Will platforms still be effective post-FOFA?
How much can platforms really help? Patrick Jackson questions the ability of platforms to create efficiencies in tackling the wave of regulatory changes coming our way.
To date the extent to which an investment platform can assist financial planners through the maze of the Future of Financial Advice reforms (FOFA) has been limited; in fact on the surface unless a planner has all client assets on a single platform it is debatable how much use they can be at all.
To navigate through FOFA, there is no doubt that the more administrative options for an adviser to satisfy the requirements the better; but it seems to me that most issues can be handled by financial planning software, which as you would expect, paint a far more holistic picture of a client’s advice position.
The main opportunities to assist planners from a platform perspective are opt-in and the Fee Disclosure Statement (FDS).
Over coming years many platform operators will find themselves in a quandary as the requirements for clients to opt-in create a conflict between traditional distribution and the need to retain funds under administration.
If a platform is supported solely by financial planners, what will they do with a client who chooses not to opt in? Or neglects or forgets? Do they need to identify why they did not opt-in?
Many groups have prided themselves on supporting the advice industry by refusing to accept direct business. I believe this is not only an admirable stance, but also a practical one.
With the complexities of platforms in terms of processes and procedures, not to mention the array of investments, most operators would far prefer that all transactions occur through a planner.
A planner knows how to perform a switch, knows how to convert to a pension and knows how to re-weight a portfolio.
Clients attempting to do this by themselves not only utilise limited servicing resources from the platform, but would almost certainly make errors and create potential claims when something they did harmed their performance or created some form of loss.
So a client opting out leaves the platform operator with a couple of choices: set up the old “orphan” client system and allow the client to remain; or dig their heels in, contact the client and request they opt-in if they wish to remain on the platform.
Fortunately we have two years before these hard decisions need to be made, but from a strategic point of view it is important to take some form of position and articulate this to your distribution network.
Many planners might also see opt-in as a catalyst to reduce their exposure to unprofitable clients. This in itself means platforms may need to revisit their pricing, as advisers may be content to allow or even encourage a client to opt-out (more correctly not opt -in) of their services.
A platform can assist with these requirements by providing letter templates, recording opt-in dates and in some circumstances offering a value-add such as a client follow-up service comprised of, say, letters, email, sms and phone calls.
However the responsibility remains with the planners, so they need to ensure that they control this process.
The second point of interest for a platform is the Fee Disclosure Statement.
This FOFA requirement is one where a platform can be of some assistance, certainly by providing templates and where appropriate populating fields with platform data.
Of course nothing is so simple; unless a planner has all a client’s fees stored within the platform, there will be some manual intervention required, or datafeeds with other financial planning software or commission systems.
The business model is key
A lot of this depends on the business model of the licensee.
For example a licensee which uses a single platform, runs all commissions through the same system and/or uses the same financial planning software across the network can largely automate the fee disclosure process - even if certain aspects of FOFA seem to be pushing licensees away from this model.
Alternatively a licensee may allow a number of different products on different platforms, have a flexible pricing policy and outsource its commission payments to a third party.
In this scenario the fee disclosure statement becomes quite a cumbersome process for both the licensee and the planner.
A decision also needs to be made by the licensee in terms of the start date adopted for the commencement of the ongoing service arrangement for existing clients.
This is one of two very important decisions to be made; the other is which payment amounts to include in the fee disclosure statement.
The key question to ask a planner is: do you have an ongoing fee arrangement with the client (an arrangement that is anticipated to go for more than 12 months)?
If the answer is yes you should disclose all services you have made available to the client in the 12-month period, all the services they utilised and consequently all advice fees they paid (in this context advice is considered a service).
If the answer is no, you can be expected to agree remuneration with the client at the time of engagement.
The curve ball in this aspect is whether the amounts disclosed should include product commissions.
This is a judgement call by the licensee, though I do believe a client would find it strange if you disclosed all the fees you charged, but did not include commissions from your main platform.
Platforms do not have the full story, and hence can only capture certain elements of the services offered.
However a template can be provided allowing a planner to select a range of services, or add their own, to indicate whether the client utilised the service, and where applicable match an appropriate fee to that service.
So while a platform can assist some planners (certainly those who hold all client assets on the one platform), in general financial planning software should provide a far more efficient mechanism to control the client relationship and provide the required information.
While storing anniversary dates, opt-in dates, advice fees paid, producing FDSs and opt-in letters are probably within most platform’s capabilities, they still only provide part of the picture. I am not convinced this is the most efficient way to proceed.
Patrick Jackson is the head of operations and business solutions, Fiducian Portfolio Services.
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