FOFA reforms roundtable

MT Welcome gentlemen, the subject today is, as you know, the fee-for-service debate and the fact that of course the Government is back in power, albeit on a very thin margin. But it seems that regardless of that, fee-for-service is here to stay.

So the debate now seems to be about how it’s going to be structured and how it’ll be applied and whether, underlying all of that, individual planners will go to fee-for-service, but dealer groups will maintain their volume rebates, because that’s part and parcel of how they are commercially established.

Do you see something evolving from the FOFA reforms that sees not only planners giving away commissions and trails, but dealer groups having to change the way they take their part of the dollar as well? Mark you’re the FPA man here.

MR The future of financial advice reforms are fairly clear; what they’re seeking to do is remove volume-based payments, so not necessarily remove rebates as such, but where they’re linked to volume, the papers were pretty clear that they took issue with that, so I think that’s probably the major issue.

And it’ll be interesting to see how licensees restructure themselves if they need to deal with that — something I’m sure many of them are already taking steps towards. Andrew, Grahame and Indy might have a more in-depth view on that.

AG Well I’m happy to make a comment. Regarding the FOFA reforms, the Government’s main concern (especially when relating to volume payment) is volume payments that conflict advice, and it’s hard to argue with that principle. If there are volume payments that either conflict advice or have a potential to, I think they do need to be challenged. I think to their credit, the public policy makers understand the workings of the industry very well, especially in Treasury and the different payment structures.

The more they probe and understand that, they will start to recognise that there are indeed some volume payment structures in the industry which have the potential to conflict advice and that will need to change. But equally, there are lots of structures in place where there are volume-related payments that don’t conflict advice. They are effectively product neutral, they don’t influence fund manager selection and they don’t influence asset allocation decisions, so they’re neutral in terms of the impact on advice. I think there’s the recognition that it’s not appropriate that those arrangements are impacted by the proposed reform.

So one possibility is that volume payments that don’t conflict advice may continue. That’s a possibility as opposed to a probability at this stage if the reform goes ahead in the current form. And we’ve already flagged for example that we would need to restructure our business model, and we would restructure it by becoming the responsible entity for our preferred platform offerings.

With the usual selection of fund managers we would contract platform infrastructure services and the margin that we seek through providing our service would be pretty resilient.

GE That sort of model is really where businesses like accountants and Professional Investment Services would head. Unfortunately the case with that situation is that we have the actual volume to substantiate and be able to handle that sort of infrastructure, whereas a lot of the boutique dealers actually don’t.

The argument for me comes down, partially, to this long-running discussion about platforms and whether platforms are a product or not and whether they actually influence investment selection. And when you go back to when platforms started and you go through the history, platforms have always been an administrative mechanism.

When we look back to AM and Asgard, they enabled us to actually change investment managers without new upfront costs and so on, which is where it started off originally and that hasn’t actually changed. We’ve seen downward pressures on fund managers’ margins to actually get people a better deal through that process.

But also there’s a non-invoice cost of actually administering your own investments and the platforms actually do this. So the question really gets down to me is that can we finally get some sort of answer about whether a platform is a product or is not a product. In my view it’s not. And on that basis then let’s exclude that issue from the debate, because to me there’s no reason why we can’t, and I think rebate is actually a nonsense word.

We margin share with people, because we have the opportunity to do our own or to actually offer choice and therefore we offer a number of platforms on that basis. So I’d like to hopefully get some clarity around that if we could. The other aspect is to use Don Chipp’s expression to ‘keep the bastards honest’, something we need to from our end. I’m talking about from the account end and the Professional Investment Services end and the Fiducian end of the equation to have alternative investment mechanisms, which actually create a competitive environment.

We have funds management in place now, but less than 5 per cent or 6 per cent of our funds flow go to our investments — although it does actually create a competitive environment. If we allowed the top four banks to control absolutely everything, then the competitive nature I think will actually diminish — and our inter competitive nature is really why we have been such a successful financial planning business throughout the world.

IS I agree with what Andrew and Grahame have said. I think one of the things is just to step back a bit and it’s a question of semantics in many cases. I remember years ago we paid probably 4 per cent commission to our stockbrokers. They were smart and they changed the word commission to brokerage.

What exactly is a commission is still open for discussion, because it started really with the industry funds and they’ve been attacking not just the mode of payment but the financial planning industry itself through the advertising of commissions. And I can’t understand how all of them, the regulator, our industry body and the Government seemed to have confused two issues.

