The federal government’s vision for the future of financial advice in Australia has become rushed and uncertain, leaving some advisers concerned that the reforms will “decimate a particularly important industry”.
In its most recent submission to the parliamentary joint committee (PJC) tasked with making recommendations on Future of Financial Advice (FoFA) reform, the Association of Financial Advisers (AFA) again called for more time to digest changes it says have caused “significant disquiet within the industry”.
In introducing the AFA’s position, CEO Richard Klipin outlined the industry’s frustration at what it perceives has been a lengthy delay against a back-drop of economic turmoil.
“Unfortunately, we are now a full two years on from the release of the PJC report (Ripoll Inquiry), and the eventual outcome of FoFA still remains unclear,” he said.
“When put in the context of the huge impact that the GFC has had on advisers (and their clients), this now reflects a period of nearly four years where advisers have been subjected to huge environmental and regulatory uncertainty.”
The AFA is particularly alarmed by predictions of a significant reduction in adviser numbers, contained in the Explanatory Memorandums (EM) to both Tranche 1 and 2 of the draft FoFA legislation, which it says highlights the level of anxiety and uncertainty being experienced.
“If the reduction of over 40 per cent of advisers, as suggested in the EM, were to eventuate, this would decimate this particularly important industry,” says the AFA submission.
“Such an outcome would result in a significant reduction in the number of consumers receiving advice, which would have seriously detrimental impacts upon the country as a whole.”
According to Klipin, a clear indication of the extent to which FoFA has lost direction is apparent from the Tranche 1 Bill that was introduced into Parliament on 13 October 2011.
“This bill was limited to Opt-In, which was never part of the PJC recommendations, and an increase in ASIC powers,” he said.
“Thus of the 11 PJC recommendations and the seven key FoFA recommendations from April 2010, only a small fraction appeared in the first FoFA Bill.”
The AFA is of the view that the debate on FoFA has become inexorably mired in a range of technical issues and it needs to be re-focused on the key issues facing consumers.
The AFA has further concerns about the consultation process, which it believes started well but is currently being “rushed through [as if] following a predetermined outcome”.
“There has been no explanation provided as to why FoFA has been split into separate Tranches,” said Klipin.
“There is a level of concern within the industry with respect to the reasons for why FoFA has been broken into multiple Tranches and the lack of explanation for this.
“Breaking FoFA up into multiple tranches is poor practice. The industry should be given the chance to review the legislation in its entirety, not in bits and pieces.”
The AFA has also concluded that a start date of July 1, 2012, is unworkable for implementing FoFA reforms.
“In the context of the referral to the PJC and the Senate Economics Committee, it is now clear that the legislation cannot go back into the parliament for a number of months,” states the AFA submission.
“This means that it is now impossible for the industry to be ready for a 1 July 2012 commencement. The AFA has previously voiced a view that the commencement date should be no less than 12 months after the date the legislation is passed.
“Based upon this principle, 1 July 2013 would be the soonest that the legislation could commence.”
My problem with FoFA is that it is not just about increased professionalism in our industry. Its about doing what it can to damage this industry.
Storm and others post GFC did nothing to add to our virtues and “financial injuries” were everywhere. Now we are presented with a bill that has far more reaching effects on every financial planning business then ever was intended. Every practice has been bundled together into a single service category. Wrong! Many agree there will be casualties of the proposed reform, I feel these are more likely to exist in the smaller volume practices. Sadly, they will include businesses that have always supplied professional standards of service…………” comments like …. I feel its the right time to exit” are out there. Still there are those that have decided to persist but are concerned with the potential swings in their revenue streams that opt-in may provide.
Whatever happens, I am committed to procedure, but Opt-in is a dangerous provision……… Lets imagine its impact, not to your business, but the total and complete financial services industry if it were in place in 2008 ….Opt-in letters (required to contain both current and future fees ) issued in the months that surrounded GFC doom and gloom every day, portfolio values slashed, couple with the Govt’s guarantee on bank funds and the exodus came from across all portfolio styles. Don’t think opt-in, isn’t going to rammed into every household.
