FOFA's fundamental shift to favour instos

The Government’s proposed Future of Financial Advice (FOFA) reforms are likely to cause a fundamental restructuring of the financial advice sector, with larger institutions likely to benefit and increased consolidation to result, according to law firm Minter Ellison.

Smaller dealers that have been reliant on volume payments will diversify away from those earnings by setting up their own products and platforms, according to Chris Brown, Minter Ellison partner, corporate, mergers and acquisitions.

It is also doubtful this policy would avoid a repeat of small fringe players such as Storm, he added.

The other option for smaller groups to remain profitable is to merge with institutions, which are far better equipped to deal with the changes because they have a presence at every level of the value chain, he said.

Institutions used to give away part of their margin through their distribution strategy, but they can now retain that and are in a better position to attract advisers and provide them with a dealer group offering, he said.

We will continue to see consolidation of dealer groups and the institutional space, and if the policy objectives of FOFA are to loosen the institutional stranglehold on the advice space it is likely to have the opposite effect, he said.

We could also see more institutions taking minority stakes and looking to have a seat at the table when consolidation accelerates, Brown said.

“Things are fundamentally changing. Without the support of fund manager subsidies the profitability and value proposition is less competitive,” he said.

“At a practice and small dealer group level there are opportunities for scaling up, buying out those looking to exit the industry, creating a franchise model and effectively industrialising and segmenting clients.”

Scaled advice provisions are likely to suit institutions that are better resourced to provide it, and will leave smaller non-aligned dealer groups unable to compete for clients outside the high-net-worth space, according to Richard Batten, Minter Ellison partner, corporate, financial services.

Scaled advice will also create liability issues where a client only asks for advice on a particular area such as insurance or superannuation, he said. If a planner helps them into something they want but it doesn’t meet the client’s needs and the planner hasn’t discovered that, it raises the question of when duty of care arises, he said.

The banning of risk commissions within super put advisers in an invidious and relatively impossible position, Batten said. Client tax benefits of taking out the insurance within super may be missed if clients do not want to pay an upfront fee, and while advisers may legally absolve themselves by explaining the choice upfront this doesn’t resolve the dilemma for the client and simply moves the conflict to the client level, which is unsatisfactory, Batten said.

“In that context it doesn’t make sense – there’s no reason to differentiate,” he said.

Opt-in provisions are one of the other major negatives because they could drive the wrong type of behaviour, forcing advisers to focus on short-term gains rather than long-term outcomes in order to enhance their value proposition, Brown said.

Uncertainty over grandfathering provisions is also creating uncertainty over practice values and making it tough to put together transactions in the merger and acquisitions space, he said.