It is Autumn in Sydney and the Future of Financial Advice (FoFA) finish line is in sight. After a long consultation period, two different ministers, and a new government, the profession is set to receive the draft FoFA regulations. This will not only be a benchmark of our collective lobbying efforts but, more importantly, will see (we hope) the rhetoric of FoFA match its strategic intent.

On Anzac Day 2010, the Association of Financial Advisers (AFA) welcomed the broad thrust of the FoFA changes and we have worked hard to ensure that the broad intent is not hijacked by vested interests.

The key intent of FoFA since the outset has been to ensure that:

• financial advice is in the best interests of consumers;

• remains accessible; and

• professionalism increases, so as to rebuild the trust of the community.

A number of key issues have emerged during the consultation phase that need to be added to the mix. The first is that the number of Australians who receive advice is approximately two in 10 (AFA Back to Basics Research, 2010). This is a shockingly low number and yet the evidence from those who get advice demonstrates that the benefits go beyond financial issues into happiness, peace of mind and a sense of control.

The fact that advice is good for you has never been in doubt for the 16,000 financial advisers that operate in the market place. The fact that through our research we have now proven this value is a critical piece of the puzzle – because the tone of Ripoll and FoFA positioned the profession as needing a “serious” clean up; as though all were responsible for the failures of Storm, Opes Prime, Centro, the agribusiness sector and so on.

Although this tone has softened over the past 12 months, let’s remember that the Financial Services Reform Act (FSRA), the most recent piece of regulatory change for the profession, tried to address a number of big issues under the guiding principle of “clear, concise and effective” disclosure – and we all know where that regime has taken us.

A strong, sensible voice at the FoFA table is critical for advisers, licensees and most importantly their clients, because long after the FoFA caravan – with all its current advocates, champions and detractors – moves on, they are the ones who will “pay the price” for well-intentioned but ultimately poor regulation.

Recent media reports have revealed what those of us operating in the advice industry have known for quite some time: the cost of “opt-in” is high – for advisers, for consumers and for the industry.

In reporting to the Senate Estimates Parliamentary Committee, Treasury conservatively estimated the cost to advisers at around $100 a client – adding about $100,000 a year to the running costs of an “average” financial advice business. Who will foot the bill? Advisers, who have already borne a hefty reputational cost, will have to build it into the price they charge clients. And, following the death of commissions, this means an additional out-of-pocket expense to clients.

Bottom line, the very people the FoFA reforms were designed to protect will have increased costs, therefore introducing price barriers to accessing financial advice.

While the AFA admires the co-operative approach taken by Treasury and the Government on the FoFA reforms, and is working with them to provide input about their impact on advisers and their clients, it is time to call opt-in for what it is: bad policy.

There is no law currently operating that compels consumers to have a conversation with a service provider in order to continue with a service. The AFA believes opt-in is an unnecessary imposition on advisers and on consumers who already have the right to change advisers if they see fit. Consumers will also continue to be protected by an adviser’s obligation to act in their best interests – an obligation that has always been on advisers and which will be cemented with the implementation of a fiduciary duty.

In January this year, the AFA released its groundbreaking Tides of Change research, commissioned in partnership with NAB Financial Planner Banking and conducted by CoreData/brandmanagement. The aim of the research was to better understand the current mindset of advisers and their views about the impact of the impending FoFA reforms.

According to the research, the most contentious of the FoFA reforms for advisers is opt-in. Respondents are most opposed to the proposed requirement for clients to opt-in annually, with three in five (59.2 per cent) giving it a rating of between zero and three out of 10. Practice principals are the most likely to oppose the reform (64.5 per cent).

The problem for advisers with opt-in, particularly annual opt-in, is the red-tape war it will unleash. This means that advisers will only be able to deal with higher value clients and will stop advising lower value clients because they can’t afford to service them.

At a business industry level, opt-in will increase paperwork, drive up costs, reduce the adviser’s capacity to service clients and consequently undermine the long-term nature of advice.

As our research reveals: “Had the opt-in requirement existed at the height of the GFC, many advisers’ clients – having experienced significant portfolio losses, as most people did – would have chosen to cut their losses and run. They would have declined to opt-in and instead run for cover, and would now be considerably worse off for the decision.”

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