If fund volatility continues to generate negative performance plus fees plus… opt-in, it just won’t work for everybody. I see opt-in having its greatest effect at the worst possible time for the very client its their to protect. The government doesn’t or shouldn’t want clients that have relied on professional advice, to all of a sudden become financial management experts. As we have learnt, often the time to get out is the time to get in. Opt-in has the ingredients for increasing financial disinvestment, lower retirement savings levels, with longer life…. will mean an increased reliance on Centrelink for many.
I cant understand what all the fuss is about FOFA -Its very consumer friendly .
What is so hard about sending out maybe 200 “opt in” letters each 2 years asking clients to comit for a further 2 years to the financial planning process .
Getting those letters back from a small percentage of clients is going to be painful but that is the nature of the beast .
Friendly consumers who are recieving transparent conflict free advice will invest more .
I guess it would be hard if you are sitting on 700 clients with FUA of 150 million on which you are collecting a handy service fee topped up with a juicy 20 basis point platform bonus – and you dont really know 50% of them
Well , you dont have to worry about that too much because it would appear existing arrangements will continue, without having to implement the new regulations .
Where the sticking point occurs if you try and sell your client files and you dont have opt in in place
The sale of a financial planning book would result in the new firm having new clients and opt in authorities would need to be in place, or have to be put in place or othwhise no sale, your worship .
This will dramtically lower the value of financial planning books . Add to that the loss of the 20 Bips and a practice that may have been valued at say 4.5 million is now valued at 1. 8 million (BOLR x3- 50% dont opt in )
The fiduciary duty is a no brainer – would hazard a guess that most advisers already cater to that space and lack of fiduciary duty is almost impossible to prove in a court of law because the duty cant be clearly defined .
Scaled advice – i dont get that one at all . You are either on the bus with clients or you cant call them clients. If you are giving scaled advice you shoud not be allowed to call yourself a planner – you should be designated a customer service officer .
And as for ASIC being Judge & Jury on who can and cant hold a license and who they can supspend or remove is a definite no no – its a denial of natural justice and wont fly .
As you say, I can’t understand what all the fuss is about. Even though you have just said a large portion of FOFA is redundant/unworkable! I think this is where the main opposition is coming from (in my view at least). I’m sure that opt-in can be done as well, its just that it shouldn’t be required. I am also concerned about the short-termism that this legislation may create in consumers, especially in down markets when the tough conversations are required to keep the clients “best interests” at heart (“oh and here’s my invoice by the way”). This along with the so called “scaled advice”/cheap advice has the capacity (again my opinion) to push consumers into harms way rather than have someone assess their real needs and keep them on the right track…..even if its hard. Make it an even playing field or the real professionals are up against it from the start. How could this be the intention? DISCLOSURE – I do not have 700 clients or $150M FUM.
In no other industry, in Australian or anywhere in the world, is professionalism defined by the way in which the practitioner charges the client.
Professionalism is defined by (amongst other things) education and competency standards, stringently regulated ethical frameworks, specialisation and a committment to community service.
Every service profession has a conflict of interest between the practitioner and the client.
The only industry in the world that is attempting to address this conflict via regulation of fee methodology is the financial planning industry.
The government’s FOFA will do nothing to address the broader challenges facing financial planning’s future as a legitimate profession. It does nothing to address competancy standards or improve the quality of advice and it does nothing to encourage the industry to self-regulate in any sort of meaningful way. It is lazy, unsophisticated attempt to be seen to be doing something
As an adviser, to claim you are professional by virtue of your fee structure is nothing more than marketing.
I should add that one other very important element of a profession is that the consumers interest must come first.
Mandating fees does nothing to put the client’s interests first.
