FOFA - the good, the bad and the ugly

With both tranches of the Future of Financial Advice draft legislation now released, participants in a Money Management roundtable discuss the good, the bad and the ugly coming out of the Government’s proposed package.

Mike Taylor, Money Management (MT): The legislation, the bill, was brought down last week and it contained a couple of surprising things. I think one of the foremost amongst these, from talking to people like Mark and others who watch this very closely, was the fee disclosure requirements which, when you read them, seem very, very onerous and very time-consuming – and there’s an element of retrospectivity about them. 

So, I guess kicking off with that, I’d like to ask the panel how they feel the industry will deal with something like that in the event that the legislation goes through unamended.

I’ll kick off with you Mark, because I know that you’ve been at the coalface on this one?

Mark Rantall, Financial Planning Association (MR): That particular piece of legislation was in terms of expanding fee disclosure to be retrospective, with existing clients to be captured rather than new clients, as opt-in is proposed to capture. It certainly was a surprise to the whole industry. It seemed to be a last-minute inclusion. 

We’re not quite sure why it was included at the last minute, but we’ll work through the details of that through consultation. 

What it does mean, however, is that now that it’s embedded in the draft legislation and that legislation will be debated, it can only be removed by the government through ongoing consultation at the political level.

In terms of the effect that it will have on financial planners, the form of the fee disclosure is quite onerous and it has a number of different components. The first component is to let clients know what fees have been charged in the past (the previous 12 months), what services were on offer during the previous 12 months, and what services the client availed themselves of during the previous 12 months.

In addition to that, the fee proposed for the next 12 months has to be outlined in dollar terms. The services that are provided for that fee have to be outlined as an estimation by the financial planner, the services that will be taken up by the client have to be outlined.

So this is not a small piece of work that’s being required of the financial planners when that has been allocated back to their existing client base. This fee disclosure could run to a number of pages, and whilst the proposal as it stood was to be implemented for new clients, financial planners might have had half a chance to progressively implement this piece of legislation in unison with opt-in – even though we don’t support opt in as a legislative requirement. 

But now, effective from the 1 July if this legislation is passed, the entire client base of a financial planner will have to be sent this notice – and we think that’s excessive. The reason we think it’s excessive is that we support full disclosure to clients of fees and charges.

Full disclosure of fees and charges are made in a statement of advice and full disclosure of fees are also made at the product level, whether it be from a platform or from an individual product. And if a financial adviser is being paid via a cash management account, well clearly there’s full disclosure there on annual statements.

So we just think this is additional red tape, additional work for no consumer benefit, and this will explode the cost of opt-in legislation. 

So we’re quite concerned about it and we’ve taken a strong stance against it. 

Nicolette Rubinsztein, Colonial First State (NR): Well what’s frustrating is that they haven’t taken on board any of the industry’s feedback about how impractical that actual notice is.

It’s one thing having an option of having the client sign a piece of paper; it’s another thing producing a piece of paper that has the prior year’s fees, the future fees, all of the services – and you think about how you actually do that.

You’re going to have to get the information off the platform, possibly off multiple platforms if your client is on multiple products. And then you’re going to have to – the deliverer is going to have to – put the services on.

I think it’s going to be very costly for the industry to build that in with previous clients. At least with future clients you could have actually managed their arrangements in such a way that you knew you were going to be able to get more of that information together, but when it’s for existing clients that’s going to be very, very difficult.

Rick Di Cristoforo, Matrix (RD): There’s a couple of points this raises as far as overall implications are concerned. One of them, at the highest level, is that effectively a clause was moved from what was 962 Division A down to 962 Division C, effectively removing the grandfathering.

The presumption was always that the industry would work on a forward basis with future clients on a new process. That’s the first thing. The next implication is by removing the grandfathering you’re effectively applying this to what we classify as C and D clients across the industry. 

How the thought process around a fee disclosure is consistent with access to financial advice is beyond me. There is no compatibility between the overall aim of access to advice. 

