the banks and financial institutions.

Australia faring better than most

The Australian market has performed relatively well in a volatile first four months of 2018 (Exhibit 1). This is despite the widespread negative implications of the royal commission affecting about one third of the market by index weight.