The Final Countdown

It’s no secret that 2012 was an exhausting year for the financial services industry, so it’s also no surprise that a majority of the market claim they are ‘FOFA’d out’ regarding the upcoming regulatory changes.

Alongside this there is concern and rumour in the market that the FOFA reforms will spark fears of an association monopoly, drive the value of practices lower or push up licence fees.

But don’t speculation and fear usually precede major change, whether it’s in financial services or any other area for that matter?

MyAdviser’s managing director, Philippa Sheehan, says this fear of change has created a difficult market over the past four years.

“It has been really tough and we are all FOFA’d out as far as talking about it goes. It’s a matter now of [saying] let’s just get the systems set up and get it started,” Ms Sheehan told ifa.

“I don’t think that FOFA has done as much cleaning up of the industry as we would like. So I think it’s actually going to be a lot easier to transition than they originally thought.”

MyAdviser, as a business, has tracked FOFA by ensuring the company is prepared and has given advisers six months to test its systems before it goes live on July 1.

“We’re going to build systems that will allow them to have opt-in for clients every year – not just every second year – if they don’t want to abide by a code. So we, and the licensees need to build their systems for every possible scenario. And really, it just means we have to build a system for an opt-in and I think that’s a good thing,” Ms Sheehan says.

The Financial Planning Association’s (FPA’s) general manager of policy and government relations, Dante De Gori, agreed that the market fears are not justified.

While there will be some specific cases in which businesses are affected, industry players need to look at the overall picture, which suggests that alongside change will come opportunity for businesses to increase values, De Gori told ifa.

“Those who adapt to FOFA better and quicker are likely to reap the benefits when it is their turn to sell their business,” he says.

Industry concerns that codes of conduct will bring about a financial planning association monopoly are also unfounded, he added.

“I don’t agree that there will be a monopoly of associations, and I also think that if you were to ask individuals who are members of these associations, they would probably say they [would] rather one association than multiple,” De Gori says.

He added that if individuals are members of multiple associations then they must seek or receive different benefits from each: “In reference to the code, there is an opportunity for every association to have a code of conduct and lodge a code of conduct with the Australian Securities and Investments Commission (ASIC), so that’s not an exclusive opportunity,” he says.

“That is actually inclusive of anyone wishing to be part of it.”

Association of Superannuation Funds of Australia (ASFA) chief executive Pauline Vamos says she has seen many advisers who have already made arrangements with their clients and moved to fee for service quickly.

“It’s a positive thing because the first thing it is going to do is ‘professionalise’ the advice profession,” Vamos told ifa. “Once a profession is recognised as a profession you have an increase in trust – then clients will want to deal with you.

“It’s time to move into being a profession. I think it’s absolutely vital that as an industry you have to embrace that and, more importantly, make sure those advisers who are not doing the right thing are drummed out of the industry.”

Are you ready?

Fidelity Worldwide Investment Australia’s managing director, Gerard Doherty, says that while the impact of FOFA on the business is relatively small, he has seen a strong division in the industry between those who are positive and those who are negative about the changes.

“I would broadly say there are two groups of people I talk to,” Doherty told ifa. “Some are still really struggling with the significant changes, but I think that is now a minority and some have opted out.

“Then there are those who are saying, ‘They are what they are and I’ll work out how to build a new business model around them’.”

De Gori says that in terms of FPA members, the majority are prepared for FOFA implementation.

“With respect to fee-for-service arrangements, I’d say 80 per cent of our membership are either there or on their way to being ready,” he says.

“The reason for that is that the FPA remuneration policy announced back in 2009 actually provided members with a transition period to 1 July 2012, so they were already forced to do it before FOFA [implementation]. Our research shows it probably takes around two years to complete the transition so the reality is that there are financial planning firms out there that haven’t started, [and] they’re going to be way behind.”

SMSF Professionals’ Association of Australia (SPAA) members also seem to be adequately prepared, according to surveys conducted by the association.

“Our members who are SMSF specialist advisers are ready now for the challenges that FOFA lays down at their feet,” SPAA chief executive Andrea Slattery told ifa.

