Love them or loathe them, the FoFA reforms certainly present a paradox. On the one hand, they strive to put client’s interests first and have brought important changes to our industry as a result. These include the introduction of best interest duties and client engagement measures such as FDS and opt-in. They have also resulted in the removal of commission-based remuneration, which was seen to compromise an adviser’s ability to act free from conflict.
On the other hand it would appear that FoFA is inadvertently driving advisers towards certain business structures that may be against the spirit of what FoFA is trying to achieve. Herein lies the great FoFA paradox.
Although the reforms are meant to prioritise the interests of the client, an unintended consequence of them is the burdens that additional compliance measures have placed on advisers to meet this goal. These have in many ways, resulted in greater consolidation in the industry, less competition and the growth of vertically integrated business models.
FoFA also fails to resolve the fact that advisers within a vertically integrated model may receive benefits that they would not otherwise. That is, if they were operating independently, or within a dealer group with a diverse Authorised Products List (APL).
The incentives for advisers to join a vertically integrated model are not necessarily unfounded – such as access to cheaper integrated product solutions and back office support. An institution’s larger financial capacity may also nurture a sense of security for advisers. They may be afforded greater resources to deal with client complaints and where relevant, to ensure compensation for clients where there is a decision against them through the Ombudsman scheme.
However, advisers in a FoFA world, should be mindful about the direction and development path of vertically integrated solutions. Particularly solutions that have the effect of ‘railroading’ clients towards particular product suites and which form part of restricted APLs that do not allow advisers to recommend other products for clients. Though an integrated solution may have certain cost benefits for clients, whether such solutions allow advisers to tailor advice that meets client goals and objectives and protects them from the risk of a lack of diversity, is questionable.
Meeting the challenge of the FoFA paradox
So, if advisers are required to deal with the compliance burdens of FoFA but simplifying to one provider’s integrated solution is not the answer, how can they meet the challenge of the FoFA paradox more effectively?
A key way is to embrace greater innovation and adopt an advice-centric approach. At a minimum, advisers should focus on client segmentation, develop and document tailored strategies for their clients and then look to source them the best solutions and service providers with diversification at each component of a strategic financial plan. Advisers must be able to demonstrate that financial planning is all about strategic advice. That is, the strategy, structuring, planning and coaching of clients to achieve their goals and objectives. Financial advice should never be about product. Even though it may at times be simpler to recommend a one-stop-shop solution to a client that is institutionally aligned, not all aspects of that solution may be in the client’s best interest.
Once a strategy has been developed for a client, working in partnership with multi-layered, independent solutions – which may include some high quality institutional offerings e.g. platforms – can assist an adviser to increase their engagement with a client and better manage risk around best interest. For the independently minded adviser, balancing all of the competing client, business and regulatory factors is possible with well thought out business and client strategies focusing on quality service and solution partnerships. It’s definitely worth thinking about sooner rather than later.