Matthew I think you are being a bit harsh and maybe even missing the point. I agree with you on the need to improve professionalism, but with no disrespect to a large portion of advisers who I believe are already putting the interests of their client first (and have always done so). However, we have not ‘had two years to be ready for this’ because nothing is concrete and this is the problem with the way the Government is handling FOFA. Have you tried to decipher what the best interest duty ACTUALLY means and how it applies…….let’s say to scalable advice as an example? Good luck trying to figure that one out – it seems a bit more complicated than it firsts sounds. If you disagree maybe you can discuss it with the legal profession who are currently raising the issue. A “win” for the industry would be the government not hedging their bets by releasing legislation in tranches. It either has a strong, well thought out position or it doesn’t. Are they just too busy still drafting it up? It is similar in other proposals they have made without a solid understanding of the likely outcomes (eg how are they going to police the concessional contribution cap in the future based on the $500,000 total limit?). My main point is, it is reasonable for a “profession” or any industry to expect some clarity on important issues affecting its operation within a decent timeframe of expected implementation. DISCLOSURE – I do not rely on commissions to eat.
Fair call Chris. I guess I should disclose that I really have little respect for the FPA and the AFA. They’re supposed to be leaders in our profession and I think they are order takers rather than policy makers. They’d rather dance to the beat of the drums of their members rather than what is going to do what’s best for the profession over the long term.
Why do we need to wait for the Government to push these changes on to us? Why aren’t the FPA or AFA introducing measures such as opt in to secure a higher level of trust for our profession in the eyes of consumers. Why, when AMP gets caught for churning doesn’t the FPA turn around and say “Okay, you’ve broken the code of ethics, you’re membership has been terminated until you fix this”.
There’s no leadership, just kicking and screaming.
“Why do we need to wait for the Government to push these changes on to us? Why aren’t the FPA or AFA introducing measures such as opt in to secure a higher level of trust for our profession in the eyes of consumers.”
An excellent point. Self-regulation is an important principal of legitimate professions.
Mandating fee charging methodology will not only do nothing to address this.
The fee argument act as a placebo and give consumers that impression that everything is A-Ok.
It will also provide dodgy or incompetent advisers from embracing genuine steps towards professionalism, just as long as they tell clients that they are fee-for-service.
Matthew, its the remarks like yours that come from the mouths of the so called professionals that keep our industry “in question” in the minds of those that matter.
If you’re right with it all, well and good. I can assure you though, there are many, that still run very creditable practices, that will find the FoFA obligations placed on them time consuming, costly and leaving them questioning their perceived value in the vital role they play .
As an industry we need to be united,if a practice operates fee for service there is little to worry about, however, the risk guys, the thousands of evolving practices that are out developing client bases are still out their having to “sell” (yes that’s right I said it) their services, these guys have every right to be concerned.
Keep up the good work Richard.
In my experience George, it’s commissions and fees based on a % of FUM that irritate the hell out of those that matter…consumers.
I have no time for advisers that are kicking and screaming about the opt in provisions. If you aren’t making time to call or communicate with your clients at least once a year then odds are you’re receiving passive income for doing nothing. I understand that cuts into profits because they’ve been doing next to nothing for that money for decades. Suddenly they have to do work and are embarrassed about having to front up to clients to justify the fees they charge.
The term “financial adviser” and “insurance adviser” need to be defined. They are completely different roles and demand different rules and methods of remuneration. I have no problem with risk only guys charging commissions, but I don’t believe financial advisers should be receiving commissions on insurance. They should rebate the commission and charge fee for service; their ongoing relationship fee should substitute for the trail commission. I have the upmost respect for insurance advisers; tough job and I think that there is room for us all.
So perhaps here is where the confusion lies. Financial advice and insurance have been merged together; it might be time for them to be separated rather than trying to have one set of rules to govern both.
Those who have promoted “opt-in” are much better informed than Matthew. They are well aware of the research which shows that when consumers are presented with a choice to continue with a service or not, a requirement to “opt in” results in a much lower level of continuing engagement than does a requirement to”opt out”.
Behavioural economics research also shows that consumers place a much higher value on having money their pocket now as against paying to securing their long term future.
