The FOFA freight train picks up speed

While financial planners have warned that the FOFA changes will be significant, Mike Taylor reports that the Government does not see that as an impediment to achieving its ultimate policy objectives.

If some of those providing advice to the Government on the Future of Financial Advice (FOFA) proposals are to be believed, the ultimate impact on planners will be negligible and the benefits to consumers will be significant.

The Assistant Treasurer and Minister for Financial Service, Bill Shorten, has made clear the Government is now fixed on a course of delivering draft legislation that includes a two-year ‘opt-in’ requirement, and also bans commissions on all life/risk products within superannuation.

The minister has acknowledged that there will be some negative impacts on financial planners flowing from the Government’s approach, but while Treasury officials earlier this year referenced a cost of $100 per client with respect to opt-in, that figure is no longer being used by either departmental or Government spokesmen.

However, a survey undertaken by Money Management has not only served to reinforce the validity of the $100 figure, but has suggested many respondents believe it will cost a great deal more.

Asked what they believed the cost per client would be of handling the Government’s two-year opt-in, 67 per cent of respondents nominated a figure at either $100 or higher. Further, 49 per cent of those respondents suggested the cost would be higher than $100 per client.

The Money Management survey also revealed many planners expected to lose clients as a result of the changes – particularly B and C clients, something that would cause them to focus more closely on the retention of their A and B clients.

What financial planners need to understand, however, is that the Government is not going to be unduly moved by the knowledge that planners are going to have to stump up $100 or more per client to fulfil their obligation to opt-in.

Indeed, the Government’s counter-argument is going to be that given it is a two-year opt-in, it would seem not unreasonable for planners to spend $50 a year to stay in touch with their clients.

This much was made very clear by Shorten in his address to the Association of Financial Advisers last month when he said:

“In relation to opt-in, I have chosen to make it a two year opt-in to reduce the administrative burden on advisers. However, we shouldn’t lose sight of the fact that opt-in is simply a requirement that the adviser check-in with their client on a regular basis and seek their agreement for ongoing fees.

“I believe it is no more than what a client is entitled to expect from a professional adviser acting in their best interests.

“I also believe that it is no more that what the best advice practices are already doing as regular contact brings its own rewards in terms of customer satisfaction.”

In other words, the Government sees opt-in as being little more than providing legislative backing to good practice management.

While the draft legislation emanating from the FOFA proposals is expected to grandfather existing trailing commission arrangements, no one should be in any doubt about the manner in which the imposition of opt-in is intended to eliminate the culture of trailing commissions – the notion that planners can receive remuneration from clients with whom they have had virtually no contact.

Planner concerns about losing B and C clients are also unlikely to move the Government in circumstances where the minister and many of those on the panels advising him have been actively embracing the notion of scaled advice.

As Shorten put it: “We are determined to remove the red-tape that has prevented the provision of more affordable forms of advice – particularly simple or ‘piece by piece’ advice.

“The Future of Financial Advice will expand a new type of advice called ‘scaled advice’ which will particularly benefit individuals and families who may not currently have access to financial advice. This will allow advisers to expand their existing customer base by offering limited scope advice for those with simpler needs, such as younger people, at an affordable cost.”

Shorten said that, ultimately, “these reforms will encourage more Australians to seek financial advice and open up new revenue streams for financial planners”.

“We are creating a level playing field so that all financial advisers can provide consumers with scaled advice, both inside and outside superannuation,” he said.

Of course, the problem confronting many financial planners is that superannuation funds and the major financial institutions have already claimed the inside running with respect to the provision of scaled advice as a result of their membership and distribution network advantages.

The outcome would seem to be financial planners providing holistic and complex advice while the institutions and superannuation funds dominate in the scaled advice arena.

What the Money Management survey appears to confirm is that the FOFA changes will, as predicted, lead to a further rationalisation of the financial planning industry with many smaller and mid-tier practices feeling compelled to seek the security provided by larger organisations.