The first issue is that what we deal with is personalised tailored financial advice. That is an agreement between the adviser and the client and it is stated up front. What the industry fund can argue about is possibly mandatory corporate superannuation, where a client may have to pay a fee for service they do not receive. So I think there’s been complete confusion; some people still think that the fund manager actually pays the fee. The truth of the matter is it is always the client who pays for the fee — no fund manager has the money to pay the fee. They take it from the client’s account, they pay themselves and then they pay the adviser, so it is always the client who pays.

I’m actually confused on how we can get the waters so muddied, where tailored personalised financial advice under an agreement is clubbed together with a commission, which industry funds have attacked the entire financial planning industry with. So that’s my first point, I think we need to clarify that.

The other thing I’ve been talking about is volume rebates. I don’t think it’s really an issue of the rebate, it’s a question of disclosure. I have spoken to some advisers who’ve been getting rebates, and I said: ‘What’s the big deal about it? Why don’t you just tell your clients that the total fee to use is 1.75 per cent of which 0.75 per cent goes to my dealer to exist, to pay his fees, to pay the industry, to regulate you, to manage the business and 1 per cent goes to the adviser — that’s the fee’. So I think it’s purely a question of disclosure in terms of rebates. And as Grahame said it’s a question of sharing it with different parties or doing it yourself, as Andrew is suggesting. We could see that problem years ago and so we are already doing that.

Fiducian has platforms, Fiducian has funds; we don’t give rebates and we disclose every fee we get. In fact our clients get online reports that disclose the last cent that was charged to them overnight, even if it’s five cents. We have multi-manager funds. For us our clients trust the multi-manager funds, because we report our performance on the surveys and they’re very highly rated. Ninety per cent of new money goes to our multi-manager platform, because of performance.

I just feel that it’s not so much the semantics of what this fee is called and nor is it the mode of payment that’s important, it’s the service that’s important. If the service is provided, how one gets paid should not be up to the Government; it’s nothing to do with them or the industry funds. When a service is not provided, yes I’ve got an issue and that could only possibly occur through the corporate superannuation area.

Managing conflicts

AG The main issue with that Indy is where the Government does want to get involved is to ensure that conflicts are managed, so they are either avoided or they’re appropriately managed. There’s a whole range of different remuneration models, and there’s the potential there for conflicts and it’s then a question of how you manage them through disclosures and the like.

That’s where they probably reasonably express a view that if you can get things to a situation where it’s neutral in terms of product and fund manager selection, it’s neutral in terms of asset allocation decision, if you’ve got full and proper disclosures. I agree with Grahame that I think in some cases the actual reference to volume rebates is an unfortunate phrase.

IS It is a misnomer.

AG I know in the case of Count, yes we earn a margin through platforms, but it’s actually a margin that we determine and it’s the platform provider which is effectively collecting it on our behalf through this administration service, but it’s fully disclosed, it’s fully transparent and it’s product neutral.

IS As long as it’s disclosed what’s the issue? We’ve had so much regulation. We’ve had the old section 52 and then we’ve got the Trade Practices Act and along came AFSL and it goes on and on and there are more complaints and claims now and more product failures than ever before.

I’d like to actually challenge the FSC on this. I’ve seen John Brogden stand up at a seminar and just wave his arm (I think you might have been there, Mark) and said “all you financial planners”. Unless there’s been a clear case of fraud (and that can happen anywhere, you have doctors doing surgery and killing people) which financial planner has ever had a claim or a complaint that the product has not failed?

So what responsibility does the FSC and others take to make sure that products coming out are fine? There’s none of that, it’s always the financial planner — and we’re a soft target. It’s easy to attack a financial planner, but the big boys as you said — the guys who list companies — they charge commissions. Lawyers charge commission for managing estates. As I said, stock brokers used to charge commission, they now call it brokerage.

So what’s wrong with an asset-based charge? I think when you’ve got an asset-based charge we suffer with the client. If the client does well we gain, if the client does poorly we suffer too. I think the way they’re talking about dollars and hourly charge rates with fee-for-service is equally open to conflict. It’s the old story where this lawyer goes up to heaven and he’s 45 and he’s standing in the back of the queue and the angel comes and says, ‘Hey you better go to the front because you’re an old man’. He says ‘Oh I’m only 45,’ and the angel says ‘Well, how come your billable hours show you’re 125 years old?’ And it gives the wrong impression that the fellow is working late at night and he’s charging 10 hours or 12 hours.

It’s the same thing — clients are not that silly. While we have a contract I don’t see why anyone should interfere. The contract explains what the contract is about, it’s a fee for a service. If a service is provided, you pay a fee, if a service is not provided, I’ve got an issue.

