Does FOFA pose Hobson’s choice?
As planners grapple with how to implement the changes flowing from the FOFA reforms, David Hasib examines the stark choices that many will have to make, including actually exiting the industry.
The changes imposed by the Future of Financial Advice (FOFA) reforms will raise the bar in ensuring the best interests of the client are always, first and foremost, the primary consideration.
It is a simple sentiment by which the majority of financial advisers already operate, and yet one that will dramatically transform the way Australia’s financial services industry functions when FOFA becomes mandatory from 1 July this year.
The responsibility of the Australian Securities and Investments Commission (ASIC) to ensure and monitor the provision of fair and impartial advice to clients means that the reinvention of many current advisory processes is unavoidable if the possibility of conflicted advice is to be thwarted altogether.
Several areas, such as current remuneration structures, ongoing value propositions and the lack of transparency in these dealings, leave open loopholes that cannot always ensure clients’ best interests are protected from being compromised.
The moves to overcome such challenges are great news for all Australians. Yet reform in any industry is expensive, and at least for the next few years the changes may appear to be a double-edged sword.
ASIC has outlined several key steps which will help improve perception, culture and services in the financial services industry. Increased fee and service transparency for financial advice will play a huge role in building clients’ trust in an industry with an arguably tainted reputation.
For the first time, financial planners will be obliged to introduce annual Fee Disclosure Statements (FDS) under RG 245, detailing to clients: the dollar amount of fees paid by the client; the services they were entitled to receive, and the service that they actually received.
There will be no space for hidden costs, value for money will become obvious, and improved understanding and engagement means Australians will be able to better judge where and how they should invest and obtain advice.
However, provision of this proof of work requires time, and therefore, money. Administrative workload increases, or else advice companies must turn to expensive new IT software to cope as they adapt.
Either way, someone must foot the bill. And while advisers consider how to meet those additional costs, traditional income sources are to be simultaneously cut.
The ban on hidden commissions is an obvious and effective way of eliminating biased advice. Product manufacturers will no longer be allowed to incentivise advisers to promote their products, forming a level playing field for rival, and perhaps more suitable, options.
Traditional adviser revenue streams will suffer a significant shortfall, pulling on the purse-strings of both the adviser and the fee payer funding that service.
With pressure being applied to revenue sources, along with the added requirement to potentially understand the product universe, advisers must now work to expand their product/strategy knowledge, either becoming part of a research house or product analysts themselves.
Extra time spent on brushing up skill requirements means fees can be expected to rise in accordance with the elevated service.
In the same vein, there are a number of product-owned dealer groups producing their own products, which subsidise adviser fees in order to have their own selected products prominently placed on approved product lists (APLs).
Under the reforms, APLs must now appear universal, showing a broad range of options. An inevitable drop in in-house product sales can be anticipated as choices open up to clients, causing subsidised adviser fees to rise again.
While the roll-on effect continues, there is some financial relief for clients. The introduction of scaled advice allows access to specific advice without the need to undergo a comprehensive assessment. In this light, financial advice is more affordable if taken in necessary doses.
On the opposite side of the scale, the changes will prove too costly for many smaller businesses, suggesting 2013 will be an active year for mergers and acquisitions.
Under sudden legal confinements, several small business models - from one-man bands to those who rely on rebated dealer fees from their dealer groups and small practices without specialism - will find compliance readjustment hard, if not impossible.
Advisers must now decide whether they become part of a larger code of conduct or whether they can afford to build their own.
For some, leaving the industry may be the only option. The strengthening of ASIC’s powers to act against unscrupulous operators is one contributing factor.
Advisers need to be aware of the legal liability now forever present in their workplaces. Should FOFA not be taken seriously, those firms take the risk of facing the ire of the Financial Ombudsman Service (FOS), regardless of best intentions for their clients.
As strategies and products become even more sophisticated, even well-intended advice can prove devastating to a client’s finances if an adviser is under-qualified in that area.
Those who for years have been able to ‘dabble’ lightly outside of their specialist comfort zone in order to provide a holistic service to clients will now be held accountable should they continue.
In short, advisers can no longer be everything to everyone.
Much like the medical general practitioner model, financial planners must now become part of an organisation with specialists within it or around it, or become an independent specialist.
The new system provides protection, working to ensure clients only receive advice from the appropriate source.
To begin with, it is not going to be an easy transition for both businesses and clients, and as with any significant industry reform, implementing the changes will be a costly exercise – but eventually the market will determine a fair cost for good advice.
David Hasib is director of financial planning at accounting group Chan & Naylor.
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