And the third thing – and this is not from a Matrix perspective but from consultation with a number of players in our industry including consultants who are supposed to be helping the overall industry do its job – is they’ve said in no uncertain terms the data doesn’t exist. 

So by not listening to the industry, as Nicolette has rightly said, they’ve put in a piece of legislation that is actually not possible to be implemented by 1 July 2012. I know we’ve all got questions about when this thing gets implemented, but even with it in its pre-exposure draft form we had questions about the implementation. 

I’ve now got questions about how every single company in this industry actually coordinates together a piece of data on a piece of paper for a new client, when all the pieces of data are in disparate places. 

They simply can’t be put together with what we’re seeing in the industry right now, and I know that’s not a view of just Matrix, that’s a view of every single person I’ve spoken to. 

NR: And the Finance Industry Council of Australia have now written a letter to Government questioning the timing, asking for more transition time.

Paul Harding-Davis, Premium Wealth Management(PH): Given how long it’s going to take for final details, for final passage, how few months are left for the industry to wrestle with this? It’s kind of alarming, particularly when you think about the sorts of changes you’re asking platform providers and superannuation fund administrators to make. 

I find myself a little intrigued, too, about the implications of that across some of what the government might argue are their own constituencies – in terms of the effort they would have to go to to produce this information, and to put in place those processes in that same space of time. I would have thought that some of them would be alarmed by what they’re being asked to accomplish. 

MT: Richard, the question really is looking at what the bill, which has now been introduced, had to say particularly about fee disclosure – and the impact that has on financial planners and the cost imposition, I guess, on planners. I’m just wondering, as you’ve just really entered the room, I just wonder what your take on it is from the AFA’s point of view?

Richard Klipin, Association of Financial Advisers (RK): Oh look…great concern, great concern that it’s been, if you like, tossed in at the last moment; great concern about what it’s going to mean, as people around the table have said, in terms of just practice activity.

It adds another layer of uncertainty, this is almost like the joker in the pack that’s tossed in at the last moment. Is it a negotiating point? Is it now new policy? Is it now new policy on the run? Where’s the evidence for it? It kind of brings into question what the whole thrust is here, because the playing field keeps on shifting. 

Big businesses and small are making big decisions about getting ready, because the 1 July, 2012 deadline really hasn’t changed – and it’s entirely unreasonable for the landscape to shift that dramatically in the space of weeks. I’m not sure whether it’s been tabled, but it’s our understanding that the legislation is going to be referred to the Parliamentary Joint Committee [PJC]. I’m not sure if you guys have spoken about that. 

There’s therefore a process that’s going to now happen within the PJC. That’s no doubt going to take some time. And it almost feels as though we’re back to the start of 2009. If we’re going back to the PJC (which is where we started), it feels like: what’s the last three years of really hard labour, hard yards, dramatic landscape change, what’s it all been for, if you like? So yeah, as an opening set of comments, that’s where I sit.

MT: Gerard, you’re coming at it from a slightly different perspective?

Gerard Doherty, Fidelity (GD): Yeah, well look, as an industry participant I agree with Richard. There’s been, I think, a long arduous process that we’ve gone through, and this sting in the tail at the last minute is very frustrating and very concerning.

We’ve heard consistently that the dialogue from the government is, ‘We want to give more Australians access to financial advice’, (but we keep putting up more barriers for people who want to be in that business by introducing this continual complexity).

So for all industry participants it’s not a good thing and I don’t think it’s ultimately a good thing for investors. I think it will produce another set of paperwork that people won’t understand, that’s the sad thing.

I don’t think it will achieve – well, I don’t know what the desired outcome is – but it won’t achieve what the normal person would think it would achieve, which is to make an investor better informed. I just don’t think it will. 

