Top 3 concerns about DBFO tranche 2 reforms

With the first tranche of the Delivering Better Financial Outcomes (DBFO) reforms passed in June, advisers now await the second tranche. However, with a federal election set for Australia in 2025, there are concerns about the timeline of delivery for the reforms, with Financial Services Minister Stephen Jones stating in early July that the second tranche would be developed over the second half of 2024.

Appearing on the latest episode of The ifa Show, Entireti chief executive Neil Younger discussed his biggest concerns about the upcoming regulatory reforms for the advice profession.

“I think three real, real important parts to this legislation are certainly on our minds, and we’re keen to understand how they work in a practical sense. The first of those is really around the whole redefining of best interest obligations,” Younger said.

He suggested that rather than completely removing the safe harbour steps, only the “catch all provision” needed to be removed to retain a framework that continues to protect client interests.

“Where we might end up is in a world where there isn’t as much of an objective test around whether someone has met best interest,” Younger said.

“We’re hoping to see something that performs the framework, or guardrails, for how people evidence best interest. Otherwise, the benefit of hindsight can sit over advice and that could create some ambiguity in the system.”

In addition to protecting clients’ interests, he argued that there needs to be some kind of objective test in place to protect advisers as well, asserting the limitations of advisers’ abilities to protect clients from factors outside their control.

“It’s the certainty of that objective test that I think is a real question mark that’s got to be resolved in this process. Otherwise, again, if things go against the client beyond the control of the advice itself and the adviser still becomes responsible for that, that doesn’t seem like a particularly fair model, does it?” Younger said.

“So, I think there’s some things that we just need to be careful of as we see the details around how this framework should then operate, such that people have a sense of safety.”

The provision of limited advice

The second area of interest, Younger said, regards advisers’ ability to provide limited or scoped advice and the potential it holds to make advice more accessible for clients who don’t want or need fully comprehensive advice.

“The second piece, which I think is the most fantastic opportunity for this sector, is certainty around limited or scoped advice. That advice will open up advice for a whole sector of clients that now find themselves excluded from it because advisers have to go into a comprehensive model to satisfy their obligations today,” he said.

“For many clients, as we know, they just want to answer the question they’re posing. They’re happy to qualify their need for advice to that answer but advisers have been reluctant to limit their advice to that answer because they’re caught within the structure of the framework today that necessitates comprehensive advice.”

Younger added this would be “the most significant door opener to access to advice that we’ll see as part of this [regulation] reform”.

Qualified advisers and the spectrum of advice

The third area, which Younger described as “kind of a hobby horse” for him, regards the introduction of a new class of advisers, believing it is an opportunity for the advice profession to service Australians that are currently unable to afford comprehensive advice, if only they were able to charge for their services.

“I think the opportunity there is that people need simple answers to simple questions. It’s kind of crazy that they can’t ring their super fund and answer a simple question about their fund without being caught in this comprehensive advice regime that’s prohibitive from a cost perspective for them,” he said.

“I think that’s a positive step, and I don’t think the industry sector, the financial advice market, should be in any way, shape or form threatened by that, but I do believe it needs to be connected to it.

“A relevant provider today needs to be able to offer or have within their business structure an ability to offer, that type of ‘qualified adviser’ level service, and they therefore need to be able to charge for it.”

He further argued that clients who may wish to take advantage of the qualified adviser level advice shouldn’t be restricted to accessing the service through their super fund, and that the exclusivity of the service may foster an environment for conflicted advice.

“There is an argument to be put as well that the potential is there, and I’m not suggesting it would play out this way, but the potential is there for, if you can only get that advice from the super fund, then there is the potential for conflict in that advice,” Younger said.

“So, there is an argument to be put there, but I think it’s a lesser argument. I think, ‘What do clients need?’ Clients need to know they’re in the right hands getting the right advice and they should have some consumer sovereignty in that regard. They should be able to go where they choose to get it.”

Speaking at a media roundtable in June, Financial Advice Association Australia chief executive Sarah Abood said members have raised concerns that it would not be possible for them to employ a limited adviser and not charge clients.

“There aren’t very many practices that are big enough, with big enough margins, to be able to offer that service entirely for free,” Abood said.

“It has been an advocacy point for us in the current round of consultations that there should be no restrictions on charging.”

She argued that not only should this be allowed, it also would not be a “level playing field” without the ability to charge.

“If small firms aren’t allowed to charge for it, they can’t do it. And then that would effectively restrict this option only to large financial institutions,” Abood added.

To hear more from Neil Younger, tune in here.