John Brogden, chief executive of the Financial Services Council (FSC), says requiring clients to opt in to advice annually risks creating a “fast food-style” advice industry.
Brogden instead wants an advice renewal framework that allows clients to opt out every three years, to avoid creating an industry that “provides ‘McDonald’s advice’ and churns through customers as quickly as possible”.
Brogden’s comments, delivered last Friday, are directed at the Future of Financial Advice (FoFA) recommendation to require clients to opt in annually, which continues to raise concerns within the industry, as many believe it contradicts protecting the best interests of the client, and is simply not necessary in a world where clients control the payment of fees to financial planners.
“We believe annual opt-in is bad public policy,” Brodgen said.
“It will send the industry back in time to when the emphasis was on sales rather than professionalism.
“It is short-sighted, it undermines the strength of the FoFA reform package as a whole and provides weaker consumer protection.”
However, new research commissioned by Industry Super Network (ISN) released today showed nearly 75 per cent of consumers favoured the annual renewal of ongoing fees.
The survey, conducted by Newspoll also found 89 per cent of respondents agree there should be a law requiring financial planners to act in the best interest of clients.
Brogden said the significant advantages of the three-year framework over annual opt-in is that it puts complete control in the hands of consumers, it will not drive short-termism and it will reduce the administrative burden on small businesses while retaining the highest consumer protection.
“Individual businesses for financial advice will be layered with burden with the approval of annual opt-in and would lead to an increase in the cost of advice,” he said.
“If you were saying to them to get their hundreds or thousands of clients to renew annually, it would be a high administrative burden for them.”
In addition to the proposed framework, the FSC says consumers must also receive a statement, at least annually, from their advice that outlines all fees and services over the previous 12-month period and also for the following 12-month period.
“One of the ironies in all this is that there’s absolutely no doubt that the reforms we’re putting forward will make the lives of financial advisers harder,” Brogden said.
“If you’ve got a situation where a client can walk away at any stage, you’re going to work harder to keep that client around. You’re going to serve them properly, you’re going to advise them well and you won’t be just visiting once a year, you’ll be doing a lot more than that in terms of communication, both physical and electronic. Our option significantly empowers the consumer to walk away at any time, rather than lock them in for 12 months.”
Brogden also expressed the FSC’s opposition to FoFA’s recommendation to ban all volume-related payments, warning that “blanket banning will result in significant distortions in the market” and thus need to be differentiated.
He says volume-related payments that distort advice should be banned and clarified the three areas of banning are: “Preferential payments which increase access more visibly on a platform or an APL, adviser remuneration schemes based solely on sales volume or that bias advisers in a certain way and most particularly, volume-related payments that go directly from a fund manager to an adviser.”
However, Brogden supports any volume-related payment that provides consumers and the industry with the benefits of scale.
He said he is “very confident” that this could be distinguished legislatively and that ASIC could regulate it.
“A lot of advisers don’t take volume-rebates, they just pass them directly on to consumers so [this is a point of difference for a lot of advisers],” he said.
“It would be absurd to abolish volume rebates that go to consumers’ hands.”
The FSC’s main focus will be on the “areas of significant disagreement” with the FoFA reforms, says Brogden.
“The real risk here for the government is through a set of intended consequences, they end up making the wealth management industry as consolidated as the banking sector – and we don’t want that,” he said.
“We want much more competition than we have now.
“We would regard a three-year opt-out and the maintenance of appropriate payment rebates as ‘Siamese twins’ on this occasion.
“We do think that they are critical and we’re not attracted to trading one over the other. The rest of the recommendations we don’t think are even in the zone of needing to be traded. Our recommendations on annual statements, for example, I would be stunned if the Government didn’t do that or more.”
I’m puzzled – IFSA used to declare that it was an ” .. organisation which represents the retail & wholesale funds management and life insurance industry.” It was the voice of product providers. It has now changed its name to “Financial Services Council” and says that it ” . represents Australia’s retail & wholesale funds management businesses, superannuation funds, life insurers and financial advisory networks.” FSC now has a view on how advisers should be paid, etc, etc. A number of financial planning practitioners have expressed concerns (unfounded, in my view) that the FPA has been influenced by fund managers and life companies. Are they thinking of the FSC. A glance at the FSC membership list and, in particular, their Advice Board Committee makes very clear which part of the financial services industry has influence in their organisation. It does nothing to help the challenge of convincing the community that financial planners are not subject to the influence of product providers when the FSC purports to represent “financial advisory networks”. The FPA and AFA are one too may bodies for the community to comprehend – having the FSC try to move from the dark side into the advice space is an unnecessary further complication.