MR: Well I’m glad you’ve raised that, because given that both the ISN and Choice have come out with such strong support for this particular retrospective initiative around disclosure documents, you know, they’ve lobbied hard to have this addition at the last minute to the legislation that’s been tabled – given this, I just question why they would want to do this when we fully support disclosure in all its forms, when that disclosure is already there on people’s annual statements in terms of fees and charges. 

When we’ve gone through, as everybody says, an arduous consultation process over many years and many months, then to have this sort of thrown in at the last minute – you know, you can only draw the conclusion that the ISN is trying to put in place a more difficult operating environment for financial advisers to suit their own ends. 

Where the ISN is a wealth management conglomerate consisting of part of a group called Industry Super Holdings which has a bank – ME Bank – it has a wealth management company with $39 billion under management and a financial planning company turning over $265 million a year, you know.

I think the question needs to be asked: what are the motives of supporting such an initiative when the vast majority of the industry had already lined up behind a position, only to have it overturned at the last minute?

PH: Before I have to head off, I think it’s really important when we discuss this and we use the term ‘retrospective disclosure’ to constantly reinforce the fact that there has been extensive fee and cost disclosure in place and prescribed fee and cost disclosure for years. 

The reality is the level of information that is required to be given to an investor or a customer of a financial planner is already highly prescribed and very comprehensive. So I worry [that] we sound like we’re objecting to fee disclosure on a retrospective basis; it’s quite the contrary, what we’re objecting to is a radical change in the form of that disclosure at the last minute. 

The fact is there has been comprehensive and rigorous fee disclosure, in fact arguably some of it’s almost hard for the consumer to understand because there’s so much of it prescribed in a Product Disclosure Statement.

The average PDS must cover three or four pages on fee disclosure, and I question most ordinary individuals’ interest level in wading through three or four pages in amidst 40 or 50 or 60 others, but the reality is the disclosure has been extensive and it’s been consistent and it’s been prescribed by all of those parties for some time – and willingly adhered to by everybody I know in the sector.

MT: Well let me throw probably a little bit of a controversial question at you on this and I’ll understand why some people may wish not to be involved in answering this question, but in all the circumstances do you believe the government has been honourable in the manner in which it’s gone about this legislation in terms of where it started with Ripoll and how it’s got to where it is today which is the bill that was introduced to the House last week?

Were they honourable, were they transparent in how they got to where they’re going? It’s a very noisy silence.

MR: Well I’ll lead off, I don’t think this is a matter of being honourable or not, I don’t think it’s a matter of behaviour.

I think there was a robust process that has taken a long period of time, which is appropriate for the extent of changes that are being made. I mean FOFA is not just about opt-in, there are other ramifications of FOFA. 

There are lots of other parts of legislation and tranches to come through that we haven’t seen yet, and from the Financial Planning Association’s point of view we broadly support the thrust of the FOFA reforms.

We have had for some time in our code of professional practice a best interest duty. We had for some time the removal of commissions, and we’ve had for some time the avoidance of conflicted remuneration. And we’ve had for some time the avoidance of any soft dollar opponents.

We support higher standards and we support higher education. We don’t think RG146 is an appropriate level of education for financial advice.

So, you know, the disappointment with this is: after two years of consultation where our association broadly supports the majority of the FOFA reforms and the new direction that we’re taking for the benefit of consumers, to have a piece of legislation which incorporates two pieces of policy – one of them a bi-annual renewal statement, and the other a retrospective disclosure statement which is excessive. 

It is disappointing to see that the broader industry has not been listened to on this subject and that legislation is still being tried to be pushed through, because I think without it there’d be general industry support and professional support to make sure that we improve standards for the benefit of consumers. 

That’s the disappointing aspect, and I can understand that due process has been undertaken. It’s the result of that due process in relation to specific parts of this legislation that has now been tabled that is a disappointing result.

NR: Staying off the honourable, not honourable: I think there’s been a sort of decline in trust, and now just if we look at the way that we’re going to build opt-in from a platform point of view we will probably do the IT build in two separate sections, almost on the expectation that the Labor Government will not be elected next time around. 

