FOFA to continue dominating financial advice in 2012
The FOFA reforms well and truly dominated the financial planning industry during 2011 and the year ahead looks set to bring more of the same, writes Nicolette Rubinsztein.
With 2011 behind us and the new year now underway, the question on everyone’s lips is “what will 2012 hold for the financial advice industry?”
The Government’s Future of Financial Advice (FOFA) reforms dominated the landscape during 2011, with both tranches entering parliament and the legislation being referred to the Parliamentary Joint Committee on Corporations and Financial Services and the Senate Economics Legislation Committee for inquiry.
After almost two years of work on this issue, ‘FOFA fatigue’ and ‘FOFA frustration’ are becoming commonly cited expressions.
Although the terms are largely used in jest, the start of a new year provides a pertinent opportunity to reiterate the importance of these reforms for both the industry and the consumer. These reforms are intended to increase confidence in the financial planning industry and make it easier for Australians to access quality advice.
With that in mind, it’s no real surprise that FOFA is set to dominate again in 2012.
It’s easy to get caught up in the short-term issues, such as the lack of certainty over start dates and grandfathering, which are key aspects of FOFA.
Ironically, it’s the longer-term impacts that are easier to predict, with four key trends expected to characterise the market in 2012:
- The end of ‘one-size-fits-all’ financial advice;
- A shift towards big or boutique licensees;
- Business model specialisation;
- A focus on cost reduction and income diversification.
The end of ‘one-size-fits-all’
Client segmentation, pricing and alignment of services are becoming increasingly important as advisers continually seek to better match their offering to the needs of their clients.
Over the next six to 12 months it’s expected this trend will accelerate, resulting in a clearer delineation between comprehensive and scaled advice.
The primary consequence of this shift will be a decline in comprehensive advice, probably down to less than a quarter of clients. That is, those clients who have the propensity to pay the cost required to prepare this type of counsel.
Rapid growth in scaled advice is also expected. Whilst many envisage large call centres delivering scaled advice, we believe it will primarily benefit traditional face-to-face models because it should allow planners to reduce some of the costs in the advice process: in particular, the fact-find and the statement of advice.
However, there remain some roadblocks to this becoming a reality. For example, many lawyers argue strongly that the current definition of ‘best interests’ does not support the delivery of scaled advice.
Should the reforms permit, it’s anticipated the majority of new clients will limit the advice received, seeking additional assistance only when a life event requires it.
This shift to a single-event advice relationship will impact advisers and consumers.
For the adviser it will mean reviewing practice models and future revenue growth assumptions, while for the consumer, decisions to opt for limited, event-specific advice may detrimentally impact outcomes by removing the holistic perspective the comprehensive advice model enables.
Big or boutique
Consolidation is common in mature industries such as financial services. It’s a trend that has been in play for the past five years and one that will continue in 2012.
However, the key driver this year is likely to be FOFA. Mid-sized financial planning licensees will seek access to the resources needed to comply with the legislative requirements.
In addition, the potential ban on the flow of payments from platforms to licensees is encouraging some firms to consider the sustainability of their current business model in a post-FOFA environment.
The consolidation trend will not hinder the continued success of the boutique licensee market, but significant business model transformation among this group is anticipated.
This will involve redefining their client proposition and engagement models to ensure their offering remains relevant to their market.
In addition, practices will actively seek to acquire new clients, shore up revenue streams through offer diversification, and plan for business succession and value realisation.
Business model specialisation
Success in the post-FOFA environment will require advisers to very clearly demonstrate the value of their advice. As a consequence, business model specialisation is likely to increase.
Some practices will opt to focus on a particular demographic or a specific area of advice such as SMSFs or business insurance, rather than seeking to offer advice across a broad spectrum of areas.
Cost reduction and diversification
Cost pressures have been a global theme since the onset of the global financial crisis and like all sectors the financial advice industry has been impacted by the continuing uncertainty.
Many businesses have sought to manage these pressures by reducing costs and diversifying their income base – a trend that is expected to continue in 2012.
FOFA is likely to be a key driver of cost pressures as practices invest in systems, processes and training so they can meet the requirements set out in the legislation. These requirements will also necessitate extra man hours.
Advice practices will need to take their efficiency to a new level and many will seek the assistance of platform providers in meeting these challenges.
To provide this assistance, platform providers will need to deliver in critical areas, including pricing, and in functionality that supports new adviser remuneration models and the opt-in regime.
FOFA, FOFA, FOFA
There is no doubt FOFA will continue to dominate the industry landscape in 2012.
Over time, the changes will lead to an increase in confidence in advice and we welcome the current form of many of the proposed changes.
However, there is one exception: opt-in. We are of the view that the opt-in provisions need to be amended to avoid an excessive administrative burden for clients and advisers.
Furthermore, we believe the substance of the reform can be retained, but changes can be made which would make it significantly less costly for the industry to implement.
Nicolette Rubinsztein is Colonial First State's general manager of strategy.
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