Licensee head slams ‘fee for no service’ model in new advice reforms

Late on Tuesday night, Financial Services Minister Stephen Jones unveiled further details of the government’s second tranche of the Delivering Better Financial Outcomes (DBFO) package, which he said would help fill the advice gap through expanding access to financial advice.

According to the minister, licensees will be permitted to charge a direct fee for the advice provided by the new class of adviser (NCAs).

This enables advice businesses, alongside super funds, banks, and insurance companies, to employ these advisers and offer their services for a fee – this must be an episodic fee, with NCAs prohibited from charging ongoing fees or receiving commissions.

However, strict limitations will be imposed on the scope of advice these operatives can provide, with the minister noting that while the government anticipates some licensees will choose to indirectly charge for the new advice offering, they will now have the option to charge a direct fee.

Speaking with ifa, WT Financial Group managing director Keith Cullen said that there are “two losers” from the announcement.

“The losers are consumers and the retail funds,” Cullen said.

“Consumers lose on two levels. The first level they lose on is that a whole bunch of them are going to be paying for services they're not accessing – those that are members of the industry funds. They also lose because it will quash the innovation in retirement income products.

“The retail funds lose because they just can't compete against it. They won't expose themselves to fee for no service scandals. They'll have to charge and so they'll lose out, and their members will lose out because they won't innovate new product to the same extent that they might have otherwise.”

Fractures between industry and retail funds surfaced throughout the consultation process on the DBFO reforms, with reports that retail funds and other advice stakeholders were pushing for the ability charge for the services of NCAs.

Cullen added that unlike the industry funds, retail funds also don’t have the “advertising dollars” to run campaigns spruiking their ability to provide the advice through NCAs.

Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston echoed the sentiments around collective charging, saying the “devil will be in the detail”.

“Fundamentally, the AIOFP agrees with all Institutions having internal staff giving product related information to clients, which may include Centrelink/tax implications specific to the client’s circumstances,” Johnston told ifa.

“The only concern is how this activity gets funded. The ‘fee for no service’ model is unfair to those clients who do not use the service. Our understanding is that within the super fund experience no more than 20 per cent of members access the service but 100 per cent get ‘clipped’ to fund it.”

Super Consumers Australia also took aim at the “poorly trained, highly conflicted new class of ‘advisers’”.

“This approach encourages super funds to charge fees for no service and flies in the face of the financial service royal commission reforms to end this practice,” said Super Consumers Australia CEO Xavier O’Halloran.

“We want to see greater transparency on the quality and use of advice delivered this way to prevent people’s retirement savings being drained by low quality advice they may never use. This is a huge win for super funds, it will now be easier to charge their members for conflicted advice.”

According to SCA, the reforms assume super funds are capable of delivering quality advice – an assumption the body strongly disagrees with.

“If the quality of advice currently being delivered by super funds is anything to go by, we have grave concerns,” O’Halloran said.

“Many funds are giving ‘one size fits all’ advice, which would either see people run out of money well before they pass away, or advising people to spread their savings well beyond age 100, unnecessarily reducing their standard of living while they are alive.

“Super funds have also been exposed for taking over a year to pay people death benefits and governance failures. Is now really the time to give them yet another responsibility they are demonstrably incapable of delivering on?”

Potential to be a positive for advice firms

Cullen argued that the NCAs could be a “win for advice” and firms that wish to employ them, adding that it is a “win for advice and a step towards opening up the supply of new advisers”.

According to the licensee boss, the announcement has the potential to address the “supply side problem” of advice provision, however it is not the best way to solve the problem.

“The profession will rebuild itself to 20,000-25,000 advisers over the next five or seven years – if they can recruit people. There's no one to recruit because of the narrowly cast degree,” Cullen told ifa.

“There were 35,000 commerce graduates last year. Every one of those should be able to start a PY tomorrow, do a DFP 134 while they’re in the first six months of their PY, and start advising straight away after that six months. That fixes that supply side problem, that will drive down the cost or proper professional advice.”

Lionel Rodrigues, chair of the AIOFP technical committee, had a number of questions for the government following the announcement, noting that “as yet there are no details available and it would be necessary to review not only the draft legislation but the regulatory guides provided by ASIC and APRA”.

Top of his list is whether NCAs would be required to pass the adviser exam and ethics exam, as well as how NCAs would record the advice provided – will there be a short form ROA or SOA for the NCA that differs from that required for the professional adviser?

Other questions from Rodrigues include:

• Who will actually charge for the advice. The NCA or the supervising licensee?
• How will the ‘simple advice’ of the NCA be recorded? If not a written advice, then what is the standard that is required of the NCA to keep records of ‘verbal’ advice’?
• Can the NCA charge for such ‘verbal advice’?