The industry is fighting a desperate rearguard action to have the controversial opt-in proposal overturned. It seems that some common ground may be found between the two opposing sides. Simon Hoyle reports.
Sometime between November 23, 2009, and Anzac Day, 2010, a funny thing happened. The concept of an “opt-in” mechanism for the clients of financial planners found its way into a package of reforms for the industry put forward by the Government.
Ever since, the financial planning industry has been fighting a rearguard action to have the proposal overturned. Its counter-arguments centre on three main things: First, other reforms in the Government’s Future of Financial Advice (FoFA) package – principally, banning commissions and introducing a statutory fiduciary duty – make opt-in redundant; second, implementing an opt-in regime will raise the cost of advice and put it further out of the hands of the lower end of the market; and third, the proposal will have significant unintended adverse consequences that outweigh the supposed benefits.
While supporters of the opt-in proposal remain implacably opposed to its abolition, it seems that common ground is emerging that could result in a workable compromise.
FoFA was released after the Government had received and considered the final report of the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Financial Products and Services in Australia (the Ripoll Report).
‘The Ripoll Report mentioned opt-in just once, and only then in the context of asset-based fees’
The Ripoll Report mentioned an opt-in proposal once, and only then in the context of a discussion about asset-based fees. The report said:
“Industry Super Network [ISN] also opposed asset-based fees, stating that conflicts of interest remain and such fees still encourage product sales ahead of strategic advice. They suggested that they would only be appropriate in the following circumstances:
“Where the client and adviser agree on an asset-based fee, this must be agreed and approved by the client at least annually. ISN proposes that clients should opt-in, on an annual basis and in writing, to receive and pay for financial advice. This is typical in client-professional adviser relationships and ensures that consumers are only paying for advice that they desire and receive.
“Therefore, while a product provider can facilitate payment of the advice fee directly from the client’s account, this must be based on a written authority from the client, with an annual renewal.”
However, no recommendation for an opt-in mechanism was included in the final Ripoll Report.
But five months later, when then-Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, released FoFA, the package proposed “the introduction of 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 reforms will introduce an adviser charging regime where financial advice is provided to retail clients,” it said.
“Advisers will be required to agree their fees directly with clients and disclose the charging structure to clients in a clear manner, including as far as practicable, total adviser charges payable, expressed in dollar terms. The Government will consult with industry about the form of the annual renewal notice and the period after which the initial advice is given that it will first apply.”
The report also said: “If an adviser is to provide an ongoing service, the adviser must send an annual renewal notice to the client. If the client does not renew the services, the adviser cannot continue to charge the client.”
It said the proposal would “provide transparency for consumers in relation to adviser charging. Adviser charging will be clear, product neutral, directly related to the services provided and must be renewed on an annual basis.”
Despite not putting forward opt-in as an explicit recommendation, the chairman of the PJC inquiry, Bernie Ripoll, supports the idea, and says it is a necessary balancing mechanism.
“I see it as the final piece that brings it all together and makes it make sense, in terms of the full supply chain,” Ripoll said, at the national conference of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) in March.
“Opt-in plays an important part in rebalancing what is an information and knowledge divide in the sector. For me, it’s about advisers re-engaging with their clients; it’s about making sure there’s a continuing dialogue; making sure people do understand what they’re actually getting; it’s about value for money; and it’s not too much different from what we all expect when we sign up to anything else.
“Depending on the longevity of it, depending on what it looks like and what kind of product it actually is, we get a say in it from year to year. I don’t subscribe to the set-and-forget principle in terms of advice, because advice is not set-and-forget. Circumstances change. People change.
“There are a whole set of circumstances where I believe you need to re-engage, the sector needs to re-engage. And if that’s done right, there’s no reason why that can’t be a positive. I do accept that there’s a cost with this; we all accept there’s a cost. It’s small but still significant. But it’s still a cost – it’s viewed as a cost now, because it’s not being done.
“It’s a bit like servicing your car. If you never service your car, the first time you service it, it’s going to look like a cost. But in terms of the investment or the overall value of that car, you really need to service it every year.