GE On the dealer group model, one of the areas (and I know Treasury is aware of this) is that there is an element of transfer pricing — and I say that in the politest possible way. Transfer pricing in the institutions means they can run their dealer groups at a loss and it doesn’t matter, and they could run their products at a massive profit. There is a separation — they don’t necessarily need to feed one and the other, because they give guarantees. It’s all done through transfer pricing.

One of the areas that we’ve been working on inside PIS is to actually make our business look like an institution the same way, so we could actually run our dealer group at a loss if we wanted to with the product actually getting all the profit. But it doesn’t make a lot of sense — aren’t we supposed to be doing the best thing by the consumer?

All we’re doing is trying to compete on a level playing field. If we get pushed in this direction there’s going to be less choice for the consumer. That’s got to be a major issue for the regulators and the Government if we’re going to have less choice because of the structure they’re pointing us towards.

MN As the only manufacturer in the room, in all honesty, just listening to the conversation is very interesting. From our perspective, of course, our business has a large manufacturing area. Grahame made an interesting comment about whether platforms are products or something else. I mean they’re essentially administration-based services, but they can be packaged up in different ways.

The reviews that have come out are interesting. I’ve looked at a raft of things and I know the focus in the last few minutes of discussion has been on things like rebates and on bonuses and so on, but I think Cooper in particular also looked at cost to the client, with things like MySuper and so on as an initiative for bringing costs down for the client.

That’s going to be one of the challenges for this industry in terms of how you manage the client lifecycle through a MySuper type product and transition them into an environment when they start to acquire sufficient funds and clearly they need the advice. That’s going to be an interesting challenge. From my perspective I think the industry has responded well to the draft recommendations. The FSC got off on the front foot last year with the super charter and we’ve certainly supported it as an organisation from day one — as have all the other large organisations. I think the review is healthy and it’s certainly good to have a discussion about the way that remuneration models are currently set up and the future models.

I think that in the intermediated model that Australia has had for a number of years — and I’m talking about industry funds — the advice-based model has been a very good one. I think it served the Australian investor really well. I think we need to look at ways of improving that, but we also need to be aware of the fact that it’s a strong model that has worked well in the past.

It’s important that we have a review process and we try and refine things, but don’t lose the essence of what we’ve had, which is the ability for most Australians to get some really good advice about their key investment. After their house, this is the most important thing they’re going to be investing in during their lifetime and clearly they need that to be able to access the expertise and the skills coming from financial planners.

Real costs to clients

IS Can I just add something on a cost to client? If you look back, the cost to client has been pretty static. How the pie has been carved up has been changed. It’s a question of survival. There was a time when the fund manager got the bulk of the cost, there were days when there were retail funds and we were eking out a living. We now found that the bar has shifted to the advising side and the 2 per cent or whatever the fee was has now been split up with squeezing the fund managers and then the platforms, with the bulk of it coming to the advising community.

That fee is pretty close to what it was, if not static. It’s a question of survival. I saw the 137 recommendations and I’ve looked at the 11 for FOFA and 135 for Henry Tax Review and we see them. Some of them surprise me that they can be so naïve, but you’re right, it’s good to have a review and I hope that when this review is done they should understand that the industry must become vibrant and deliver the service.

I don’t believe that advisers genuinely defraud their clients. I don’t believe that they intentionally do things to cheat their clients. There will always be the odd one and you can’t fight that, but to tarnish everyone with the same brush and to think everyone in the advising community needs to be regulated and everyone else is fine, is wrong.

I was quoted in your magazine saying I like opt-in and I don’t actually like opt-in. I said that people should get a review, but to force someone to sign every year gives the impression that what advisers do is something that’s not right. That’s incorrect and it’s not honest. Why is this regulation only pushed through the financial planning community? Why don’t doctors make you sign up every year that you’re going to come to me again? Why don’t the accountants make you sign up every year? Why don’t we go and get an opt-in from a bank every time you go to draw money out? Why us? Because we’re a soft target.

AG Can I make a couple of comments? First of all on the review process, I think if you sit back and look at it objectively, I think it’s been a more than fair process. There are a range of issues, which in a booming industry would be legitimate areas for a Government to make inquiries about, so we’ve had the Ripoll Review leading to the future of financial advice reforms, and the Cooper Review and the Henry Review touched on other issues.

But if you look at the whole process that the Government and the public policy makers have been through, in many respects it’s difficult to fault them on process. They’ve had detailed reviews, they’ve been well considered, of course there’s some recommendations which people would like and some which they don’t like, that’s the nature of reviews. With the proposals there’s a time frame, which is July 2012, especially with the FOFA reforms, which is a reasonable timetable in terms of working through the issues and getting enabling legislation and all that.

