The Financial Services Council has released the final version of its plan to reset the advice industry after pulling in professional services firm KPMG to assess how effective the five major steps in its whitepaper will be in restoring profitability to the sector.
A refresh of the sophisticated investor definitions, the abolishment of safe harbour steps, a swap-out of SOA’s for shorter Letters of Advice, the reclassifying of advice into personal and general categories and an eventual move to individual adviser registration by 2030 are the key pillars of the Council’s reform plan.
The “simple verse complex” advice component of the proposal outlined in the FSC’s earlier greenpaper has been abandoned after “strong, resounding” feedback that the plan was more complex than simple, according to the FSC’s policy manager for advice Zac Castles.
“Fundamentally, it wasn’t satisfactory to our members and stakeholders,” Castles said on a webinar to discuss the whitepaper. “Call it what you will, ultimately it’s information and advice that we need to discern and demarcate between. That’s the issue we need to resolve.”
A loss-making venture
After commissioning Rice Warner to fashion the original plan back in October 2020, then bringing in pollsters Pollinate to “inform” its thinking in March this year, the FSC teamed up with KPMG to analyze its proposal in the lead up to the final paper’s release.
The starting point used by KPMG in its report was that the upfront portion of advice, at least, is a loss-making venture.
“Based on data provided, the results show that it is currently costing advisers more to produce advice than is generally charged as an upfront fee to consumers,” the report states.
The cost to produce advice would drop between 35 and 37 per cent from $5,334 to around $3,400 if the FSC’s reforms were implemented, KPMG’s Cost Profile of Australia’s Financial Advice Industry report surmises, while the time spent to complete the advice process would reduce from 23.9 hours to under 17 hours.
Broken down further, KPMG estimates removal of the safe harbour steps would save between nine and 11 per cent in costs, while reclassifying advice types would save nine per cent and the introduction of LOA’s in place of SOAs would wipe 17 per cent from the cost of advice.
The estimated 30 to 32 per cent “efficiency gains” would allow an adviser to potentially see over 40 new clients per year, KPMG adds.
The report was commissioned by the FSC on July 17 and involved a survey sent to FSC member licensees, five interviews and two “case study assessments” of AFSL and advice practices.
Timeline to reform
The FSC’s proposal includes a schedule that would see the bulk of its reform package implemented in 2023, with another tranche in 2026 and the rest to be done by 2030.
One of the key planks of its reform package – removing the safe harbour steps introduced along with best interests duty as part of the FoFA reforms in 2013 – should be the “first priority” of the government, the FSC states, and enable a principles-based advice model to flourish under the existing BID framework in tandem with the Code of Ethics.
“Abolishing the safe harbour steps should occur in 2023, immediately following the completion of the government’s Quality of Financial Advice Review,” the whitepaper states.
Linked to this move would be a reissue of the Code of Ethics to make it “more principles-based and less prescriptive”, the paper continues, with Standards 3, 5, 6, 7 and 8 all in need of a rewrite.
“Reform should not replicate the safe harbour steps in the Code, but enable a more seamless interaction between the Code and the Best Interests Duty within the Corporations Act,” the whitepaper states. “It should provide a foundation for the long-term principles-based regulation of financial advice in which the professional judgement of the advice provider is at its centre.”
Call to arms
Among the other reforms packaged in the whitepaper, the FSC proposes amending the breach reporting framework “to reflect an environment in which conduct is judged against the professional judgement of the adviser”.
Of primary concern for the council are the “unduly punitive” penalties triggered by breaches of the Corporations Act.
“The breach reporting framework should be realigned with a reformed Code of Ethics to ensure the civil penalties regime is proportionate,” it states. “Financial advisers should be trusted and encouraged to demonstrate professional judgement, not be subject to harsh penalties for technical breaches of the law.”
According to FSC CEO Sally Loane the advice industry has reached professional status while the regulatory settings that govern it are yet to evolve and produce a drag on the cost to serve.
“Our recommendations will improve the economics of the advice industry, lower the cost of delivering advice to clients and increase the number of Australians who can access advice,” Loane says. “We call on the government to commit to our plan.”
Life / Disability Advice has been hit hard, many risk specialists have left the Industry and many holistic Advisers have had to scope out risk advice due to the complexity, cost blow outs and risks that outweighed trying to work through the maze.
In order for more risk advice and more Insurance to be written, the Industry needs to stabilise the premium hikes that are creating chaos for clients and Advisers.
We are seeing premium hikes of over 70% in the last 2 months, on top of massive premium hikes every year for the last few years, which all Australians are finding it difficult to accept.
This is creating even more work for risk advisers and even if the cost to provide new advice dropped to $3,400 it still leaves a bad taste in clients mouths who are not to blame for their premiums skyrocketing, though are forced to pay more in fees or a combination of fees to supplement the losses against the commissions paid that do not cover the cost of advice.
Australians will not pay much for risk advice and are not going to tolerate continual premium hikes, so the solution is for the Life Industry to integrate technology that will do most of the heavy lifting for the advisers, which will reduce the time, cost and risk of writing up new business and help retain existing Life premiums, so we can get back to lower premium increases for clients and higher retention of existing books.
The FSC are to be applauded for tackling this issue but as is always the case with large stakeholders they address the legal and regulatory structure without meaningful adherence to innovation and technology – where the real game changer lies. Particularly if it’s coupled with their proposals. New digital advice technology players such as Map My Plan have developed a staged entry to low cost affordable advice without any link to investment or product. This includes discharge of advice no product, contains a fact find process and ‘digitalises the safe harbour provisions’. This is where the future of advice lies because technology opens the door for planners, orphaned clients, platforms and Super Trustees to work together and eradicate the low value manual paperwork. The more the big end of town learns of this innovation the better for all.
This is the first time I have EVER made a comment on Professional Planner because this seems like the best suggestions I have seen yet to help the industry. I hope this goes ahead. Good to see from the FSC.