“I’ve tried to look at this in terms of how does this apply in other areas, how does this apply in real life? And I know that with Cooper there’s opt-in, there’s opt-out, there’s maybe combinations, but I think there is a real difference. Opt-in in terms of certain products and advice is really important, and it shouldn’t be seen as a negative, it should be seen as a way to re-engage. If you haven’t spoken to one of your customers for three or four years, you’ve probably got something wrong.”
Ripoll says the opt-in proposal is “about more than just engagement; it’s about rebalancing”.
He says there is “a huge gap” between the knowledge and expertise of the planner and that of the client.
“When we talk about ethics and standards, why is the sector demanding this, and professionalism? It’s because the advice you provide is very much one-sided. The person receiving that advice may not completely understand what they’re getting.
‘It’s about heavy-handedness and legislation and the consequences of that’
“What they should understand, though, is what they are paying for. They should understand the value model. And they should have, in these circumstances, to opt back in. Whether it’s 12 months or 24 months, I’m not the person to decide that. I think the principle is sound. The expert advisory panel can then work with the sector. There may be some differences with different products.”
The Financial Services Council (FSC) has also focused on the opt-in term, and has proposed an approach that would honour the principle contained in FoFA while addressing some of the concerns, particularly to do with cost and administration.
Members of the FSC employ about 80 per cent of all financial planners in Australia, so it may be assumed that the proposal meets with the approval of a large majority of the planning community – or, at least, with those dealer groups.
FSC’s proposed amendment to the opt-in is simply to retain the requirement that a planner formally seek a client’s approval or agreement to continue to provide services (and charge for them), but to require it less frequently.
The FSC proposal would still require clients to formally agree to continue to receive advice, but every three years, instead of annually.
The chief executive of the FSC, John Brogden, recently told an FSC event that an annual opt-in would create “a ‘fast food’ style advice industry; one that provides ‘McDonald’s’ advice and churns through customers as quickly as possible”.
To address the “set-and-forget” issue highlighted by Ripoll, the FSC says consumers must also receive a statement, at least annually, from their adviser, outlining all fees and services over the previous 12-month period and also for the following 12-month period.
The three-year opt-in term would not preclude a consumer from opting out of receiving advice earlier than that, if they wished.
Andrew Gale, chief executive of Count Financial, told the SPAA conference that “the big issue here is the law of unintended consequences”.
“I think there’s a real risk that especially an annual opt-in arrangement is actually not in the clients’ interests,” he says.
“I think we’ll have three likely events. First of all, I strongly believe the cost of advice will go up, because the reality is … you put a lot of effort in right upfront, in terms of the client and strategic advice and getting them set – often more time than the revenue you receive – and you amortise that over the next few years. Now, if you’re going to amortise that upfront effort over a shorter period of time, the cost of advice is going to go up. So that’s issue number one.
“Secondly, I think there’s a real risk, especially with an annual requirement, that some clients will drop out of the system, not through intent but through inertia – people do not get around to doing the paperwork on an annual basis – and that leaves them exposed. When they should be covered by advice, they’ve effectively dropped out of it and [from] the protection of being advised. That’s a risk.
“We are already seeing advisers starting to desert middle Australia. They are starting to say, ‘OK, I will migrate to the top 30 per cent of clients who have more significant account balances and more significant contribution levels’. Some of the slack will be picked up by industry funds and not-for-profit channels and bank channels, but I do have concerns about middle Australia being disenfranchised in the process.”
Gale says his concern is that opt-in “is going to be disruptive”.
“It certainly will have an impact on small businesses and I think unnecessarily so, especially if you have a duty of care provision, if you’ve got non-conflicted remuneration structures, that actually gives you a lot of reliance on quality of advice,” he says.
“If it has to apply, then we support the position which the FSC has put forward, which is a minimum three-year period, and I think it’s important that the intra-fund concept gets broadened to be intra-product and can extend right across the board, so people can look after their clients with smaller account balances and smaller contribution levels; you can have a simplified service, and charge a lower amount to look after those clients.”