And then the public policy makers and the Government are genuinely committed to a consultation process to really work through the issues. So if you look at say the position for the financial services industry versus something like the resources super profit tax and the consultation process, you’d have to say that the process that they’re going through as a Government and the public policy makers, I think is a reasonable process.

Now it’s not to say that we’ll like all the recommendations, but if they have a review and there’s consultation and they need to reach a decision on certain matters, I think from a public policy perspective that’s a legitimate process to work through.

The second comment is, I think we as an industry have got a lot of work to do, because to a certain extent we permit or allow all the attention and all the focus to be on the cost of advice and on fee structures or remuneration structures. And I think we as an industry need to spend a lot more time talking about the value of advice and what it genuinely delivers.

If you look at some of the surveys that are now coming out with the results of those who receive or benefit from advice and what their experiences have been, and look at that against comparison groups of those who haven’t received advice, there are clear major benefits to advice provision. And I think all of us in the industry have a responsibility to be promoting that message a lot more and shifting the debate from the cost of advice in its various forms to the value of advice.

GE I totally agree Andrew, and I’m comfortable with the process, but your last point was one that actually caused me most concern about where we got to and why we got there. The Ripoll Inquiry was all about the bad things that were done to the poor clients of Storm and I do feel for those clients, but it was all about that.

When it really came down to the industry supporting the value of the advice, you could hear the crickets in the background. And if you look at those submissions (and they’re still around) from the people involved in the financial planning industry, you’ll find that there were very little which actually said that what advisers do for clients was a good thing.

So where we go to with respect to the value of advice to me was what we actually deserved, because the major institutions sat back and watched it happen, because they could see what was going to happen and because they’ve heard me say it to them direct to their faces. They sat back and watched the industry crumble. They had an opportunity to go in and support the industry and they didn’t do it, I think they were absent from that situation.

So now we’ve got to go and fight a rear guard action on the value of advice, because it wasn’t done at a time that it should have been done. And that’s a very hard issue to fight now, because people say you’re only doing this because of what’s happened.

It isn’t and there are lots and lots of stories that are there of the benefits. And you’re right, it is about the value of advice, but we can’t continue to fight that battle day in and day out. We’re going to have to accept the umpire’s decision in respect to some of these things and we’re going to have to adjust our models to reflect that.

We need to look at this level playing field issue. I know it’s my soapbox, but we need a level playing field for institutions, a level playing field for major non-institutionally owned businesses, and a level playing field for the industry funds. And I don’t put all the industry funds in the one camp — there’s a lot of good industry funds out there. We’ve got financial planning businesses that operate just the way we operate and I don’t think that they see all of the comment that comes out from an industry fund perspective as being representative of what they actually do.

If we’re all going to compete in the same marketplace then we’ve all got to have the same rules. And if the Government is serious and the regulators are serious, then if we’re all going to play, everybody is going to play under the same rules.

Pricing advice

AG In many respects I think the whole process of unbundling the pricing of advice and the pricing of products is a really positive development.

It’s greater transparency for the client in the first instance, but the more you unbundle the pricing of advice from the pricing of product and if you talk about how the retail sector competes with the industry fund sector, it actually puts the retail sector in a much stronger position with the unbundling of that pricing, because then you’ll start to get onto the ‘like’ comparisons.

A lot of the comparisons in the past have been apples and oranges, where one’s had effectively the price of advice implicitly bundled into the pricing and one hasn’t included advice. Now if you forcibly remove the pricing of those, things like comparative advertising for example, this will actually put the retail side of the sector in a stronger position.

IS I think you’re right that the review process has been methodical. The question I have about a lot of the recommendations is: are they commercially viable? As I said before, it is a matter of survival for each component — the fund management, financial planning and the adviser. I don’t see many dealer groups — even larger ones — surviving without what people call a rebate. They need that funding to survive to give that service.

It’s a matter of carving up the fee. If the rebate is cut off from the large groups, ‘hey they don’t give enough return to their shareholders’, it would be a problem. The fee is still charged to the client. The client pays everyone, pays me sitting here, your magazine, our jobs, everything, we take money from them and we pay each other.

Whether the old rebate prevents a conflict of interest for new money or does it prevent a conflict of interest for old money, which is already sitting on the platform. It’s a fee and if it’s disclosed that’s fine, clients should know about it. You’re right Grahame, that the big groups sat back and I wondered why that was happening.

The only reason I can come up with is maybe they have a conflict themselves, because they provide funds management to the large industry clients, so they’re happy to sit back and let us suffer. That’s the only reason I can come up with. I can’t see why the large fund managers did not support the financial planning industry at a time like that. They have an axe to grind; they would never want to upset their industry fund that provides them billions of dollars to manage. So maybe that’s the reason why they couldn’t.