Public policy should encourage investors in complex financial products to obtain financial advice and to keep their investments under review, not set-up processed that encourage dis-engagement.
The high moral ground that Matthew seeks to occupy concerning “opt-in” is uninformed and ignorant about its intent and likely effects.
And, while I am letting off steam, those who criticise the work of the FPA and the other associations re FOFA must lack even a cursory knowledge of the submissions made and the work done on behalf of all financial planners. It’s vital work and it needs to continue.
And George can I just add that I think it promotes more faith in our profession if we’re prepared to have robust debates about what we could be doing better.
To say that my comments are what keeps our profession in question is quite silly. It’s events like Storm, Westpoing, Basis Yield, and surveys that show advisers recommending in-house products all the time that do far more damage.
You make some interesting points in relation to financial adviser vs insurance adviser there Matthew.
I would go one step further that advisers (any any ilk) that provide specialist advice should have to meet specialist accreditation – SPAA have done very good work in this respect in relation to advisers to SMSFs.
Risk is a far more technically demanding area of advice than is given credit for. Whilst there is no formal specialist accreditation for risk (or equities or strategy or etc…) perhaps there should be – just like in other professions.
This is what I find interesting. Here we all are saying how complicated and technical these different areas of advice are yet not many people seem to be up in arms about this so called “scaled advice” model. I just can’t see firstly how it is going to work in practice (ie conflicts with the best interest duty) and secondly how it isn’t going to encourage consumers down the path of the cheaper option, often to their detriment. Rarely do I come across a client who’s needs I could honestly say are that straight forward that they could be handled appropriately by someone at the call centre.
Nailed it Chris. You’re 100% right. Scaled advice doesn’t work and will lead to bad advice. For example, giving Transition to Retirement Strategy Advice on a scaled basis is fraught with danger; you have to know all about a client’s situation to get it right.
This flys in the face of the best interest duty…well said.
Advisers have had two years to be ready for this so a start date of 1 July 2012 isn’t unreasonable.
It’s embarrassing to hear Richard carry on like this; yet another example of how the industry needs to be dragged kicking and screaming to professionalism. I expect the date will be pushed back to 2013 which some might put down as a “win” for the industry, but it’s really a win for consumers.
Meanwhile the financial advice profession doesn’t have to change a thing because we’re already doing what the “proposed changes” are suggesting. Putting the client first. Anyone who doesn’t want to do that doesn’t belong in our profession so good riddance to them.
“Meanwhile the financial advice profession doesn’t have to change a thing because we’re already doing what the “proposed changes” are suggesting.”
And therein lies the problem. Just as long as you comply with the government’s version of professionalism you have no requirement to meet educational and competence standards that a genuine professions expects, you have no genuine, peer-based, scrutiny of whether you are adhering to a stringent code of ethics, in short you have no requirement to embrace any of the principals of a genuine profession.
The argument that the industry has neglected to puch for higher standards and have failed to effectively self-regulate is valid.
Attempting to address those failings with the snake-oil of opt-in and fee for service excuses the industry for a myriad of sins and is a con on consumers.
Keep up the good work Richard. Nobody else (eg. FPA) is pressuring the Government on behalf of advisers generally. One wonders where it will all end. Will Fund Managers have to justify their management fees and only charge investors on the amount of work that is done on their particular investment. Will there need to be fees levied when clients call the fund manager if their investment is a direct one.
Until financial planners are expected to hold a minimum of a university degree to work in the industry I will not take the FPA or any other professional body seriously. It is a joke that financial planners have to meet such minimum requirements to work in a very serious industry. I think the Government needs to work on fixing this in its long list of things to be changed.
As for the fuss over opt-in, all my clients opt-in to ongoing review agreements each year at their annual review so this will make no difference nor add extra cost onto something we should all be doing or probably are already doing anyway. What is the fuss about?
Carla,
Couldn’t agree more. If we’re seeing clients on at least an annual basis and providing them with an invoice for our service, which they choose to pay, that’s opting in as far as I can tell.