The cost of the opt-in proposal is debatable. Some analyses have put the cost at as high as $100 per client, per year. That suggests an astronomical cost – several hundred million dollars a year.
But a comprehensive review of the regime by Rice Warner Actuaries, commissioned by ISN, suggests a much more modest cost.
The Rice Warner analysis stresses that its assessment is based only on “advice provided and business written after the FoFA changes”, which come into effect on July 1, 2012.
It’s a comprehensive review, and it concludes that implementation costs will be minimal, assuming those costs can be amortised over a seven-year period.
“The estimated costs set out reflect an empirical analysis of the specific additional functions required [to implement opt-in, in isolation from the overall FoFA package] and cost estimates for each, based on our experience of implementing process and system changes more broadly within financial services businesses,” it says.
“On this basis the overall cost of an opt-in regime over and above an opt-out regime, when expressed as a percentage of funds under advice, [is] expected to be in the range of 0.003 per cent per annum to 0.009 per cent per annum (or 0.3 to 0.9 basis points).
“In the long term, once one-off establishment costs no longer have an impact, costs are estimated to reduce to between 0.002 per cent per annum and 0.007 per cent per annum (or 0.2 basis points to 0.7 basis points).”
The philosophical arguments against opt-in focus on the role of the Government in defining the relationship between individuals and the professionals they engage with.
The chief executive of the FPA, Mark Rantall, says “there is no profession in the world that has a legislated opt-in”.
“Is it good practice that you engage your clients every year? Absolutely it is, of course it is. But it’s not about that,” he says.
“It’s about heavy-handedness and legislating and the consequences of that. It’s redundant policy, given that we’re banning commission and [introducing] statutory fiduciary duty. Opt-in is absolutely redundant and heavy-handed policy. It’s overkill to the extreme.”
From a regulatory point of view, on opt-in at least (as opposed to asset-based fees), the regulator claims to be agnostic.
Australian Securities and Investments Commission (ASIC) commissioner Greg Medcraft told SPAA that ASIC would “implement whatever the government [decides], whichever government it is”.
“There was a recent Newspoll that found that 85 per cent of current clients prefer set fees or hourly rates, which probably fits in with where things are going; and of those who are happy to pay ongoing fees, 75 per cent favoured annual renewal of ongoing fees [with] opt-in rather than the current opt-out model,” Medcraft said.
“Is it a government requirement, or just best practice? I think that’s where the debate is. It’s a matter of policy for government to decide how it’s implemented – and what’s implemented.”
The Opposition also thinks opt-in is unnecessary, in the context of the broader reforms contained in FoFA. The Shadow Assistant Treasurer and Shadow Minister for Financial Services and Superannuation, Mathias Cormann, told the SPAA conference that opt-in “adds red tape; it will add unnecessary costs”.
“People develop lifetime partnerships with their financial advisers – a lot of effort [goes in] upfront and then ideally a lifetime relationship,” he said.
“This is a contractual relationship between an adviser and his client and there is no need for government to get itself into the middle of it. We can’t see the problem it’s trying to fix and so from that point of view we are totally opposed to it.”
Rantall says that “opt-in is a supposed solution to what was perceived as a problem, and the problem that was perceived was that financial planners were receiving ongoing revenue where the client was not getting regular annual ongoing advice”.
“The solution to that, which maybe the policymakers were not aware of, was banning commissions,” Rantall says.
“When commissions are banned, the effect that it has is that it gives control of the payment of fees directly back to the client, such that those commissions are no longer embedded in product.
“Therefore, if a client is no longer receiving advice, they can ring the product manufacturer and/or the adviser and have any advice fees removed or stopped. Before that, with commissions being embedded in products, a client had no control over the discontinuation of those commissions, and therefore [over] reducing their overall costs.
“My sense is that solves the problem of the adviser receiving commission when they are not providing a service for that. But by creating opt-in to solve the problem, complexities abound in terms of what the service is that the financial planner provides, how often they provide this service, and what the perceived value by the client is of the role the financial planner plays.
