When the ASIC recently released its FY25 corporate plan, some were surprised to see “monitoring the use of offshore outsourcing arrangements” high on the regulator’s list of strategic priorities. Nestled among mainstay goals like improving consumer outcomes and driving consistency and transparency was the regulator’s plan to advance data security by enhancing business, cyber, and operational resilience, with a focus on reviewing how investment managers and financial advisers manage the risk of using offshore service providers.
Other key activities included monitoring the use of AI and advanced data analytics by Australian Financial Services Licensees. The areas of focus called out by ASIC highlight the financial services industry’s exposure to technology risk, as the guardians of vast amounts of invaluable personal financial data. It also points to a growing outsourcing trend, mirroring the rise of business outsourcing globally.
According to data platform, Statista, the Australian Business Process Outsourcing market increased 5.62 per cent in FY24 and is set to hit $19.7 billion in revenue by 2029. There isn’t publicly available data specifically on the adoption of outsourcing by financial advisory businesses but, anecdotally, there are at least several thousand offshore staff working for advice firms.
ASIC’s heightened focus on the different outsourcing arrangements used by advisers, and how risk is managed in relation to technology, data sharing, and privacy, is a welcome development. In light of recent high-profile cyberattacks, this clearly will include the ability and capacity of advice businesses to respond to cyber incidents, data breaches, and technological disruption and outages.
This attention is likely to lift industry standards and governance and strengthen consumer protections, which is a good thing for advice firms, licensees, and the outsourcing teams that support them. The industry has an opportunity to get ahead of problems with the regulator’s help. This is much better than trying to fix problems after the fact, like it has been forced to do so many times.
Outsourcing in financial planning isn’t new but, in the past five years, practices have really ramped up their use of offshore teams, particularly for paraplanning, administration, and IT support. A number of factors are behind this trend including capacity constraints, a shortage of on-shore talent, and relatively high local salary expectations.
Small businesses are struggling to attract and retain good people willing to perform administrative tasks on a long-term basis. The Covid-19 pandemic lockdowns also transformed attitudes around working remotely and dramatically increased the adoption of cloud-based video communications. Business leaders realized that people didn’t need to be physically in the office to work effectively.
At the same time, outsourcing companies have grown significantly in size, scale, and sophistication, enabling advisers to build larger offshore teams and delegate a broader range of responsibilities. The sector is no longer a cottage industry. While many of today’s specialist financial planning outsourcing businesses started life as a side hustle, after their founders originally employed and trained a small offshore team to support their financial planning practices, outsourcing has since become the main game.
There are estimated to be twenty or more specialist financial planning outsourcing businesses in Australia. As a rapidly growing sector, greater regulatory attention is inevitable and critical. Managing third-party service provider ecosystems is more complex and important than ever, requiring expert knowledge and skills. If done poorly, there are serious implications for businesses.
It can lead to business disruption, loss of revenue, loss of trust, and reputational damage. Stakeholders, including clients, shareholders, and regulators, expect businesses to effectively manage risk, understand and monitor their supply chain, and continuously strengthen their systems and processes. As the advice industry prepares for legislative reforms designed to make advice accessible and affordable to more Australians, ASIC’s focus on outsourcing is timely.
The Delivering Better Financial Outcomes reforms, coupled with Australia’s aging population and associated intergenerational wealth transfer, will see more people seeking professional advice at a time when adviser numbers have plummeted, talent is scarce due to record low unemployment, and inflation is driving costs and fees higher.
While AI and automation will eventually play a key role in freeing advisers up to help more people, for now, businesses are still more likely to turn to human workers. That means greater demand for outsourcing solutions and more client data at risk of not being protected appropriately. As such, it is imperative that advisers strengthen their cybersecurity framework and regularly test and review their systems and offshore service providers to identify and address any vulnerabilities.
Nathan Jacobsen, Chief Executive of adviser outsourcing firm Vital Business Partners, emphasizes the importance of understanding the implications of outsourcing in the financial planning industry. With the increasing reliance on offshore teams for various functions, it is crucial for businesses to manage risks effectively and ensure the protection of sensitive client data.
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