So we will build the ability to capture the client information and the fee information in the first instance. Then the next build, which only needs to happen in two years time, will provide the ability to produce the statements. But I think that’s indicative of people’s view of the government. 

MT: It’s a pity he’s had to leave us, but Paul Harding-Davis I think last week was suggesting, as have others, that in some ways the net outcome of FOFA is a bit of a back-to-the-future where the banks and the major institutions are going to be dominant in the financial advice space. 

I guess we can see Count Financial, you know, get the offer from the Commonwealth Bank, and understandably given all the things there’s a move there that will probably get signed off. Rick is here and he announced yesterday that in fact Matrix is looking for investment. 

So I just wonder whether really what Paul had to say last week, about the way in which vertical integration is kind of where it’s all being pushed, is what’s really happening – and ultimately is it a good thing, is it a bad thing? Rick I’m going to ask you first because…

RD: Of course, why not? I think we’ve got to be very careful to separate the decision that an individual company makes around its own strategy versus what goes on in the macro environment. I can only speak for Matrix that we would make decisions based on what our own internal capabilities and our own internal views are about what the future looks like. 

So I can honestly say FOFA had no impact on the announcement. However I think that what you see when you see FOFA, in terms of the overall industry consolidation, is the beginning of a very large, unintended consequence. 

Now whether or not you think that vertical integration, industry consolidation, companies like Matrix – for whatever reason making the decisions that we’ve made – is a good or bad idea, we will end up with an industry that looks different. We would arguably, as I’ve always argued, end up with an industry that has less dynamic competitive pressure. 

By definition that seems to not be consistent with the best interests of the community and clients overall. So for the purposes of FOFA and its impact on the industry at large, rather than specifically related to Matrix, you know I’ve said publicly it is a real shame because it’s creating changes in the industry for certain players that would not otherwise make decisions. 

And Nicolette, that is exactly the sort of conversation I’ve been having with other people over the past few weeks.

You’re in a large organisation, people often talk about independent-owned licensees – and I’m not going to go into any of that – but the reality is if you’re in a very large institution with a very large platform that you’ve spent X amount of millions of dollars developing, and you are seriously considering building two different systems effectively to deal with the ‘what-if-they’re-in, what-if they’re-out’ scenario. 

If that isn’t a waste of money I don’t know what is – but you’ve got no choice, and that to me is another unintended consequence.

I don’t think we really think the Treasury ever thought, ‘let’s just make Colonial First State and ANZ and all these other companies build dual systems for disclosure and fees’. It’s ridiculous. So I think what we’ve seen is just the beginning of one of the many of what could be very large unintended consequences.

NR: Sorry, just to clarify, we’re not building two systems, we’re actually just splitting the build. 

RD: But let’s put it this way, that has a cost to it.

NR: It’s easier to do it all in one go.

RD: Exactly, so at the end of the day, if we’re talking about something that’s most efficient, you would not be doing it a particular way, and I don’t know anybody in our industry that can honestly say that they’re looking at the future and going, “I’ve absolutely been able to choose the optimum path”, if they are they’re lying, to be perfectly honest.

How can they possibly be telling the truth, because you’re having to do things that have been manufactured by a piece of law.

NR: I think FOFA does favour vertical integration obviously, but I think the iPhone market will be alive and well. I don’t think anybody would predict the complete decline of the IFA market, and yeah, you know we were looking at Count, we’ve looked at them for years so we would have done it with or without FOFA. We’re still very interested. 

We get 50 per cent of our inflows from the IFA market, so we’re very focused on making sure it continues to thrive. I think without doubt you can cross-subsidise within vertical integrated businesses. 

GD: I think there’s no doubt that vertically integrated players will dominate over the next few years and I think there are three influences. 