“Not only are you interfering with the payment procedure, but you’re interfering in the value proposition of the financial planner to their client.”
Rantall says that once commissions are banned and planners are subjected to a statutory fiduciary duty, it’s difficult to see what additional benefit opt-in achieves.
He says the FPA could live with an alternative, opt-out structure, under which clients might be invited to formally dispense with a planner’s services if they no longer need or want (or believe they are getting) service.
But that is a fundamentally different proposal to opt-in: it would require no action on the part of the client to retain a planner’s services. In other words, the “default” scenario would be that services continued year-to-year.
“Yes – that’s one thing,” he says. “But it’s the concept of having to get a certificate every year. If for whatever reason a client is apathetic, or they forget or they are not in the country, or they do not get to see someone, the concept that you’ve broken the law because you haven’t got that certificate is extremely onerous.”
David Whiteley, chief executive of ISN, says opt-in is necessary to avoid a situation where a planner could replace ongoing trailing commission from products with an ongoing asset-based fee, and still provide no ongoing service or advice to the client. In other words, if asset-based fees remain an acceptable way to charge clients, then planners will have to live with opt-in.
“In our view the only way that ongoing fees for advice can be tolerated is where the client has the opportunity to annually consider whether they want to continue to receive and pay for advice,” Whiteley says.
“That’s the purpose of the annual opt-in – its purpose is to align the payment for advice with the receipt of advice.”
The Association of Financial Advisers (AFA) has resolutely opposed the idea of opt-in. The association’s official position can be read this month in the inaugural column for Professional Planner, written by the AFA’s chief executive, Richard Klipin, on page 7.
In January, the AFA and NAB Financial Planner Banking released a report based on research carried out by CoreData. It found, unsurprisingly, that the majority of planners surveyed opposed the opt-in proposal as originally formulated in FoFA.
“Of all the FoFA reforms, adviser support is weakest for the opt-in reform,” it said.
“Three in five advisers [oppose] the reform (based on a support rating of zero to three out of 10).”
The report examines an alternative – an opt-out mechanism “whereby clients who are unhappy with the service they are receiving can choose to no longer receive the service”.
“This alternative would not only reduce the paperwork for both advisers and clients, but it also comes at no cost, removing the need for advisers to increase the fees charged to clients to cover the cost of reform.”
The report says that this mechanism already exists and can be used by consumers at any time. In the past, however, trail commissions have presented a very real obstacle.
“In an environment where trail commissions are banned, there would no longer be a barrier to opting out,” it says.
Key groups, including industry funds and a relative newcomer to the scene, The Australian Financial Integrity Network (AusFIN), do not support an opt-out proposal. AusFIN is comprised of the consumer group CHOICE, the Australian Council of Trade Unions, the Consumer Law Action Centre, the Finance Sector Union, the Australia Institute and ISN.
ISN’s Whiteley says just allowing clients to formally opt-out of receiving advice each year is not acceptable.
“No,” he says. “One of the key issues in financial services is inertia. That is, people continue to pay for a service, particularly advice through commissions, where they don’t receive it.
“Our estimates are that more than four million people are paying commission ostensibly for advice, but don’t receive it. We do not want to replace one system that, through inertia, means people pay for something that they do not receive with another system that is equally likely, through inertia, to mean that people pay for something they do not receive.”
Whiteley says that there is an asymmetry of knowledge between a financial planner and a client. Opt-in addresses that imbalance by requiring the planner to explicitly receive the agreement and consent of the client to continue receiving (and paying for) advice.
However, Brogden told the FSC event last month that that an annual opt-in requirement is “quite simply bad public policy”.
“It is counter to consumers’ best interests and will send the industry back in time to when the emphasis was on sales rather than professionalism,” he said.
“I find it amusing, to say the least, how the most vocal supporter of opt-in and loudest opponent of opt-out, the consumer group CHOICE, deals with its members.
