FOFA doing more harm than good?

Andrew Bailo takes a look at the issues arising from the Future of Financial Advice reforms, and concludes that the harmful changes outweigh the beneficial ones.

As an adviser with over 10 years of experience, and having recently established my own practice on the north side of Brisbane, I am well qualified to enter the debate regarding all the extra legislative requirements soon to beset us practitioners.

We have registration with the Tax Practitioners Board (TPB), opt-in requirements, no commissions after 2013, MySuper and Fiduciary requirements – just to name a few.

I am not sure how other advisers feel, but I am sick of being considered by this Government as a crook until I prove otherwise.

I care very much about my client’s financial future, as the overwhelming majority of planners do, but will any client be better off after all of this? Will it ensure no further Storm Financial firms arise? I don’t think so.

Qualifying the qualifications

Consider the registration requirements with the TPB.

It will be a limited registration, so a financial planner will not be able to do a tax return for a client (for example), but will be able to give advice on tax matters that will certainly impact the tax return.

Will somehow being registered with the TPB improve the advice given to clients on tax issues, when we still have to refer the client to their tax agent to confirm this advice? 

Accountants argue quite rightly that to obtain their qualifications they require a relevant degree, as well as the professional association’s accreditation requirements.

To be a registered tax agent they must fulfil further experience requirements.

This is more rigorous than the requirement to simply have a degree and have completed the very basic tax module of the Advanced Diploma of Financial Services.

This is not to knock these changes by the Financial Planning Association (FPA), but rather to argue that there is no change to the requirement that a client seek the approval of a qualified tax agent before implementing advice that affects their tax requirements.

So why do we need to be registered with the TPB as well, and where is the benefit to the client?

Commentators argue that Future of Financial Advice (FOFA) is first and foremost driven by a left-wing ideological stance of the union movement through their fully owned and operated network of industry funds.

Let’s face it, Storm was not commission-based, it was fee-for-service – yet it is being touted as the reason commissions need to be banned.

The industry funds have been anti-commission because they did not have a distribution base, fund choice threatened a previously tied membership and they relied on the Government to cobble the Industrial Relations Commission on default funds.

This Government does not appear to be interested in a level playing field.

When it comes to full disclosure, how do you explain that these funds can say: “All profits returned to members,” when I have looked at hundreds of industry fund member statements and have never seen a percentage of any profits disclosed on them?

So what are their profits and where are they?

Best of luck to anyone trying to find them. At least if I own shares in a publicly listed company I get my dividend and a copy of the financial performance of the entity so I know exactly what my share is – but this is not the case with Industry Funds.

But they still use this in their advertising. Industry funds promote themselves through the ‘compare the pair’ campaign and other advertising, through sponsorships of major football teams and venues.

Who pays for this? And as a member of a fund, why can I not find out exactly what this costs the fund? 

Putting the cards on the table

In this new dawn of full disclosure that will supposedly result from these reforms, perhaps we could have a look at ensuring that what applies to one section of the industry applies to all.

How about bringing all super fund disclosure under the Corporations Act so they have to provide the same disclosure requirements as public companies?

Let’s see a full Statement of Financial Position highlighting exactly what costs the fund has incurred and exactly what profits (if any) they have made.

Surely, if we wish to do what is in a member’s best interests we should be promoting this at every opportunity – but this is not the case.

What you will get at best is a short synopsis on an industry fund website or in an annual statement.

And when it comes to some of the smaller industry funds, good luck if you can find out anything on their financial positions.

Transparency is what will protect clients in the future, and we see none of it forthcoming from the Industry Super Network.

So, by all means the rules should require us do what is in the best interests of our clients, but allow them to make a qualified judgement as to what fits their needs – especially when it comes to superannuation.

For starters, let’s ensure that when a super fund says it is a ‘balanced’ fund, it is actually what the industry standard is and not the 84 per cent growth assets we see in an AustralianSuper, or the 83 per cent of growth assets in MTAA’s so-called ‘balanced’ fund.

Do the members of these funds fully understand the risk this asset allocation presents to their future retirement?

Can all super funds adopt a unitised pricing method, so members know on a daily basis exactly what their funds are worth?

This seems preferable to a crediting rate that is applied at some period, dependent on how much cash the entity holds, in an attempt to smooth returns so they look better and less volatile over time. 

On the right track

Yes, there is a need for further reform in the industry, and the FPA is on the right track in trying to increase the education levels for planners.

From what I can see, the proposed FOFA reforms and ‘limited advice’ is great for the network of industry funds, but it does nothing for their members except give them access to limited advice through their fund that their members will rely on at their own risk.

The ‘reforms’ will also be based on industry funds retaining their investors in the funds they are in, rather than looking objectively at alternatives or diversification. 

Yes there is a benefit to a client to have a fee-for-service arrangement with a planner, since they may choose to turn off that fee if they do not receive service.

But of all that is proposed in FOFA, that is all I can see that is worthwhile and beneficial to a client. The rest of it should be placed in the dustbin of history.

Andrew Bailo is a financial adviser at Fiducian Financial Services.