FOFA: Bring it on

While people are generally reluctant to embrace change, the more proficient financial advisers will adjust swiftly to their new landscape following proposed FOFA amendments, writes Greg Cook.

I’ve heard footballers describe a bittersweet experience as ‘like kissing your sister’. My experience with the Future of Financial Advice (FOFA) and Stronger Super changes and their precursor inquiries, if not so crudely bittersweet, has at least taken me from ambivalence to anxious equivocation.

The problem

The financial services industry certainly continues to have a significant minority of pretenders. Individuals who fall short on technical competence, cruisers who would prefer not to provide ongoing advice to their clients, and to a lesser degree, ‘unprofessionals’ who elevate their own interests well above their clients’ interests.

A booming economy inevitably brought in a conga line of opportunists – and accidental tourists too. Amateur property developers, day traders and financial engineers begin to think they have developed their own magic formula, when in fact they are simply being swept along. As the saying goes, a high tide raises all boats.

Each in their own way, the global financial crisis (GFC) wash-up and the improving education, professional and disciplinary standards have all moved to shrink the disease in the last three years. One consequence of FOFA should be to drive this significant minority from tipping point to a non-representative pimple.

I’ve been involved in the Financial Planning Association’s (FPA’s) new remuneration guidelines which are set to apply from 1 July 2012 – specifically regarding the continuation of life risk commissions. The committee that I chaired recommended to the board that these be allowed to continue beyond 2012.

The journey from an advice industry to a planning profession cannot be made by individuals and their professional bodies alone though. Whether we like it or not the catalyst will be Government regulation.

When shortcuts abound, people take them. Most people are reluctant to embrace change, especially where it is set to make their professional life harder and potentially less profitable, or shine the light on the shortcomings of their business model.

The intervention

Prior to Easter I attended the somewhat infamous FPA lunch where Assistant Treasurer and Minister for Finance Bill Shorten was the speaking guest.

The speaker invited questioners to stand and indentify themselves, and Shorten would answer their question.

Neither then occurred. Shorten declined to answer the first questioner, saying he would like to take notes and answer all the questions and comments in an ‘omnibus’ fashion.

Shorten then returned to the lectern bridling with a collective response.

Fiducian managing director Indy Singh’s mildly cheeky and amusing question about the Government consulting like Bruce Lee fights in Enter The Dragon (fighting without fighting) was admonished.

The sour conclusion did not bode well for the upcoming FOFA announcement!

A question about the increasingly sloping playing field of intra-fund advice was misunderstood by Shorten to be referring to general advice that might be given at a workplace seminar.

That was particularly unfortunate because it was a question hungry for an answer.

The self-described industry fund ‘movement’ is, by all accounts, on a path of subsidising advice from the revenue of management fees.

I recently heard firsthand from a leading recruiting executive that our friends in not-for-profit are aggressively recruiting planners with packages as high as $220,000 per annum.

The free-marketeer in me would normally think that is a good thing, albeit a long way from the costly anti-advice campaign (not just anti-commission) over the decades.

Only problem is the advice cost is apparently not being passed on commercially.

Advice that probably costs thousands of dollars to deliver is charged to the member at a fraction of the cost.

At least in the current low-cost milk war the small outlets and the supermarket chains operate commercially, and the supermarkets haven’t got the Government altering the rules to their advantage!

The majority of members who receive little or no advice subsidise this advice through a giant internal trail commission. More than a little ironic?

They are certainly a progressive movement, but here they are moving in the wrong direction.

The question I am now asking is: Could Shorten be accused of over-egging the pudding? To paraphrase US president Barack Obama, my answer is: ‘Yes he can’.

Shorten is what the commentators call a conviction politician. It’s warming to see a person of principle, considering the poll-driven flip-flopping of many of his political contemporaries.

Former senior Labor Minister Lindsay Tanner says that at the last election Australia voted for ‘none of the above’.

The path of conviction can be a hard road when you are running a minority Government. In this case though, to wring out the last of my metaphor, it may save Shorten from marching across a bridge too far.

Or is the tactic to put out an ambit proposal, and retreat to implement only what is necessary?

The intended consequences?

As the many unanswered FOFA questions begin to find an answer, the industry can begin to take comfort that life will go on.

For example, the proposed grandfathering of remuneration structures will mean that business values will not decrease overnight.

Regarding opt-in, my position is that professional planners are happy to have their clients regularly reminded of the advice fees that they are paying, but why should the default position be that the advice relationship ceases every two years?

Many of us are scratching our heads though, wondering what major problem the banning of superannuation risk commissions will solve.

Certainly not the endemic underinsurance one in Australia. And the Storm and Westpoint victims weren’t taken down with too much term insurance in their portfolios.

If it is really young part-time workers unwittingly having unwanted insurance premiums deducted from their small account balances (a story that News Limited newspapers rather conveniently ran on the eve of the post-Easter FOFA announcement), then we are in sledgehammer and walnut territory.

Regardless of fiduciary responsibility, with non-super contracts continuing to pay commissions, both the public and the industry will be completely skewed.

I understand too that the intention is to include members of self-managed funds in the net. We will be the only country on the planet that has such an advice environment.

Planners who want a purer risk advice model are free to do this now – being paid only by the client in every transaction, rather than by a product.

From the advent of the four-page Customer Advice Record of the late 1990s, to the resulting overblown disclosure documentation of Joe Hockey’s Financial Services Reform Act, financial advisers have mostly been reluctant participants.

My experience is that when confronted by new regulation though, good advisers can lift and adapt quite readily to a new landscape. Let’s continue to work to make sure the results are not unintended ones.

Greg Cook CFP is managing director of Eureka Financial Group.