The member surveys have shown that members charge on a fee for service basis, with a very small minority (five per cent) needing to change their practices in advance of the upcoming reforms.

“What SPAA has always stressed to its members is for them to offer professional, strategic advice that adds value for the client,” Slattery says.

But according to Ms Sheehan, while a majority of the industry is prepared for July 1, there are still many more changes that need to be made before it reaches the goal of being considered a ‘profession’.

“At the end of the day, we’ve still got a long way to go as a profession as far as FOFA is concerned. But we’re going to be OK,” she says.

“By this time next year, we will still have an industry, clients will still need financial planning, it will be a little bit more transparent, we’ll have disclosure notices, we’ll have a code of conduct and that is just going to improve our industry from where it was yesterday. It’s a great thing,” she says.

Advice for advisers

Regardless of how firms are placed in the lead up to implementation, businesses – both financial planning and accounting businesses – should be looking at how well they service their clients.

The significant impacts of FOFA, StrongerSuper and the associated changes are all directed towards achieving better value service for the price paid, meaning that reviewing client structure and types of servicing are vital.

Vamos explains that it is also important that businesses focus on the processes and templates they are putting in place.

“When the onus is on advisers, I would look at how you ensure your more experienced advisers mentor your more junior advisers; road test as much as possible the documentation – get advisers involved,” she says.

Ms Sheehan says firms should have already started work on their client value proposition and pricing structure.

“That’s obviously something that should have been bedded down a long time before now,” she says.

Ms Sheehan believes the most significant thing MyAdviser has done with its advisers – and something the industry needs to do as a whole – is to clarify what their ‘message’ is and what their business stands for.

“[It’s not about] SMSFs or selling a platform provider; [it’s] what it is that you stand for as a financial planner,” she says. “Getting that message right now will set them up nicely for the changes ahead.”

The FPA is also encouraging its members to review how they interact with clients and also to make decisions around process and training.

De Gori says FPA members realise they are at an advantage already because they were required to undergo process changes under the FPA code of conduct.

“What people are actually starting to realise is that they’re [already] doing the processes now – it’s just it may not be that evident in respect to naming and the detail,” he says.

“When we map out the fact that the FPA code actually does require a number of these things that the [FOFA] best interest duty does, it’s making them feel a bit more relaxed and feeling a lot more confident that it’s not that much of a change to their processes. Some of it is really just a mind-shift.”

The outlook ahead

In the first six to 12 months following FOFA implementation, most of the industry will probably be taking a ‘wait and see’ stance, while businesses concentrate on ensuring they are operating in line with the new requirements.

Following a period of adjustment, businesses will likely tighten up – and then go on to reap the benefits of the new reforms.

“I think, if you look a few years down the track, there will be strong, green shoots of growth in the advice industry because we have a growing market,” Doherty says.

“[The advice] will be provided in a different way, perhaps as a result of FOFA and perhaps as a result of the changing market. So there will be a few strong advice businesses running a fee-based model, and we’ve seen evidence of that in other countries.”

Sheehan is equally positive that embracing the changes will benefit the industry and the client in the long term.

“It’s going to be great. We’ve got all the different layers of the industry and it is going to be better for everyone if we do it well. Change is a good thing for our profession – and it had to change,” she says.

“Remember that this is not going to be the last change that happens to our industry and we need to address the ones we’ve got out there now.”

According to Slattery, it will be those businesses that are able to sort out conflicts in their remuneration models and justify the value in the services they provide to clients that will be the winners.

“Those who don’t move with the times – and understand that it is the client and how they are serviced that it’s all about – will be left in their wake,” she says.

Looking further forward, to the next 18 months to two years, the financial services industry will likely face polarisation in response to market shifts to allow for FOFA.

According to Vamos, there will be a number of boutique advisers that service a limited number of high net worth clients and provide a holistic service.

“Then, I think, we will also see a number of advisers who are attached to large providers,” she says.

“With those businesses, you will have various parts of that financial advice business doing the full range of financial planning.”