“[It says]: ‘To keep your membership going we’ll debit your credit, charge or debit card automatically every three months until you tell us to stop’.
“As they say, people in glass houses…”
S
ometime between November 23, 2009, and Anzac Day, 2010, a funny thing happened. The concept of an “opt-in” mechanism for the clients of financial planners found its way into a package of reforms for the industry put forward by the Government.
Ever since, the financial planning industry has been fighting a rearguard action to have the proposal overturned. Its counter-arguments centre on three main things: First, other reforms in the Government’s Future of Financial Advice (FoFA) package – principally, banning commissions and introducing a statutory fiduciary duty – make opt-in redundant; second, implementing an opt-in regime will raise the cost of advice and put it further out of the hands of the lower end of the market; and third, the proposal will have significant unintended adverse consequences that outweigh the supposed benefits.
While supporters of the opt-in proposal remain implacably opposed to its abolition, it seems that common ground is emerging that could result in a workable compromise.
FoFA was released after the Government had received and considered the final report of the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Financial Products and Services in Australia (the Ripoll Report).
The Ripoll Report mentioned an opt-in proposal once, and only then in the context of a discussion about asset-based fees. The report said:
“Industry Super Network [ISN] also opposed asset-based fees, stating that conflicts of interest remain and such fees still encourage product sales ahead of strategic advice. They suggested that they would only be appropriate in the following circumstances:
“Where the client and adviser agree on an asset-based fee, this must be agreed and approved by the client at least annually. ISN proposes that clients should opt-in, on an annual basis and in writing, to receive and pay for financial advice. This is typical in client-professional adviser relationships and ensures that consumers are only paying for advice that they desire and receive.
“Therefore, while a product provider can facilitate payment of the advice fee directly from the client’s account, this must be based on a written authority from the client, with an annual renewal.”
However, no recommendation for an opt-in mechanism was included in the final Ripoll Report.
But five months later, when then-Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, released FoFA, the package proposed “the introduction of 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 reforms will introduce an adviser charging regime where financial advice is provided to retail clients,” it said.
“Advisers will be required to agree their fees directly with clients and disclose the charging structure to clients in a clear manner, including as far as practicable, total adviser charges payable, expressed in dollar terms. The Government will consult with industry about the form of the annual renewal notice and the period after which the initial advice is given that it will first apply.”
The report also said: “If an adviser is to provide an ongoing service, the adviser must send an annual renewal notice to the client. If the client does not renew the services, the adviser cannot continue to charge the client.”
It said the proposal would “provide transparency for consumers in relation to adviser charging. Adviser charging will be clear, product neutral, directly related to the services provided and must be renewed on an annual basis.”
Despite not putting forward opt-in as an explicit recommendation, the chairman of the PJC inquiry, Bernie Ripoll, supports the idea, and says it is a necessary balancing mechanism.
“I see it as the final piece that brings it all together and makes it make sense, in terms of the full supply chain,” Ripoll said, at the national conference of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA) in March.
“Opt-in plays an important part in rebalancing what is an information and knowledge divide in the sector. For me, it’s about advisers re-engaging with their clients; it’s about making sure there’s a continuing dialogue; making sure people do understand what they’re actually getting; it’s about value for money; and it’s not too much different from what we all expect when we sign up to anything else.
“Depending on the longevity of it, depending on what it looks like and what kind of product it actually is, we get a say in it from year to year. I don’t subscribe to the set-and-forget principle in terms of advice, because advice is not set-and-forget. Circumstances change. People change.
“There are a whole set of circumstances where I believe you need to re-engage, the sector needs to re-engage. And if that’s done right, there’s no reason why that can’t be a positive. I do accept that there’s a cost with this; we all accept there’s a cost. It’s small but still significant. But it’s still a cost – it’s viewed as a cost now, because it’s not being done.
“It’s a bit like servicing your car. If you never service your car, the first time you service it, it’s going to look like a cost. But in terms of the investment or the overall value of that car, you really need to service it every year.