As far as level playing field, you’re absolutely right, I’ve been vocal about it, I’ve come out in the magazines that I cannot understand how an industry fund can pick up the phone and tell someone what to do with their investments, which is basically keep it in our fund. And an adviser in Tasmania goes to jail and is put away for two years because he did not give a Statement of Advice [SOA] to his aunt or someone like that, it’s just ridiculous.

The point is that as a group, we’re not together, we’re disparate and we cannot fight the same battle. We do not cooperate. The FSC is big, it can do what it likes, we need to get together and fight the battle together. I’m surprised when I hear people talk about value advice.

We send surveys out to our clients every year, and I got a call from this old client saying ‘thank God for Fiducian and my adviser’. He said ‘I know when I die my wife will be well looked after’. This is the stuff we get back. It surprises me that when I hear that advice is not given, that the pricing is separate. We’ve always been remunerated, either through product or whatever you call it, commission or a fee for asset base. It always comes from the client, always, so we can try and split it up as much as we like, the client always pays, we just have to tell him where it’s going.

AG I think one of the issues for us to talk through with Government and Treasury and the public policy makers, now that the election is over and they are re-engaging in the consultation process, is the consultation issue. Grahame, you and I have been involved in some of those discussions.

Unintended consequences

AG One of the issues that they are receptive to is the whole issue of unattended consequences and how some of this stuff may play out, especially with the FOFA reform — potentially there’s a tilt to the vertically integrated players and you have to think in terms of the overall quality of advice and a level playing field is an outcome that you want.

There is a distinct possibility that it will lead to increased concentration of the industry, because especially in the non-aligned part of the sector, organisations may well need to reconfigure their business models and the reality is that some of the larger organisations that have got the wherewithal and the capability and the capital to make that transition will be able to do so. And the smaller to mid sized licensees will find that more challenging, so it’s inevitable that if the FOFA changes go through as they’ve announced them thus far, it will lead to increased and accelerated concentration in the industry.

So is that an outcome that the Government and the public policy makers actually want? It’ll more than likely lead to potentially a reduction in the level of competition in the market, and with that tilt to the vertically integrated players, it may also lead to a reduction in the independence of advice. So there’s a range of risk factors there in terms of if you take the macro view on the FOFA reform, which the public policy makers really need to think through now.

Having said that I think they and especially the people in Treasury are acutely aware of that. They have looked at the overseas experience in the UK where there’s been any number of reforms in the last 20 years and a lot of them haven’t quite worked out the way they planned. So I think they’re particularly sensitive to that and we’ll work through some of those issues. I maintain a degree of hope, if not utmost confidence that some of those issues actually will be worked through.

IS Yeah, I would expect that Mark having come from the industry understands that better than some of his predecessors.

Look at the UK model. The UK came and looked at Australia to fix their system when they had polarisation of their industry. But I’ve looked at the UK model again and I think they’ve got it right. They say that the adviser can only charge with the agreement of the client — the adviser can charge for advice, not the product. They don’t say anything about how you can get paid, and they say that an asset-based charge is OK if there is an agreement.

That is the simplest easiest form and if our regulators adopt something like that, maybe it’s time for us to go and see what’s happening in the UK and adopt that. If our regulators do that, we would move forward with the least amount of disruption to the industry and a process that actually works, because you get commitment from the client. You can only charge if the client agrees and you can charge an asset-based fee, which we’re used to, and we suffer with the client. I think that’s fine.

GE I think the UK did move along the system that was represented by MLC’s submission to Ripoll, which was the ‘aligned or non-aligned advisers’. Unfortunately there are very few non-aligned advisers because the hurdles that are required were so great that they just wouldn’t jump them.

So they are still struggling over there with a lot of those issues. I suppose from my perspective there are two issues that Andrew just mentioned. One was consolidation of the industry. We’re starting to see different mechanisms being established and we saw this a while back (but it wasn’t for this particular reason) with the establishment of associated advisory practices, which is our boutique dealer services, but you’re also seeing the AIOFP [Association of Independently Owned Financial Planners].

Are we going to see more extensions of this type of model for the boutique that doesn’t have the size to be able to establish its own responsible entity (RE)? And I applaud ASIC because it’s actually starting to talk about getting these REs to be more substantial. If we had that in place before, I think we wouldn’t have had some of the problems we’ve had with product failures.

But with the size of organisations, a lot of the boutique licensees will not be able to have those REs. So does that mean that we’re going to have a development of a new vehicle that is not a dealer, but is actually working with boutiques to actually provide that mechanism to have that RE, to have their own products? And I think there’s a big chance that’s going to happen. Now we’re already down that track, the AIOFP is already down that track and I suspect there are going to be more following.

