Six steps to FDS success

Much discussion of the Future of Financial Advice (FOFA) reforms and the new regulatory climate has centred on commissions, remuneration and the question of how financial advisers are going to get paid.

While this is a key focus of the reforms and is understandably front-of-mind for many advisers – particularly those who are accustomed to getting paid via product commissions – being transparent about that remuneration model is emphasised equally in the Corporations Act amendments.

Claire Wivell Plater, a financial services regulation specialist and owner of legal consultancy The Fold, thinks advisers, many of whom are her clients, need to start focusing not just on how they’re going to get paid but on how they’re going to approach that conversation with clients.

“From 1 July 2013, advisers will not only have to have fee disclosure statements that set out the fees they received in the last 12 months, they will also need to show which of the services they agreed to provide to the client were actually provided,” Wivell Plater told ifa.

“This is a real challenge in terms of how [advisers are] going to comply.”

The six steps

To help advisers best prepare for the new FDS requirements, Wivell Plater and her team of compliance experts offer six simple steps to ensure an advice practice is on track:

1 List – Identify all clients with whom you have a continuing fee arrangement. If your advice software can’t do it for you, use an Excel spreadsheet to capture their name, address, services offered and provided, date of continuing fee arrangement and fees charged in the past 12 months.

2 Sort – Sort the clients by:
• The date on which the arrangement started; and
• For ease of administration, the services provided. This will be easier if you have defined packages of services e.g. ‘Gold’, ‘Silver’, ‘Bronze’.

3 Template – Prepare a template FDS. Customise it for each package. Code it into your advice software if you can, or set up a Word merge document.

4 Allocate – Decide when your Disclosure Day(s) will be. Think about whether to bring it forward for some clients to ‘smooth’ the work load. Allocate the clients to the intervals at which you want to provide Fee Disclosure Statements, e.g. monthly, quarterly.

5 Publish – Prepare your first batch of FDSs. Check and double check them before sending.

6 Analyse – What was hard? What didn’t work? Use the errors you find as a guide to simplifying and improving your process.

A few more tips…

If you reset the Disclosure Day:
• The FDS still has to cover the past 12 months.
• Be clear that the continuing fee arrangement only existed for part of that period and the fees and services only relate to that period.

When buying a portfolio:

• Ensure when doing your due diligence checks that the seller properly provided FDSs to ongoing clients.
• Include a warranty to this effect in the Purchase Agreement.
• Require the seller to provide you with the information you’ll need to prepare the next FDS.

Engaging with FDSs

In addition to The Fold’s ‘six simple steps’, Wivell Plater also offers a practical solution to complying with the new FDS requirements that comes with several other benefits: client engagement letters.

“An engagement letter that clearly lists their services will make this simple, and the list can be replicated in the Fee Disclosure Statement with a tick or a cross to show whether or not the service has been provided,” she said.

“One benefit of this approach is that it would comply with the [Financial Planning Association’s] code of practice, but there are also a number of other benefits.”

First and foremost, a client engagement letter is a contract. Therefore, it provides a contractual basis for a continuing fee arrangement and services negotiated between the adviser and client. In the new regulatory environment, this contractual protection becomes increasingly important.

“A key issue is that the client is now responsible for paying fees, not the product provider, and so that client can turn that off at any time,” Wivell Plater warns. “An ongoing fee arrangement in the form of an engagement letter will allow you to recover your fees at least up until the time of termination, giving you a contractual right.”

This approach, she says, is far superior to the inclusion of fee disclosure information in a statement of advice (SOA), which is often listed as the most likely place to include an FDS under the new requirements.

“To some extent you need to give this information in a statement of advice, but I think ultimately an SOA is an inappropriate place to have an ongoing fee arrangement, because the conversation about services and the conversation about fees should be different,” she says.

“An SOA is not a contract, so it does not have the benefit of having an ongoing fee arrangement. An engagement letter is just one document that sets out clearly what your services are and you can go back to that document and cross check whether you have done all that you set out with the client, giving an additional layer of compliance protection.”

As well as ensuring compliance, engagement letters are a handy tool with which undertakings of confidentiality can be introduced and general information about a practice can be provided.

They should lay out the terms of the business agreement and they can and should also be tailored to the specific advice needs of the client – that is, whether you will be providing scaled advice, a full financial plan, implementation and ongoing services and, where relevant, opt-in notices.

More broadly, says Wivell Plater, a client engagement letter is a symbol of the type of engagement that the new environment will foster. Old school client engagement and communication methods will simply no longer cut the mustard.

As Wivell Plater puts it: “We believe a ‘new broom sweeps clean’ approach to client engagement is probably best.”