“I’ve tried to look at this in terms of how does this apply in other areas, how does this apply in real life? And I know that with Cooper there’s opt-in, there’s opt-out, there’s maybe combinations, but I think there is a real difference. Opt-in in terms of certain products and advice is really important, and it shouldn’t be seen as a negative, it should be seen as a way to re-engage. If you haven’t spoken to one of your customers for three or four years, you’ve probably got something wrong.”
Ripoll says the opt-in proposal is “about more than just engagement; it’s about rebalancing”.
He says there is “a huge gap” between the knowledge and expertise of the planner and that of the client.
“When we talk about ethics and standards, why is the sector demanding this, and professionalism? It’s because the advice you provide is very much one-sided. The person receiving that advice may not completely understand what they’re getting.
“What they should understand, though, is what they are paying for. They should understand the value model. And they should have, in these circumstances, to opt back in. Whether it’s 12 months or 24 months, I’m not the person to decide that. I think the principle is sound. The expert advisory panel can then work with the sector. There may be some differences with different products.”
The Financial Services Council (FSC) has also focused on the opt-in term, and has proposed an approach that would honour the principle contained in FoFA while addressing some of the concerns, particularly to do with cost and administration.
Members of the FSC employ about 80 per cent of all financial planners in Australia, so it may be assumed that the proposal meets with the approval of a large majority of the planning community – or, at least, with those dealer groups.
FSC’s proposed amendment to the opt-in is simply to retain the requirement that a planner formally seek a client’s approval or agreement to continue to provide services (and charge for them), but to require it less frequently.
The FSC proposal would still require clients to formally agree to continue to receive advice, but every three years, instead of annually.
The chief executive of the FSC, John Brogden, recently told an FSC event that an annual opt-in would create “a ‘fast food’ style advice industry; one that provides ‘McDonald’s’ advice and churns through customers as quickly as possible”.
To address the “set-and-forget” issue highlighted by Ripoll, the FSC says consumers must also receive a statement, at least annually, from their adviser, outlining all fees and services over the previous 12-month period and also for the following 12-month period.
The three-year opt-in term would not preclude a consumer from opting out of receiving advice earlier than that, if they wished.
Andrew Gale, chief executive of Count Financial, told the SPAA conference that “the big issue here is the law of unintended consequences”.
“I think there’s a real risk that especially an annual opt-in arrangement is actually not in the clients’ interests,” he says.
“I think we’ll have three likely events. First of all, I strongly believe the cost of advice will go up, because the reality is … you put a lot of effort in right upfront, in terms of the client and strategic advice and getting them set – often more time than the revenue you receive – and you amortise that over the next few years. Now, if you’re going to amortise that upfront effort over a shorter period of time, the cost of advice is going to go up. So that’s issue number one.
“Secondly, I think there’s a real risk, especially with an annual requirement, that some clients will drop out of the system, not through intent but through inertia – people do not get around to doing the paperwork on an annual basis – and that leaves them exposed. When they should be covered by advice, they’ve effectively dropped out of it and [from] the protection of being advised. That’s a risk.
“We are already seeing advisers starting to desert middle Australia. They are starting to say, ‘OK, I will migrate to the top 30 per cent of clients who have more significant account balances and more significant contribution levels’. Some of the slack will be picked up by industry funds and not-for-profit channels and bank channels, but I do have concerns about middle Australia being disenfranchised in the process.”
Gale says his concern is that opt-in “is going to be disruptive”.
“It certainly will have an impact on small businesses and I think unnecessarily so, especially if you have a duty of care provision, if you’ve got non-conflicted remuneration structures, that actually gives you a lot of reliance on quality of advice,” he says.
“If it has to apply, then we support the position which the FSC has put forward, which is a minimum three-year period, and I think it’s important that the intra-fund concept gets broadened to be intra-product and can extend right across the board, so people can look after their clients with smaller account balances and smaller contribution levels; you can have a simplified service, and charge a lower amount to look after those clients.”