In fact, Indy does it now already in his own form and Countplus is not far off being listed. There are all sorts of different ways of dealing with it, more so for the smaller licensees , because they’ve got many greater hurdles to jump. And they are the people who drive the competitive nature of our industry and we’ve really got to think hard about the implications of that.

IS I’ve read in the press (I don’t go to many of them) that a lot of them are trying to move to direct investments and the risk I see is of administration failure as it gets more and more complex and they start using different products. They don’t have a big account or PIS or others to back them and support that process, so there could be some problem with administration.

The other thing is, and I may be out of school on this, I don’t know how much they know and how good they are in terms of investment knowledge. On the one hand you’ve got fund managers whose pure role is to make money and to manage money and to have people who are educated to manage money. On the other hand you’ve got the other side, where as Grahame says some of these REs (which may not be fully equipped to even manage their businesses) who now believe that they can actually make those long-term recommendations by selecting securities and then administering them themselves.

Maybe it’ll work – I hope it does – but I see that that could be an administration failure. It could be an issue to look at. Not exactly fee or commission, but they feel that that’s one way of getting away from this fee and commission.

GE  Mark, regarding the FPA and the potential consolidation, but also the impact to smaller members, I know that ethics is a big issue for the association. What about the issues with the smaller members? Do you see them as having different challenges?

Asset-based fees

MR  You mentioned ethics Grahame, so first I’ll make a comment. Firstly, it’s been interesting just listening to the debate and I guess where I’m coming from at the moment is we’re completing the transition from an industry association to a professional association.

And in completing that you have to step back a little bit in terms of this discussion at the adviser client relationship and the purity of that and how an adviser gets paid for the services that they deliver. And my sense is that we’ve gone a long way down the path of clearing that up and it’s not necessarily that it was always a conflict; a lot of these things are perceptions rather than reality.

But when you’re dealing in a professional way with a client, you can’t afford to have the overlay of any perception of conflict. These reforms are just breaking it down into component parts where you’ve got the adviser interacting with the client. I don’t believe these reforms are necessarily a bad thing and I think they will clear the decks in terms of being able to have that fiduciary relationship with the client.

The interesting thing in Australia, which makes it quite different from any other profession, is that you have this concept of a licence and you have to be licensed to give advice. And back in the old NCSC days and we would all remember those, advisers were individually licensed to the record and of course that changed, because the regulator could see that the work involved in that and the size of what that was going to look like when you have about 16,000 advisers in the country today would have been overwhelming.

So effectively what transpired is the delegation of that authority to the licensee, and then through that evolutionary process the licensees became larger and licensed up those financial planners. And then they became aggregators, because they could negotiate a margin with funds management groups and/or product providers and platform providers.

So it’s an interesting evolution to where we see ourselves today, where through legislation and changes in licensing that aggregation was allowed to occur and the bundling up of advice and product and platform was allowed to occur. And now we’re looking to try and unbundle that. So I think in terms of what’s happening I think the unbundling advice from a product is a really positive move and I think most financial planners will be able to deal with that move.

So getting to your question Grahame and of course the larger players where they are vertically integrated, if they haven’t got an RE function they’ll get one, so they’ll be able to manage through the sharing of margin in a new world. And I think you’re right, the smaller boutique players will find it more difficult if in fact they are sharing margin today.

You have to unbundle it and look at where you’ve got one or two or three advisers who have got their own licence. They may in fact not be getting a volume-based rebate of any description today. So it’s probably that middle ground would be my sense that is going to find it a little difficult. And if they’re on that larger size of that middle ground I think they will go to an RE for hire to get around these changes, because they’ll want to survive.

But at the smaller end you might find them aggregating together so that they can justify the cost of implementing an RE. But that’s just a prediction, and the way I would see things.

GE  I put my theoretical hat on and take my commercial hat off for this issue. Looking at the economics of the industry and having been in the industry for way too long, it still seems to me the industry economics are dependent upon product sales. I struggle with the concept of an industry that relies on product sales to exist and survive and to be a profession. So that’s a personal Grahame Evans theoretical comment.

MR  But we’re almost to a point where we can be linked and professional advice can be given and an adviser can survive without necessarily having a product at the back-end of that.

New debate

GE  I really challenge that. I just think where we are it’s a long haul to get to where you could put your hand on your heart and say this industry is now a profession because it no longer requires a sale of a product in any form whatsoever for the business to exist. And I think that’s probably one of our major challenges.