One is the global financial crisis, which has seen incredible consolidation of banks and insurance companies and it’s also driven consolidation in large industry super funds that are getting larger.

The consolidation in the industry funds I think is something we should be very mindful of. It’s happening at a hell of a pace. So that’s partly driven by the global financial crisis. 

I think the Cooper Review and the advent of MySuper is another reason to drive consolidation – so difficult financial times, Cooper Review and now FOFA is the third thing that makes for consolidation.

So we’ve gone from the 80/20 rule almost to the 90/10 rule, a small number of very large players who are integrated and who will be able to dominate, because they have the scale to be able to deal with these things.

It’s also happening during a difficult period for investors where sentiment is down and flows of the managed investments are down. But I agree, I think in the future there will be a new IFA world. I think it will be a different bunch of guys.

It won’t be the entrepreneurs who grew up through the 1980s, like the Matrix guys who did a wonderful job building businesses on the rules that were there at that time. 

But there’ll be a new bunch of guys and I meet those guys. There’s two sorts of people you meet in financial planner land: there’s the older guys who are feeling really frustrated with the ways the rules are changing, and the other guys who are saying “bring it on”.

I can see great opportunity and I think as confidence re-emerges in investors and markets become more bullish, then those entrepreneurs will be able to build businesses in the new game. So you’ll get this small number of large players – and then a number of small players breaking out again.

In 10 years time I think you’ll probably have a more robust IFA market than today, quite significantly, building new business models. 

RD: If you’re running a business at the moment and you’re that sort of original entrepreneur, if you haven’t already addressed the idea around succession you’re probably five years too late anyway.

So I suppose the argument is FOFA obviously focuses the mind, but realistically in organisations again like Matrix you have to make it a part of your job to ensure that people have generational shift, for example we’ve got second and third generation in now. 

So you’re moving to do that and there’s an element of people who obviously have frustration, who say, you know, “this is a pain” as rules change. I think we’ve all got those [people] regardless of how much time we’ve got. 

At the same time we’ve got some people who are saying, “this is just another way of doing business”. In fact there are people within businesses where one part of the business is predominantly – let’s call it commission-based – and the other part of the same business is utterly fee-for-service, and that happens within even the smallest of businesses now.

So there’s opportunities attached to it, but you know obviously what we’re here to talk about is an impost that’s put upon the industry for no apparent benefit and not in alignment with the stated goals of what the Government was saying. 

RK: There’s also an emerging issue, not in the financial advice world I think but in the fund insurance world. Fiancial advice is now the commodity – that is, advice is not about the product side, and there’s now countless examples where the role of adviser is not to end up being a product destination but to manage cash flow, get the strategy right and so on. 

So I think the challenge for the product providers is that the current industry business model relies on quality financial advice leading to some kind of product outcome. Well if you break that nexus, which is clearly where FOFA is heading, how do you end up with flows, how do you maintain that relationship which I think spins out the whole advice offer? 

Which is why the scaled advice, intra-fund financial advice piece opens up the opportunity, as do the incubators of direct-to-market gain and so. That opens up the area of channel conflict or potential channel conflict, but also opens up the issue of what is advice. 

Because, financial advice to date [may have been], you know, quality advice, end-up-in-a-product proposition and away you go, but there are other things that are called advice, or ‘advice lite’ or scaled advice that ends up in a product proposition, so then we end up in this blurry land again of does advice equal sales or advice equals advice? 

The question if you’re running a funds insurance superannuation business is how do you make sure that you continue to do – so if you like feed the beast or feed the factory and keep it humming when your distribution channels have a change of focus into providing financial advice irrespective of whether there’s a product sale made or not. 

I know product providers are absolutely addressing those issues, but I think it does change the landscape and in some ways, in the same way the economics of the advice models are in change, so the economics of the product provider model also have to be in change.

So it’s kind of interesting up-line impacts. Ripoll and FOFA was never about that stuff, it was always about giving good advice so the storm doesn’t happen again.