The 2 paths for licensees in implementing DBFO

With the Delivering Better Financial Outcomes (DBFO) legislation on the horizon next year, licensees need to decide whether they are going to take a hands-off approach or use it as an opportunity to pivot their business.

Minister for Financial Services, Stephen Jones, has said he is hopeful of passing the second tranche of DBFO legislation by next May, with the first already passed in July 2024. The second covers areas such as qualified advisers, replacements for statements of advice, and advice being provided by banks and superannuation funds. 

With changes less than a year away, experts at Morningstar believe there are two possible paths to meet the DBFO legislation, and licensees will need to start thinking about which one they will take. 

The first path is a compliance-led approach, while the second focuses on strategy and business. 

Rick Di Cristoforo, director of wealthtech at Morningstar, said: “From conversations with advice firms, you can essentially take two views. 

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“First up is compliance-led where you minimise change and leave things as they are. You think about how you do fee consents, how you deliver advice and your record keeping, but that’s where you leave it.

“But then, once you have done that, then you can think about it from a strategy or business perspective and what it means for your business and clients. That could mean a change in structure of what you offer, your pricing structure and your client book. There’s some nuances around this in how you can take the compliance benefits and use them to gain additional benefit for the business.”

Questions that licensees should consider include:

• What do you see as the biggest benefits from DBFO?
• What are some potential changes to the business model?
• What is the biggest challenge regarding the changes?
• How can we mitigate potential risks?
• What is the ideal approach for us to deliver advice recommendations?
• What are the key points of advice you wish to present in front of clients?
• What are our expectations regarding financial planning software?
• How can a software partner assist with transition work?

Lanie Worsley, director of customer success and client solutions at Morningstar, acknowledged the changes may initially be “disruptive” for licensees which may deter them from making changes initially.

She said Morningstar has been conducting focus groups with firms on their DBFO readiness to understand the needs and experiences in their business models.

“Our industry is constantly evolving and history tells us this brings opportunities, but it certainly can be disruptive for practices.

“We are seeing licensees taking an active approach in this space to address the changes and many are adopting a three-step approach to this. Firstly they are assessing what the legislation says, secondly they are leveraging industry perspectives, and thirdly they are bringing that back in-house to make an informed decision at an AFSL level.

“We are seeing a growing trend of AFSLs seeking external guidance, and many are holding off making significant changes at this point in time without that external help which demonstrates a cautious but strategic approach.”