The other aspect is asset-based fees and I’m not quite sure where we deal with this, because we are struggling with this one as well. Forget the commission issue, it’s dead. I think we’re still going to fight the battle with respect to insurance and I’ll come back to that, but asset based fees I believe are an alignment of interest with the investor.

So you don’t have to have product with asset-based fees. We get measured basically on how well we actually invest for a client and so that’s an issue. But from my perspective it also does one other thing and that is because it’s asset-based, it actually subsidises the smaller client. So the larger client from a dollar perspective pays more than the smaller client. It has been doing that for years and some would say that’s not market effective or efficient, but it actually has been the case.

So one of the issues that we’ve got to deal with with asset-based fees from a commercial perspective is the small amount of conflict that arises from making asset-based fees substantial enough to actually warrant them. Will that mean that the smaller investor is going to end up paying more? And that’s an argument I think we just need to have.

MR  But let’s be clear, the FOFA reforms have been silent about asset-based fees, so as we sit here today we’re not looking at legislation that would ban an asset-based fee. I understand the joint accounting bodies have put a draft paper out looking to ban asset-based fees.

That is a pricing issue and a pricing discussion and it certainly shouldn’t impact on whether somebody is professional or not. A professional should be able to determine how they charge and in what form they charge and how the client pays in my opinion.

AG  This is going to be the next big debate. It doesn’t apply to the entire industry at this stage, but for account-based financial advisers there is an exposure draft out there to obtain comment. It’s called APES230, the Accounting Professional and Ethical Standards 230, to do with financial advice.

And it contemplates a range of different fee models, and one of the things it contemplates is that there would be certain permitted fee models and other ones would be banned for people who are members of the constituent accounting bodies. And one of the ones it’s very much focused on is asset-based fees and it has based that on the concept that certain fee models like asset-based fees are inconsistent with fiduciary duty.

This is going to be the next big issue and people will be debating the virtues and merits and demerits of asset-based fees versus fixed fee arrangements.

And whilst that’s happening in just one part of the industry at the moment, which is accountant-based financial advisers, you can be sure that if it gets established there in one part of the industry that whether you call it FOFA phase two or something like that, it’s a possible future development.

MR  And to be clear, the FPA has no issue with asset-based fees.

IS  That was a paper you put out.

AG  How professionals charge for their service is a relationship between the client and the professional.

IS  That’s right, absolutely.

AG  My sense is that this standard would take two parts.

IS  There’s  confusion in understanding the whole process of financial planning. Every time I hear of this unbundling that I hear from the industry and the Government, it keeps trying to focus on new investment, so you’re going to place an investment in a product, unbundle that advice and you actually forget that the only thing you’re using the product for is your method of remuneration.

You could use any product and you could ask the client to give you a cheque, or some other point of payment, dollar, whatever – the investment advice is one thing. We have some clients who pay big dollars to our advisers, but do not want any product advice – they want economic advice, they want market advice. And that’s fine, they are big clients. To expect small clients to go and dig into the bank and give you a big cheque because they’ve received advice makes it difficult.

We’ve got to separate the two. One is when you’re talking about bundling advice from product, we are always focusing on the new investment. You’re selling a product so you’re getting paid a fee, but it’s a method of payment. The real revenue that all our businesses get is from ongoing advice and management and maintenance of client portfolios, and there is nothing wrong if it’s asset-based.

As long as a distinction is made to say: ‘Look Mr Client, that is the recommendation I’ve made for you. You could pay me by cheque, you could pay me hourly, you could pay me per year, you could pay me quarterly, that’s the product. Or if it’s more convenient I could take it out of that asset that you have which you are investing’.

It’s the convenience. We’ve got a client, a lady who has got money with us, who has got money in an industry fund and she was so bullied by the industry fund, all she wanted to do was convert her asset into an income stream. And they billed her and they said you better come for advice and we’ll bill you $3,300 for it.

Now this lady is basically getting some Centrelink support. To expect her to go to a bank and say give me a loan to pay these guys $3,300 is ridiculous. It’s a method of payment, that’s what I keep saying. And the most convenient method of payment for, say, a doctor, is the Government. They don’t charge two cents for every chemical drug used in a medication, they say that’s my method of payment – it’s easy, it’s convenient.

If it’s disclosed, it’s clean. We should continue with it and it’s the easiest way to keep going. And Andrew I think you said the thing you fear is when people get advice. People need to get advice.

AG  I think if you go back to the FOFA reforms, the Government stated two really broad objectives or principles at the start of the FOFA reforms. One was basically seeking to remove conflicted payment remuneration structures and again, to the extent that they create conflicts, that that is a principle is entirely reasonable.

