Moving FOFA forward - protecting the interests of consumers and planners
Despite the best intentions, the FOFA reforms constrained quality advice and left little wriggle room for planners wanting to expand their experience, writes Rob Caprioli.
There has been a lot of scuttlebutt in the last few weeks about the Government’s proposed changes to the Future of Financial Advice (FOFA). Much of the conversation has centred on the belief that the proposed changes are at the expense of consumer protection.
We are all too familiar with some of the events that kicked off the initial inquiry into financial advice.
The collapse of Storm in 2009 put at risk the savings of around 13,000 Storm clients, mainly mum and dad investors who suffered losses estimated at around $3 billion.
Clients were recommended investment strategies that weren’t always suitable. Australians on the verge of retirement lost the savings they had worked their lives to accumulate.
The original intent of FOFA was to help improve Australians’ access to affordable financial advice and give them flexibility in choosing advice that suits their individual needs.
No one can argue with this intent, which is essentially to prevent consumers from suffering investment loss arising from inappropriate advice, such as the losses suffered by Storm clients.
The interests of clients should always come first, and changes like the removal of in-built commissions from investment and superannuation products demonstrate this.
But despite the good intent of the FOFA legislation, some of it wasn’t drafted as clearly as it could have been. The Federal Government’s proposed changes will add clarity and certainty for clients and advisers.
One of these is the changes to the best interests duty, making it clearer, so a client and their adviser can agree on the level of advice they will receive.
This amendment doesn’t change the core intent of the best interests duty. What it does is make it easier for the planner to give the customer what they want, in a way that is appropriate to their circumstances.
We want to be sure that planners are always able to offer what is in their client’s best interests. The proposed changes to the best interests’ duty do not take away from the robustness of this component of the legislation.
What it does is remove uncertainty in the wording so customers will be able to ask planners for advice specific to their particular requirements without going down a potentially overly intrusive and expensive path.
It means that limited advice will now be available for Australians who may not have been able to afford it in the past. It means more Australians will be able to receive guidance for their financial future to give them the best chance possible to maximise their retirement outcome.
Other amendments that add clarity are the changes to the grandfathering provisions, which make it easier for a planner or practice to change licensees. Allowing planners to move more easily is a good outcome for consumers.
One of the unintended consequences of the FOFA legislation was that it encouraged inertia in planners. Such apathy means they will not be delivering the best advice they can.
The proposed changes to FOFA don’t change what was originally intended, but they do provide greater certainty and should ultimately make financial advice cheaper for consumers.
Good quality financial advice has the capacity to make a real difference in people’s lives. In a rapidly changing external environment, businesses need to adapt quickly but the core values behind why they are in business should remain the same – and for us that means financial advice and how it changes people’s lives for the better.
According to the Financial Planning Association, only two in five Australians currently receive financial advice, and of the three in five Australians who do not receive advice, only 16 per cent are considering seeking it over the next 12 months. Which prompts us to ponder why more people aren’t getting advice and what we as an industry can do to change that.
Technology offers multiple channels for customers to access information and solutions, including leveraging new digital options such as mobile and tablet apps.
Apps provide opportunities in the advice process, particularly for those people who don’t need holistic advice but might want help with simpler things like budgeting or a mortgage.
Improvements in mobile technology provide advisers with valuable tools to help them in the delivery of professional advice.
It means they can offer their clients a flexible and efficient advice process, which is invaluable in a busy world because it means advice is placed at the heart of what planners do, without the distractions of endless administration and paperwork.
Changes in technology will shape what practices of the future look like. Multiple channels will see advice being delivered in new and different ways.
But face-to-face advice will always be important, and so is our commitment to it. We know that most people making major financial decisions still want to do this face to face.
Financial advice is important for Australians, but we need to get better at articulating its value and the very important role financial planners can play in people’s lives.
Imagine not only what the effect would be on the economy if more Australians were receiving good quality financial advice, but more importantly the effect on people’s retirement and the level of comfort they will enjoy during that time.
As the baby boomers start to move out of the workforce and younger people – who will have enjoyed the benefits of superannuation throughout their career – start to make up the bulk of the workforce, as an industry we need to make the most of opportunities to increase their engagement.
We need to get better at highlighting the true benefits of financial advice. This type of education and awareness can take many forms.
It can include providing basic education and advice to customers of a corporate super plan about things like their investment choice, through to improving the customer experience via apps and tailored customer communications appropriate to their age and stage of life.
For these Australians superannuation will probably be the main source of funding for their retirement so it’s important they understand how their money is invested, how much they will need in retirement, and the options available to them to build a more comfortable future.
Improving access to affordable financial advice is important for Australians, as is giving them more flexibility in choosing the advice that suits their needs.
For some people this might mean simple advice on budgeting, for others it will be more holistic advice.
Whichever level it is, anything that means we can bring more advice to more Australians is something that should be encouraged.
Rob Caprioli is a group executive, Advice and Banking, at AMP.
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