FOFA uncertainty and industry consolidation takes its toll on financial services

The tortuous progress of the FOFA reforms and ongoing industry consolidation has defined 2011 for the financial services sector, write Tim Stewart and Milana Pokrajac.

It has been a fractious year in the financial services industry, with regulatory uncertainty and increasing industry consolidation taking a toll.

After an exhaustive (and exhausting) consultation process, the Minister for Financial Services and Superannuation, Bill Shorten, finally tabled the first Future of Financial Advice (FOFA) bills in Parliament on 13 October 2011. 

Given the tortuous path the Government has taken on FOFA, it should have come as no shock to the industry that the Minister chose to add an undiscussed and contentious annual fee disclosure requirement into the Bill at the eleventh hour.

The inclusion of retrospective fee disclosure “flies in the face of grandfathering, and adds significant cost and administration to financial planning practices for little consumer benefit,” says Financial Planning Association (FPA) chief executive Mark Rantall.

Rantall said in October that the presence of the unexpected requirement meant the FPA could not support the Bill. However, he was pleased to hear Shorten appear to back down from the annual fee disclosure at the 2011 FPA Conference at the end of November.

“The reality is that if nobody talks to [Shorten] about issues and advocates for both consumers and financial planners he won’t reconsider them,” Rantall says.

In fact, this is not the first time Shorten has introduced a controversial amendment to the FOFA legislation and then backed down after vocal lobbying by the industry.

On 28 April (after the final round of consultation) the Government unveiled its reforms, only to surprise the industry with an announcement that commissions on group and individual insurance would be banned inside superannuation.

“Everyone then got very focused on trying to convince the Government that wasn’t the right way to go, and we successfully achieved that objective,” says Association of Financial Advisers (AFA) chief executive Richard Klipin.

Shorten did indeed back down, and risk commissions will now only be banned on group insurance within MySuper products. They will be permitted within Choice products.

Sticking to his guns

One issue that Shorten is unlikely to back down on is the opt-in requirement in FOFA (ie, the requirement that financial planners contact their clients once every two years and ask them if they would like to continue the relationship).

The industry has reacted furiously to opt-in, but thus far it has only managed to have it changed from an annual to a biennial obligation. Additionally, industry lobbying has ensured that opt-in will not be retrospective (ie, it will only apply to new clients).

Shorten isn’t the only person fighting the financial planning industry on opt-in. The Industry Super Network (ISN) is waging a very vocal campaign against commissions, and the Government has controversially cited a questionable piece of ISN-commissioned Rice Warner research that claims implementing opt-in would only cost financial planners $11 per client.

“The work and the advocacy of the industry super funds movement, which is very well resourced and very formidable, is counter-productive. It’s shrinking the market and putting in doubt the confidence of Australians,” Klipin says.

Still, Klipin is more enthusiastic than others in the financial planning industry about getting opt-in scrapped.

“Opt-in is still in doubt. The fact that there’s been vigorous debate on that is a good thing, because FOFA is going to bring significant change to the industry,” Klipin says.

The AFA is far from happy with the current shape of FOFA. The reforms must be measured against two things, says Klipin: ensuring more people get access to financial advice, and increasing transparency.

“Our view since 28 April is that neither of these things will be achieved. Prices will go up, red tape will go up, and access will go down,” Klipin says.

He was especially concerned with the concept of ‘intra-fund’ financial advice that the Government has introduced.

“The danger of scaled advice is that it will return us to the days when product sales reigned, and advice was product-led rather than client-led. That’s why the AFA has had a lot to say in such a forthright way about holding these FOFA issues to account,” Klipin says.

If the AFA has been “forthright” in its dealings with the Government, the FPA has been rather more politic in its lobbying efforts. Rantall describes the FPA as an “honest broker” in the FOFA debate, and emphasises the industry body’s desire to professionalise the industry.

“It’s now or never to evolve financial planning into a universally respected profession … all financial planners should have to sign up for an approved code of ethics and professional code of conduct,” Rantall says.

The FPA has completely re-engineered itself in order to prepare the way for a professional industry, Rantall says. The FPA has pre-empted the Government’s fiduciary duty by establishing its own ‘best interest’ obligations, he adds.

As for the Government’s two ‘best interest’ duties – the duty to act in the best interests of one’s client, and the duty to put the interests of one’s client before one’s own – they have been generally accepted by financial planners, who are quick to claim that they already place their clients’ interests before their own.

Back to school

Apart from opt-in, education too has become a real buzzword in the financial planning industry over the past year as the sector seeks to become a highly regarded profession.

Industry commentators have long argued that the entry-level bar for financial planners needs to be raised, and their voices became louder since the global financial crisis (GFC).