The cost of the opt-in proposal is debatable. Some analyses have put the cost at as high as $100 per client, per year. That suggests an astronomical cost – several hundred million dollars a year.
But a comprehensive review of the regime by Rice Warner Actuaries, commissioned by ISN, suggests a much more modest cost.
The Rice Warner analysis stresses that its assessment is based only on “advice provided and business written after the FoFA changes”, which come into effect on July 1, 2012.
It’s a comprehensive review, and it concludes that implementation costs will be minimal, assuming those costs can be amortised over a seven-year period.
“The estimated costs set out reflect an empirical analysis of the specific additional functions required [to implement opt-in, in isolation from the overall FoFA package] and cost estimates for each, based on our experience of implementing process and system changes more broadly within financial services businesses,” it says.
“On this basis the overall cost of an opt-in regime over and above an opt-out regime, when expressed as a percentage of funds under advice, [is] expected to be in the range of 0.003 per cent per annum to 0.009 per cent per annum (or 0.3 to 0.9 basis points).
“In the long term, once one-off establishment costs no longer have an impact, costs are estimated to reduce to between 0.002 per cent per annum and 0.007 per cent per annum (or 0.2 basis points to 0.7 basis points).”
The philosophical arguments against opt-in focus on the role of the Government in defining the relationship between individuals and the professionals they engage with.
The chief executive of the FPA, Mark Rantall, says “there is no profession in the world that has a legislated opt-in”.
“Is it good practice that you engage your clients every year? Absolutely it is, of course it is. But it’s not about that,” he says.
“It’s about heavy-handedness and legislating and the consequences of that. It’s redundant policy, given that we’re banning commission and [introducing] statutory fiduciary duty. Opt-in is absolutely redundant and heavy-handed policy. It’s overkill to the extreme.”
From a regulatory point of view, on opt-in at least (as opposed to asset-based fees), the regulator claims to be agnostic.
Australian Securities and Investments Commission (ASIC) commissioner Greg Medcraft told SPAA that ASIC would “implement whatever the government [decides], whichever government it is”.
“There was a recent Newspoll that found that 85 per cent of current clients prefer set fees or hourly rates, which probably fits in with where things are going; and of those who are happy to pay ongoing fees, 75 per cent favoured annual renewal of ongoing fees [with] opt-in rather than the current opt-out model,” Medcraft said.
“Is it a government requirement, or just best practice? I think that’s where the debate is. It’s a matter of policy for government to decide how it’s implemented – and what’s implemented.”
The Opposition also thinks opt-in is unnecessary, in the context of the broader reforms contained in FoFA. The Shadow Assistant Treasurer and Shadow Minister for Financial Services and Superannuation, Mathias Cormann, told the SPAA conference that opt-in “adds red tape; it will add unnecessary costs”.
“People develop lifetime partnerships with their financial advisers – a lot of effort [goes in] upfront and then ideally a lifetime relationship,” he said.
“This is a contractual relationship between an adviser and his client and there is no need for government to get itself into the middle of it. We can’t see the problem it’s trying to fix and so from that point of view we are totally opposed to it.”
Rantall says that “opt-in is a supposed solution to what was perceived as a problem, and the problem that was perceived was that financial planners were receiving ongoing revenue where the client was not getting regular annual ongoing advice”.
“The solution to that, which maybe the policymakers were not aware of, was banning commissions,” Rantall says.
“When commissions are banned, the effect that it has is that it gives control of the payment of fees directly back to the client, such that those commissions are no longer embedded in product.
“Therefore, if a client is no longer receiving advice, they can ring the product manufacturer and/or the adviser and have any advice fees removed or stopped. Before that, with commissions being embedded in products, a client had no control over the discontinuation of those commissions, and therefore [over] reducing their overall costs.
“My sense is that solves the problem of the adviser receiving commission when they are not providing a service for that. But by creating opt-in to solve the problem, complexities abound in terms of what the service is that the financial planner provides, how often they provide this service, and what the perceived value by the client is of the role the financial planner plays.
