The acceptance that commissions were going to be removed as a form of remuneration for providing financial advice has sometimes been grudging. But Richard Weatherhead says the Ripoll report recommendations were bipartisan and the industry has responded quickly.
When Chris Bowen published the Future of Financial Advice (FoFA) in April this year, the package of Government reforms was not the initiator of change, but it has certainly been the catalyst to formalise this rapid evolution in the market.
Since the FoFA release, I have been fortunate to talk to many dealer groups about the implications for their businesses and potential strategies for the next five to ten years. Developments already under way in the market have taken on a momentum of their own and Government policy, whilst important with regard to detailed implementation, is less likely to be the underlying driver of change – market forces have now taken on that role.
In this article I discuss some of the themes emerging from discussions with dealer groups over the past few months. They are likely to be prominent in the strategic thinking of advice businesses in the future.
We have already seen a number of independ- ent dealer groups merging into larger wealth management groups – particularly the bank- owned advice networks. This clearly provides a strong financial foundation for those businesses, particularly if volume-based platform rebates are banned (see later on this point).
Obviously, in mergers of this kind, the cultural fit between the two organisations is vitally important, as is the remuneration structure established for the former business owners going forward. However, the significant savings through shared back office, compliance, research and other services are often sufficiently attractive to make many integrations of this kind successful.
‘The use of SMAs… is likely to increase, particularly for higher-net-worth clients’
Some industry observers have seen the seemingly inexorable growth of the institutionally-owned adviser groups and the dwindling number of independents (in ownership terms) as leading to too much concentration of market power and as a threat to genuine choice in the advice market. It would certainly be a poor outcome for consumers if market concentration led to advice becoming homogeneous and the market lacking competition.
However, if dealer groups can make the transition to institutional ownership whilst maintaining their unique value proposition with tailored advice and services for their clients, the ultimate ownership of the dealer group is not important.
COMMISSIONS AND FEES
The transition from commission to fees for superannuation and investment products is already well under way, with groups such as AMP Financial Planning, NAB Financial Planning and AXA Financial Planning, to mention but three, having now made the transition to a fee-based remuneration structure.
A few, such as Godfrey Pembroke, are moving to a fee basis for life insurance too.
Two key issues going forward will be:
1. Whether asset-based advice fees continue in their current form or whether market forces (whether or not they result from regulatory change) will drive a shift towards “flat fees” – in other words, fees agreed with the client in dollar terms (albeit subject to indexation), rather than being based on a percentage of funds under advice; and
2. The details of any advice opt-in arrangements that may be imposed upon the industry.
Irrespective of any regulatory changes, the market seems likely to move increasingly to flat-dollar fee structures over time. Indeed, a similar move for risk insurance also seems inevitable, albeit in the longer term – notwithstanding the concerns expressed by some industry commentators that such a move could exacerbate the under-insurance problem.
Some dealer groups appear to be relatively relaxed about a move to flat-dollar fees, regular opt-ins for advice and the removal of commissions in respect of risk insurance.