Earlier this year, voting members of the FPA have approved the Association’s three-year plan, which it said would raise professional standards and increase education requirements.

They have introduced two levels of practitioner membership:

• Associate Financial Planner level, granted to those who had completed a Diploma in Financial Services and are RG 146 compliant; hold an authorised representative status and have a minimum of one year approved practitioner experience;
• Certified Financial Planner (CFP) level, which requires an undergraduate or masters degree, or a doctorate; completion of CFP certification programs, as well as at least three years approved practitioner experience.

Following the vote on the FPA’s new strategy, a new Planning Education Council was created, which began the development of a harmonised national university curriculum for financial planning.

It is hoped that within three years, there will be more educational pathways and offerings to suit members in the achievement of university qualifications.

The Australian Securities and Investments Commission too, has responded to industry-wide calls for higher education standards for financial planners.

In its consultation paper [CP 153] on the assessment and professional development framework for financial advisers, ASIC proposed all new and existing financial planners be subject to a national exam to ensure they possess the necessary competencies.

The proposed framework also includes a mandatory “professional year” for all new financial advisers, as well as a so-called knowledge update review requirement that would be completed every three years.

If passed, these requirements would present a sizeable step up from the Regulatory Guide 146 requirements, which could often be fulfilled during a two-week course.

However, although he supports the raising of the professional standards within the sector, Klipin said the amount of legislative and regulatory changes could easily overburden planners.

“The greater concern we have across all of these changes is the quantity of change coming through and the pressure it will put on small businesses to adjust and to change,” he said in an earlier interview with Money Management.

However, some institutions – particularly AMP and MLC – have dedicated a great deal of resources to increasing education standards within their financial planner networks.

Advertising weapon

The collapse of Storm Financial and the Westpoint Group some years ago did not do any favours for the public image of the financial planning industry; neither did the ever successful anti-commissions campaign “Compare the Pair”, launched by the Industry Super Network. 

Various surveys done over the past year found only two in five people use a financial adviser, that the cost of financial advice was seen to be too high, while trust in financial planners was too low.

At their national conferences in 2010, both the FPA and the AFA have proposed to their members the launch of an advertising campaign which would aim to improve the image of financial planning in the eyes of the public.

Since then, their respective members have voted in favour of this proposal, and both associations have launched their advertising campaigns earlier this year.

The FPA’s 30-second ad focuses on professionalism, comparing its members to pilots, doctors and lawyers.

But the AFA had taken a slightly different approach. What was initially going to be a “Make a Plan” advertising campaign later evolved into the “Your Best Interest” reality series. The AFA has recently launched its pilot episode, presented and narrated by former Channel 7 presenter, Naomi Robson. The video focused on the value of advice and the role of a financial planner in clients’ wealth creation.

Both campaigns have been paid for and approved by Association members.

Earlier this year, FPA chief Mark Rantall said its ad campaign would cost up to $15 million over five years, with CFP members to be levied by $220 each per year, while general and future financial advisers would pay an additional $100.

In addition, the FPA will contribute $500,000 per year from its own reserves. Rantall said the Association expected its professional partners to come through with the same amount of money for the campaign.

While a similar funding model might be a possibility in the future, the AFA’s campaign funding has so far been purely based on voluntary contributions. Richard Klipin told Money Management that some firms have contributed in the order of $10,000, while others have committed to lesser amounts.

Both campaigns aim to present financial planning as a respected profession and improve the overall image of the industry; but whether they will have enough funds to match ISN’s efforts remains to be seen.

Come together

The imminent FOFA reforms have arguably led to an increasing amount of consolidation in the financial services industry.

The year began with the completion of AMP’s acquisition of AXA Asia Pacific, which came after a $13.3 billion bid by NAB was blocked by the Australian Competition and Consumer Commission in 2010.

Later in 2011, Count Financial agreed to be taken over by the Commonwealth Bank in a deal worth $373 million. The merger took CBA’s number of financial advisers from 1,220 to 1,850 – making it the second biggest player in the wealth management industry.

Zurich exited the financial research business by selling Lonsec to the Mark Carnegie-backed company Financial Research Holdings in June.

Snowball Group and Shadforth Financial Group announced their intention to merge in May. The merged entity, with the proposed name SFG Australia, announced a net profit after tax of $25.4 million in August.

DKN Financial Group was taken over by IOOF holdings in October, in an acquisition worth $115 million that delivered IOOF about 700 financial planners (including 110 under the Lonsdale banner).

BT Investment Management looked outside Australia for its expansion, with the purchase of UK-based boutique active equity investment manager J O Hambro Capital Management for $314 million.

