Last year, Hollywood re-released the timeless classic Alice in Wonderland – a story of improbabilities and fantasy.
It was also the year the Government committed to “clean up” the financial advice industry, via Future of Financial Advice (FoFA) reforms, so that the interests of consumers would be better served. But following the release of the reform package, handed down by the Minister for Financial Services and Superannuation, Bill Shorten, late last month, many in the industry – like Alice – are baffled and confused. This is because, despite its stated intention of improving consumer access to advice, reducing costs and ensuring better consumer protection, the reforms can only lead to higher advice costs, further obstacles to accessing advice, consumers accessing life insurance via the wrong tax structure, and increased red tape for consumers. These impediments may well see the number of people receiving advice plummet from an already low level of two in 10. The result? Even fewer people will have enough money to retire on and/or enough life insurance protection in the event of death or disaster.
Many financial advisers are also business owners who share the same day-to-day issues as other businesses across Australia. However, unlike other business owners, they are now being increasingly told how to run their business, how to perform their duties and how to charge for their services. These business owners will now have to adapt and change and (re)position their businesses at a time when the Government itself acknowledges more people need greater access to advice.
So let’s look at the reforms one by one.
The Government’s plan to ban commissions on risk products within superannuation will force consumers to pay upfront fees out of their own pocket to access advice. And the bottom line here is, they are not accustomed to paying their advisers this way and many simply can’t afford it. This is particularly bad news because, as the AFA’s Back to Basics consumer research clearly shows, consumers who have an adviser are better off and have greater peace of mind. Advice is crucial to increasing their financial choices, achieving higher levels of savings, ensuring appropriate levels of insurance and giving them greater control over their future. Advisers also play a crucial role in educating clients about financial matters and, in particular, helping them to negotiate the complex and confusing legislation surrounding superannuation and taxation.
It’s difficult to see how forcing consumers to seek life insurance advice outside superannuation – thereby losing valuable taxation benefits – or forcing them to pay large upfront fees for life insurance advice inside superannuation, can possibly benefit the average consumer. This failed when the UK Government did it – leading to a reversal of the decision. The Gillard Government’s failure to provide evidence of insurance mis-selling makes it even more difficult to understand this “reform”. Except, of course, when you look at the industry fund lobby groups, which, we believe, have hijacked the reform agenda. They are the big winners of FoFA reform as their barriers to providing advice have effectively been reduced.
On the face of it, opt-in provisions, requiring clients to explicitly sign on with their adviser to receive ongoing financial advice, may appear reasonable – and a two-year timeframe makes better sense than an annual opt in. However, the devil is in the detail. The two-year timeframe becomes one by stealth and at the end of the day is simply bad policy. It will increase paperwork and hence costs to clients and cause delays at renewal time. The proposed “consumer’s best interest” amendment, together with the currently available ability of a client to opt out of advice at any time, means clients have all the power to stop paying their adviser when they want to. Opt in is superfluous – there are already mechanisms in place which effectively meet the goals the Government hopes to achieve with opt-in. It is a very curious way for the Government to put consumers first.
Another disturbing aspect of the opt-in provisions is the devaluing of the long-term nature of the adviser-client relationship. The opt-in provisions taint the professional relationship that advisers have worked hard at establishing with their clients and unfairly call into question their integrity. We believe it is inappropriate for the Government to tell consumers how and when they should renew their business relationship with their adviser – such an approach is redolent of a “nanny state” and may create more “churning” by clients themselves when issues such as market downturns, which are outside an adviser’s control, cause concern.
Unquestionably, the well-documented collapse of several financial services companies caused significant financial losses to many Australians. These collapses do not equate to a total breakdown of the advice industry, and yet the Government has used them to sell the reform package to the public. This package does nothing to address the product failures that resulted in significant financial losses for investors; nothing to address ASIC’s inability to alert consumers to problems before company collapses; and does everything in its power to set advisers up to take the rap. Curiouser and curiouser.
With such a huge program of reform, it is important that Minister Shorten releases information on the impact of FoFA on the millions of consumers and thousands of advisers and their communities across the country. In particular we all have the right to see the Government modelling on what effect FoFA will have on advice delivery and its costs, small business valuations, employment within the advice sector, and the viability of the non-institutional advice sector.
For our part, FoFA has provided the AFA with the opportunity to get back to basics. We are clear on the value our members deliver to their clients – quality, focused financial advice. We remain strong in our determination to protect the interests of our members who in turn provide valuable financial advice services to clients across Australia. We will continue to actively petition the Minister to reconsider the impact these reforms will have on affordability and accessibility of financial advice and the ramifications for the advisory profession as a whole. The research evidence is clear that financial advisers are crucial in providing leadership, education and direction to everyday Australians and we will continue to fight for what our advisers believe is right for their clients.
Minister Shorten needs to demonstrate that FoFA will address what it says it will – better outcomes for consumers. By restricting adviser businesses and narrowing consumer financial advice choices, the Government is at risk of failing to meet the needs of many Australians in building their financial future. This will leave a black mark in the history book of our nation when it comes to achieving broad individual financial self-sufficiency.
Brad Fox is national president of the Association of Financial Advisers.
