‘Talking about very complex advice’: Why the FAAA doesn’t support DBFO 1.5

While Financial Services Minister Stephen Jones’ release of an exposure draft for the next stage of the Delivering Better Financial Outcomes (DBFO) reforms is now officially an exercise in information gathering following the federal election call on Friday, the path it lays out and the feedback given to Treasury could still heavily influence the final result.

The Financial Advice Association Australia (FAAA) was particularly strong in its response to the draft legislation, with chief executive Sarah Abood outlining concerns and stating the association “cannot support it without substantial change”.

Key among the issues is the latitude the legislation would give to superannuation funds to collectively charge for a wider range of financial advice, with FAAA general manager of policy, advocacy and standards Phil Anderson noting the breadth of topics was wider than expected.

Speaking on The ifa Show last week, Anderson explained why the FAAA response included a “fairly strong tone of disappointment”.

“Let’s be, I guess, realistic about this. The Quality of Advice Review, which is the source of this, was run in 2022. The report was handed down in December of 2022. So, we’ve been waiting a very long time and we’ve put a lot into this,” he said.

“We’re very dependent upon DBFO tranche two being able to deliver significant improvements in the efficiency of delivering financial advice.”

However, what has been delivered has left out multiple “very critical parts”, such as the best interests duty rationalisation, the repeal of the safe harbour, and the new class of “provider”, as Anderson termed it.

“The three [elements] that were delivered, two of them are related to facilitating more advice being provided by super funds and we’ve expressed our views on that,” he told ifa.

“It’s not that we don’t want to support more advice being provided, that’s something that we are very keen to [support] and we do appreciate that QAR was all about improving access to advice, but it’s how it’s delivered and whether it’s going to be working in the best interest of clients.”

Who wears the cost of collective charging?

Where the FAAA has the greatest doubts on this is around retirement advice, with the association not willing to budge on its opposition to super funds collectively charging for this advice.

“The collective charging certainty was a recommendation of Michelle Levy and we can back the fact that it’s appropriate that there’s greater certainty for super funds in the circumstances under which they can provide intra-fund advice which is collectively charged,” Anderson said.

“The obligations for intra-fund advice, and sometimes people get confused about this, are exactly the same. So, the best interests duty, the appropriate advice obligation, all of those duties and obligations still apply to intra-fund advice that is collectively charged. What is different is how members pay for it.

“Now, our view is, and our view has been very firm on this for a long time, that intra-fund advice should be simple advice, and it should be a way of enabling people who otherwise couldn’t afford advice to get advice. We do not believe that it should be retirement advice.”

Alongside the draft legislation and explanatory materials, the government also provided a document titled Advice through Superannuation, which detailed the allowed and disallowed topics, and the allowed circumstances for collectively charged advice.

The entry that has raised the ire of the FAAA is the inclusion of retirement advice in the allowed topics list, which it said would include: “Advice about planning for retirement through superannuation; transition to retirement products; retirement income solutions including products, drawdown strategies, lump-sum withdrawals, and longevity protection.”

“What this documentation has provided is a proposal that it would be retirement advice and that it would not only allow them to provide retirement advice, but it would allow them to consider the client’s and their spouse’s broader financial circumstances, including assets, income, debt, eligibility for social security and so on,” Anderson said.

“That’s talking about very complex advice. It’s not the full outcome of comprehensive retirement planning advice that would consider elements of their circumstances outside of their super and provide advice outside of super.

“The [intra-fund] advice can only be within super and pensions, but it’s complex and it will be costly to produce and we’re very concerned about whether it’s appropriate for that to be provided on an intra-fund basis.”

Broadly speaking, Anderson explained that the FAAA has three main concerns around this section of the proposed legislation, with the chief among these being who would be bearing the cost burden of providing this advice.

“Why should it be the case that advised clients who are paying for their financial advice should pay for other members of the super fund to get retirement advice? That’s a really important consideration,” he told ifa.

“Secondly, it’s around the distortion of the perception of the value of financial advice. If you can get retirement advice for nothing, then what value are we putting on it and is it devaluing that perceived value for the broader community?

“And thirdly, retirement advice should be advice that is of the highest calibre. It’s advice that is for the long term and … In our view, it’s much more preferable that it’s provided by someone who’s independent, can consider providing advice on their assets outside of super, and can consider a much broader range of product offers.

“We don’t have a problem with collectively charged advice being more clearly defined, but we don’t think it should be retirement planning advice.”

Asked about why there has been something of a divergence among stakeholder groups on the measures, with others being less negative than the FAAA, Anderson said the association is looking to represent not just its members, but also the clients of financial advisers.

“That’s why I’ve emphasised the fact that why should the clients of financial advisers have to pay for their financial advice and then have to pay for other members of the super fund to get advice through collective charging?

“Maybe the solution here is to give advised clients the ability to opt out of paying for intra-fund advice and that would take us back to a key concern that we have is the disclosure of the cost of intra-fund advice.

“Some time ago, it used to be separately disclosed, but then ASIC allowed it to be merged back into the main administration fee. We think if you’re going to go down the pathway of making complex advice available through intra-fund advice, then there should be much better disclosure of the cost of intra-fund advice.”

Government response

Speaking on a Financial Services Council webinar last week, Minister Jones said he wanted to be “very, very clear” that the role of the new class of advisers would be to “provide advice on retirement in relation to the person’s interest within funds”.

“I can categorically state that this is not some backdoor attempt to have new class of advisers providing a full range of comprehensive advice on all things financial. That was never the intent. It wasn’t what we announced, and it’s not what we intend to do,” he said.

Additionally, he stated that collective charging for complex retirement advice is also not what the government intended.

“Through the Treasury consultation processes that can be fleshed out. Let’s bear in mind those broader trustee obligations still pertain – the best financial interest duty to solve purpose test. It’s not the case that this person is going to be able to provide full-blown advice on all matters retirement that have nothing to do with their interest in the fund,” Jones said.

While the minister made it clear there would be no ability for the advice to go beyond a member’s interest in the fund, nothing in his answer excluded the provision of retirement advice in general being collectively charged.

To hear more from Phil Anderson, tune in here.