Matrix Planning Solutions has put 100 per cent of its shares up for sale to an external investor, a move that Matrix managing director Rick Di Cristoforo said had “significant support” from both shareholders and financial advisers.

UBS Global Asset Management finalised its takeover of ING Investment Management Australia in October, leading to the redundancies of 36 of the 120 ING staff, according to one source.

AMP-backed Hillross Financial Services acquired the dealer group Iris in July. Hillross managing director Hugh Humphrey said the acquisition would allow Hillross to take on all 12 Iris practices, 37 financial advisers and $2.2 billion in funds under advice.

The revolving door

While there was a flurry of movement on the mergers and acquisitions front, there was even more activity when it came to executive comings and goings. 

The first big news of the year was the appointment of former ING Investment Management Asia Pacific boss Chris Ryan to the role of chief executive at Perpetual in January.

Ryan replaced David Deverall, who announced his intention to leave Perpetual in 2010.

AMP’s big acquisition this year cost AXA Asia Pacific chief executive Andrew Penn his job. It wasn’t all bad news for Penn though – he received a termination payment of $9 million which, together with his $8 million in options, amounted to a total payout of $17 million.

Paul Barrett left his role as general manager of Colonial First State’s (CFS’s) financial advice business in February to head up ANZ’s advice division. The vacated role at CFS was subsequently filled by the promotion of Marianne Perkovic.

Wilson HTM underwent a big shakeup as chief executive David Groth stepped down after a year in the role. While Andrew Coppin continues to hold the role of managing director, the firm has yet to find a replacement chief executive.

In March, managing director of Treasury Group Mark Burgess announced his resignation following his appointment to the Future Fund Management Agency. He continued in his role at Treasury Group until 24 June 2011.

Former partners Alan Kenyon and Steve Prendeville parted ways in May, forming their own practice sales businesses. Kenyon now runs Kenyon Partners, while Prendeville heads Forte Asset Solutions.

 Arthur Naoumidis resigned as chief executive of the financial services investment platform Praemium in August. His sudden departure saw him replaced with the company’s largest shareholder, Michael Ohanessian.

Following the integration of Snowball Group into Shadforth Financial Group, the company announced that Snowball chief executive Tony McDonald would leave the merged entity on 4 October 2012.

He will remain at the company for the next 10 months to oversee the integration of the two groups.

After the acquisition of DKN by IOOF, DKN chief executive Phil Butterworth departed the company on 21 October 2011.

After a month of speculation, it was announced by BT Financial Group that Butterworth – along with members of his team from DKN and Lonsdale – would be in charge of a BT financial advice business unit that includes the established Magnitude brand.

Karma Wilson departed the AMP Capital Investors Asian Equities team in the middle of 2011, leaving Jonathan Reoch and Ragavan Sivanesarajah as acting co-heads.

Shifting investment platforms

Shifting client and financial planner demands have resulted in numerous changes within the investment platform sector.

Ever since the first mention of the FOFA legislation, there has generally been a greater focus on cost, and investment platform providers have responded with either the introduction or announcement of lower-cost offerings.

Both AXA and MLC have segmented their target markets into two categories: high net worth and majority investors.

But it’s not just the financial planners who are coming to investment platforms with shifting demands. Retail investors are still thirsty for cash and other defensive assets, prompting platform providers to introduce offerings more popular than those of managed funds.

Just under a year ago, OneAnswer introduced six new ANZ term deposits, generating over half a billion dollars since, while BT had $3 billion in term deposit inflows since 2009. Bonds, direct equities, exchange traded funds and separately managed accounts are also proving to be a hit.

But with the FOFA deadline fast approaching, platform providers seem to be struggling the most in terms of meeting the 1 July 2012 implementation date. 

Major players in the sector have expressed concerns over the past year that with the lingering FOFA uncertainty around things like grandfathering and opt-in, there is not much time left to develop compliant administration systems to cater for financial planners.

Colonial First State’s Peter Chun and IOOF’s Renato Mota have agreed that delaying some of the FOFA elements to coincide with the MySuper implementation date in 2013 would result in a much more beneficial outcome for platforms, financial planners and clients.

In addition, with the removal of conflicted remuneration models – volume-based repayments passed down to dealer groups and volume based shelf-space fees coming from fund managers would no longer be permitted – comes a great deal of pressure to secure distribution channels.

As mentioned above, some of the big acquisitions include IOOF’s purchase of DKN, and CBA’s proposed purchase of Count.

However, even smaller, non-institutionally owned platform providers are making their moves. Managing director of netwealth, Matt Heine, recently confirmed the company’s acquisition of Paragem Dealer Services, while HUB24 added seven new dealer groups to its client list.