“Not only are you interfering with the payment procedure, but you’re interfering in the value proposition of the financial planner to their client.”
Rantall says that once commissions are banned and planners are subjected to a statutory fiduciary duty, it’s difficult to see what additional benefit opt-in achieves.
He says the FPA could live with an alternative, opt-out structure, under which clients might be invited to formally dispense with a planner’s services if they no longer need or want (or believe they are getting) service.
But that is a fundamentally different proposal to opt-in: it would require no action on the part of the client to retain a planner’s services. In other words, the “default” scenario would be that services continued year-to-year.
“Yes – that’s one thing,” he says. “But it’s the concept of having to get a certificate every year. If for whatever reason a client is apathetic, or they forget or they are not in the country, or they do not get to see someone, the concept that you’ve broken the law because you haven’t got that certificate is extremely onerous.”
David Whiteley, chief executive of ISN, says opt-in is necessary to avoid a situation where a planner could replace ongoing trailing commission from products with an ongoing asset-based fee, and still provide no ongoing service or advice to the client. In other words, if asset-based fees remain an acceptable way to charge clients, then planners will have to live with opt-in.
“In our view the only way that ongoing fees for advice can be tolerated is where the client has the opportunity to annually consider whether they want to continue to receive and pay for advice,” Whiteley says.
“That’s the purpose of the annual opt-in – its purpose is to align the payment for advice with the receipt of advice.”
The Association of Financial Advisers (AFA) has resolutely opposed the idea of opt-in. The association’s official position can be read this month in the inaugural column for Professional Planner, written by the AFA’s chief executive, Richard Klipin, on page 7.
In January, the AFA and NAB Financial Planner Banking released a report based on research carried out by CoreData. It found, unsurprisingly, that the majority of planners surveyed opposed the opt-in proposal as originally formulated in FoFA.
“Of all the FoFA reforms, adviser support is weakest for the opt-in reform,” it said.
“Three in five advisers [oppose] the reform (based on a support rating of zero to three out of 10).”
The report examines an alternative – an opt-out mechanism “whereby clients who are unhappy with the service they are receiving can choose to no longer receive the service”.
“This alternative would not only reduce the paperwork for both advisers and clients, but it also comes at no cost, removing the need for advisers to increase the fees charged to clients to cover the cost of reform.”
The report says that this mechanism already exists and can be used by consumers at any time. In the past, however, trail commissions have presented a very real obstacle.
“In an environment where trail commissions are banned, there would no longer be a barrier to opting out,” it says.
Key groups, including industry funds and a relative newcomer to the scene, The Australian Financial Integrity Network (AusFIN), do not support an opt-out proposal. AusFIN is comprised of the consumer group CHOICE, the Australian Council of Trade Unions, the Consumer Law Action Centre, the Finance Sector Union, the Australia Institute and ISN.
ISN’s Whiteley says just allowing clients to formally opt-out of receiving advice each year is not acceptable.
“No,” he says. “One of the key issues in financial services is inertia. That is, people continue to pay for a service, particularly advice through commissions, where they don’t receive it.
“Our estimates are that more than four million people are paying commission ostensibly for advice, but don’t receive it. We do not want to replace one system that, through inertia, means people pay for something that they do not receive with another system that is equally likely, through inertia, to mean that people pay for something they do not receive.”
Whiteley says that there is an asymmetry of knowledge between a financial planner and a client. Opt-in addresses that imbalance by requiring the planner to explicitly receive the agreement and consent of the client to continue receiving (and paying for) advice.
However, Brogden told the FSC event last month that that an annual opt-in requirement is “quite simply bad public policy”.
“It is counter to consumers’ best interests and will send the industry back in time to when the emphasis was on sales rather than professionalism,” he said.
“I find it amusing, to say the least, how the most vocal supporter of opt-in and loudest opponent of opt-out, the consumer group CHOICE, deals with its members.
“[It says]: ‘To keep your membership going we’ll debit your credit, charge or debit card automatically every three months until you tell us to stop’.
“As they say, people in glass houses…”