The second one was to make advice as accessible as possible to those who would benefit from it. So one of the filters which needs to be placed in any of the reforms is does it actually serve the purpose of increasing access to advice? So I for one think that the whole growth of intra-fund advice and limited advice through super funds is a positive development. To me that increases access to advice.

As long as you define intrafund and the scope of it and likewise for limited advice appropriately, if that means that people who otherwise wouldn’t have had access to advice do get access to advice, I think that’s a positive development. Reality would be once they appear to grow to a certain size and account balances grow to a certain size, more than likely they’ll seek a more comprehensive, holistic solution.

Overall, I think that’s good for the industry. But once you then move on to saying OK in terms of potential future developments with fee structures and what might their impact be, there is the potential if you focused on certain fee models only being the appropriate ones, that it will be the affluent and the high-net-worth who can willingly and would willingly accept those structures.

But it may end up being a bit of an obstacle for mid market and you go back to that original test of increasing access to advice – is that a good outcome? You said before Grahame probably one of the things which is implicitly in an asset-based fee model is that there probably is some degree of subsidisation between higher account balance type customers and lower tier clients.

IS  Really big subsidisation.

AG  So to the extent that if one were to challenge that or remove that, it does raise a big question I think about advice provided to middle market. Certainly clients’ lower account balances and low contributions will be looked after through super funds and intra-fund and limited advice. The affluent and high-net-worth end of the market will always be well advised. I think there’s a big question there about how some of this stuff may play out for middle Australia.

Product design

MN  You’re certainly going to see a change in the way products are designed to allow advisers to adopt different models. We will start to see products that are very much fee-for-service focused. We are bringing a product out at the end of this year that is basically designed to assist advisers in one of our fee-for-service businesses.

Clearly there is an increasing demand for that and certainly numbers of advisers inquiring about products that allow them to do that. So I think you will see adjustments and changes occur around the manufacturing of product. I take the point that it’s important to understand that moving to one fee model can create an issue in terms of that middle market type of customer.

Some of these products are going to still allow the client to authorise the adviser to charge a fee to their account, whether it’s a flat dollar or ongoing percentage. I think the big thing is going to be understanding how we can facilitate the move to fee-for-service and ensure that all clients are catered for over that period.

Just coming back to that advice question earlier, you don’t want to end up disenfranchising the smaller client, and the fee-for-service product we’re designing will cater for all types of clients, including ones with small balances to ensure that they’re not going to be affected.

AG  I think that’s going to be one of the big requirements. And again I think there’s a probability the Government might look on this favourably. Having simpler advice frameworks for people who have got simpler sets of needs. So rather than going through all the complexity of the current regime we have a recognised and endorsed framework whereby you could have scope advice or constrained advice or limited advice to a much greater extent than is currently the case.

Five years out there’ll be at least as many pieces of advice given under the heading of intra or limited or scoped as there is comprehensive.

MR  We’ve urged them to open up intrafund advice to all advisers as well, so that they weren’t restricted to a superannuation fund.

IS  Most advisers today already provide intra-fund advice. You have money sitting in the client’s account in a fund, they ring up and they ask ‘What do I do about this?’ You just say, ‘Look mate, I’ll send you an ROA and this is what you do’. It’s already done, but it’s a written document and it is because we understand the client’s circumstances, it’s already there.

As you said Andrew, we do large clients, definitely subsidise small ones, and our products and all fees are negotiable. The review fee, people say, ‘Look, I don’t want to pay a trail fee or an asset-based fee’, so there’s a review fee. You make up your mind and it can be cancelled, you opt out any time, it’s negotiable. That’s the way it’s going already for most people.

Most of our advisers, the salary ones at least, don’t even charge an upfront fee for a new product investment. Instead they say, ‘Well I’ll give you a plan, but this is what I will charge you along the way for continuing advice’. It’s already been done. I asked how many people do pro bono advice and I was surprised. When I looked at all the top advisers, the guys with big money, with good clients with good experience all lifted their hands. They all do it.

AG  It’s part of what you do these days.

IS  It’s part of what you do. I just feel that when you come with designing products, I know that big industry funds and others are talking about designing products that are a panacea for anything, so you don’t even need to go to an adviser, that is wrong. If you don’t understand the client circumstances, take an average.

When I hear the big instos coming out with products saying look we’ll design products which allow you to have a fee-for-service, I go back to my first point, what exactly is a fee-for-service? What is important, the fee, the method of payment or the service? It’s the service that’s important, the method of payment is now becoming the issue, which is wrong.

AG  Which again is where to a certain extent perhaps we as an industry have allowed the debate and the discussion to get somewhat sidetracked.