Fiduciary duty could polarise industry

The introduction of a statutory fiduciary duty for advisers could see the financial services industry return to the agent and broker models of its roots, according to Centurion Market Makers.

The financial planning industry has underestimated the impact of the statutory fiduciary duty proposal in the Future of Financial Advice (FOFA) reforms, the group said. Centurion principals Wayne Marsh and Chris Wrightson said it was clear the industry had experienced aggregation in light of a changing regulatory environment and other market pressures, with smaller practices seeking out the support of institutionally-aligned groups. However, should a statutory fiduciary duty or obligation be required, the industry might see practices break away from vertically integrated groups.

“It’s starting to feel like déjà vu,” said Marsh, referring to the evolution of the insurance industry, which saw the emergence of insurance brokers as separate to insurance agents.

Marsh said in light of the FOFA reforms, the focus tended to be on the ‘opt in’ requirement and volume rebates. But he felt it was important for financial planners to realise that a statutory fiduciary duty was “equally onerous” and might require a change of business model.

Wrightson said that if a practice had a fiduciary obligation to put its clients’ interests first, it was difficult to comprehend how a fiduciary duty could be met if they sat inside an institutionally-owned licensee, where in-house platforms or insurance products received the bulk of client funds, where the planner received financially subsidised services from their licensee, and where they potentially benefitted from an institutionally funded buyback or buyer of last resort facility.

Should a fiduciary duty be mandated, Wrightson asserted that this might result in a polarisation of the financial planning landscape. He said advisers residing inside institutionally-owned licensees might become agents acting on behalf of the licensee to create a relationship with a client where the choice of product was limited. Those advisers sitting outside would become brokers who intermediated between the buyer and the seller of financial products.

“In this [latter] relationship the requirement to act in the best interests of the client is clear and unequivocal — this does imply a full choice of platforms and products, which is quite some way from where major licensees’ [Approved Product Lists] reside,” Wrightson said.

However, Wrightson conceded that the more likely outcome of the FOFA reforms was that the fiduciary duty definition would be “softened”, resulting in an implied expectation to act in the client's best interests or clearer disclosure on any limitations in the provision of services or products. Requiring that advisers offer all product solutions available on the market would not necessarily achieve clients’ objectives and would add further costs to the delivery of advice, Wrightson said.