New research reveals that the Government’s controversial “opt-in” proposals are likely to be a major hurdle, for more reasons than one.
Of all the proposals contained in the Government’s Future of Financial Advice (FoFA) proposals, few have attracted more widespread opposition than the so-called “annual opt-in”.
Along with banning commissions and the introduction of an explicit fiduciary duty for planners, the opt-in proposal was one of three key recommendations in the package of reforms released by the former Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen. (It remains to be seen if his successor, Bill Shorten, will pursue the reforms with the same enthusiasm.)
The FoFA package unveiled an “adviser charging regime, which retains a range of flexible options for which consumers can pay for advice and includes a requirement for retail clients to agree to the fees and to annually renew (by opting in to) an adviser’s continued services”.
The Financial Planning Association of Australia (FPA) has publicly and vocally denounced the opt-in proposals as being unnecessary in a regime where fees must be agreed to by the client, and paid directly by the client to the planner, thus enabling the client to opt-out of an advice relationship at any stage.
But research by Tepana Associates has found that “advisers are united in the belief that the regulator and the major industry body have failed to understand the nature of the client- adviser relationship, the success of the current disclosure regime, and the level of comfort that many investors have with commission arrangements in the wake of reforms introduced nearly 10 years ago”.
“Opposition to the opt-in proposal runs deeper than just the effect it may have on the client/planner relationship”
“While regulation is intended to provide better consumer outcomes, advisers believe it will reduce the time they spend with their clients and increase their administrative and compliance workload,” says Kathleen Tepana, a consultant for research group Tepana Associates.
“A significant number are yet to make plans and are looking to their licensees for assistance in transitioning to fee-for-service arrangements.”
But opposition to the opt-in proposal runs deeper than just the effect it may have on the client/planner relationship.
“Opt-in is considered a major business disruption, and while it is recognised as a high priority issue for planning businesses, it is one that the majority have yet to address,” Tepana says.
The research also finds that the opt-in proposals are thought likely to affect business values; and if they’re introduced in their proposed form, may accelerate the exit plans of a proportion of advisers.
“The larger licensees stand to benefit,” Tepana says.
“A number of respondents raise concerns over the impact of future business values, with a number indicating an intent to bring forward succession or exit arrangements, while others fear an increasing consolidation of advice businesses. It appears the proposed reforms will most benefit the large institutionally owned licensees who have large administration and compliance back office support.”
Other beneficiaries may be platforms, Tepana says.
“Opt-in is likely to drive a migration of clients from legacy products into more modern wrap-based structures that support fee for service,” she says.
“However, this will not result in the client paying lower overall fees, but wrap and master trust providers [will increase their margins], further consolidating the nature of relationships between product manufacturer and the advice process.”
Overall, Tepana says, there is “a high level of uncertainty over consumer benefits”.
“Planners believe that the proposed reforms will not deliver any real benefits to consumers but will transfer business value away from the smaller independent practice, to the larger licensees, and the wrap and master trust sector.