In the meantime, and in the lead-up to FOFA implementation, advisers should embrace professionalism, make ethics the hallmark of the way they do business, remove the ‘bad apples’, design processes and ensure they are prioritising the client.

The recruitment perspective

Although some of the larger institutional businesses have been able to capitalise, there was a well-documented recruitment drive from the big end of the market in early-2012, both for business and staff.

Financial Recruitment Group director Conor Donoghue told ifa that a substantial number of financial planners were not on the market for sale but were approached with offers too good to pass up.

“For both those businesses I spoke to, FOFA and opt-in were a consideration for them. They were worried about the valuation of the practice actually diminishing when FOFA comes in next July,” he says.

He adds that after FOFA implementation, the market will still experience some redundancies but the demand for financial advice will continue.

“The last two to three years has been a ‘perfect storm’ in financial advice. You’ve had a GFC, a diminishing return on superannuation funds, and baby boomers moving to retirement etc,” Donoghue says.

“Therefore there is consumer apathy that they’re not going to get financial advice so there are no new clients coming in. Then with FOFA, there are a lot of advisers working very hard on repositioning their business and how to attract and retain their clients, and change how they get renumerated as well.

“[But] I don’t think the sky is going to change colour on 1 July 2013. There are a lot of businesses out there which are advanced in terms of being FOFA-ready, and they are some that have always had their business this way. It’s not necessarily having the ramifications that it would have with some of the larger institutional firms that might still have to work commissions out of their business as well.”

Businesses will, however, need to think about how the professionalisation of the industry will affect their ability to recruit new advisers.

“Over the next couple of years, the barriers are going to be quite high for who can actually call themself a financial adviser,” he says.

“I think businesses need to have a plan on how to hire people, not just with recruiters but also in relation to how to align themselves with educational providers such as universities.

“There are only so many graduates coming out each year from Australia. I think the industry still has a lot of work to do to get the new generation of advisers through university and out wanting to work in financial advice. They just don’t have that power base yet.”

Background to the FOFA legislation

The Future of Financial Advice reforms, due to be implemented on 1 July 2013, focus on improving the quality of financial advice, particularly product recommendations, and expanding the availability of more affordable forms of advice.

The reforms are expected ultimately to give investors greater protection and instil confidence in the financial advice industry.

Best interests duty, opt-in and fee disclosure, ban on conflicted remuneration, ban on soft-dollar benefits and scaled advice are the key components.

Initial legislation was passed by both Houses of Parliament and received the Royal Assent on 27 June 2012.

The Corporations Amendment (Future of Financial Advice) Bill 2011 was introduced into the House of Representatives on 13 October 2011 and includes opt-in provisions and enhancement of ASIC’s regulatory powers.

The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 was introduced into the House of Representatives on 24 November 2011 and includes the best interests duty and the ban on conflicted remuneration.

Both Bills were referred to the Parliamentary Joint Committee on Corporations and Financial Services (PJC) and the Senate Economics Committee (SEC). The PJC reported on 29 February 2012 and the SEC reported on 14 March 2012, both recommending that the Bills be passed.

The reforms

Conflicted remuneration:
A prospective ban on conflicted remuneration structures including commissions, in relation to the distribution of and advice on retail investment products including managed investments, superannuation and margin loans.
Best interest:
The introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients, subject to a ‘reasonable steps’ qualification, and to place the best interests of their clients ahead of their own when providing personal advice to retail clients.
Opt-in:
Increasing transparency and flexibility of payments for financial advice by introducing a two-yearly opt-in arrangement ensuring that consumers are more engaged with their financial advice services and annual fee disclosure statements will provide consumers with transparency about the ongoing fees they pay.
Fees:
Percentage-based fees will only be charged on ungeared products or investment amounts and only if this is agreed to with the retail investor.
Availability of advice:
Expanding the availability of low-cost ‘simple advice’ to improve access to and affordability of financial advice.
ASIC powers:
Strengthening the powers of the Australian Securities and Investments Commission (ASIC) to act against unscrupulous operators.