PORTFOLIO POINT: A last-minute backroom deal on Future of Financial Advice’s “iconic” opt-in arrangements will dilute benefits to super members and investors. What does it mean for you?
When two usual bedfellows break out in a spiteful stoush in an industry as big as financial services, you know something a bit fishy has gone on.
At first glance, there has been a serious watering down of an “iconic” (PM Julia Gillard’s description in December) aspect of the Future of Financial Advice legislation.
The deal was announced hours before the vote in the House of Representatives. The changes to the already previously watered-down “opt-in” arrangements seem to be a significant concession to the advice industry.
The legislation says financial advisers who sign up to a professional code of conduct will be exempt from getting their clients to sign opt-ins for costs agreements every two years.
But not so fast. The devil, as always, will be in the detail. Unfortunately, that could be some time away.
The Financial Planners Association/Industry Super Network deal was essentially hammered out to gain the support of independents including Rob Oakeshott. It will give the Australian Securities and Investments Commission, the main regulator for financial advisers, the power to approve codes of conduct/practice.
Will those codes of practice have a back-door, two-year opt-in requirement anyway? It’s possible. If they do, the concession could mean Financial Services Minister Bill Shorten gets his way and there would be no benefit to financial advisers.
But the fact is that “opt-in” will be less effective and less enforceable.
The deal has John Brogden, head of the Financial Services Council, seething at the Financial Planning Association, who made the deal with the Industry Super Network, a traditional arch-rival of both the FSC and the FPA. Brogden’s comments suggest the FSC was sidelined.
It also says something about Financial Services and Superannuation Minister Bill Shorten’s determination to cut a deal. When “opt-in” was initially announced, it was going to require advisers to get an “annual” cost-agreement signature from clients.
Following intense lobbying, this was watered down to two years. Now, potentially, not at all for some advisers if some other conditions are met.
And it follows Shorten’s announcement that FoFA compliance would be “voluntary” for the first year, until 1 July, 2013. Essentially, it was too close to 30 June. The rules weren’t in place. There wasn’t enough time to comply.
Who will benefit? The likely biggest winner, you would assume, would be the FPA and other organisations able to get their codes of conduct approved by ASIC. If advisers have to be members of organisations that have ASIC-accredited codes of conduct, you would expect the FPA to be the first to gain such accreditation.
It could be a disaster for smaller industry groups. Writing an acceptable code of conduct wouldn’t be hard. Getting members to adhere to it would take resources they simply might not have.
But what does FoFA mean to super members and investors at large?
Voluntary for first year
Most of the rest of the FoFA package stays intact. It is important to understand that the changes will only apply to clients who sign up with advisers after July 1, 2012. (That’s now probably 1 July, 2013, given the voluntary nature of the first year.)
Adviser fees and opt-in
The power is still with you to negotiate with your adviser, as it always has been.
If you don’t like the way your adviser is currently charging you, or don’t understand it, you have the right to question them about it.
And you can renegotiate your deal with your adviser at any time, including now. If you don’t like the new terms he/she is offering you, you can take your business elsewhere. It’s your money. You don’t have to wait until 1 July, 2013.
When it comes to opt-in, if the backroom deal means that advisers end up having to sign codes of practice that include at least certain service levels provided in a two-year period, then consumers might still get the protection Bill Shorten had wanted anyway.
Commissions are still going to be banned from investment and super products. (Insurance commissions have not been included in the ban.)
The nasty part of commissions – as compared to other ways advisers can charge – is that they are hidden. They are usually wrapped up in a total fee paid through a product.
That is, the total fee that a client sees on their annual statement might, for example, be 1.8%. Of that, 1.2% goes to the platform and the fund manager, while 0.6% goes to the adviser. However, with commissions, you won’t know that your adviser is getting 0.6%, because it’s bundled into the one overall fee.
Non-commission methods of charging for advice include pure “fee-for-service” agreed up front and charged by invoice, or “adviser service fees”, which can be either a percentage or a flat dollar fee, but still usually through the product. The difference with adviser service fees is that clients will see what their adviser has charged them, or received from them, on their statements, which is clearly a far more honest way of charging for advice than hidden commissions.
No commissions will be payable on geared products.
Volume-based bonuses (sometimes known as “marketing allowances”, “overrides” or “rebates”) will also still be banned. While these rebates are not paid by clients directly, they undoubtedly push up the cost of some financial products.
When banned, the provider could pocket the money themselves, leaving the adviser out of pocket.
More likely, competition in the industry will drive down the prices (fees) charged on products or platforms, which will benefit consumers.
Advisers will have a fiduciary duty to act in their client’s best interests. While it might seem surprising that this wasn’t always the case, it simply replaced rules that said advisers had to provide a “reasonable basis for the advice”. Much of the advice given to Storm Financial clients, for example, would not have passed as reasonable.
Shorten’s FoFA reforms will undoubtedly raise the bar on professionalism in the financial services industry and increase protection for consumers.
The last-minute changes, however, are going to make the reforms a little less effective. We won’t know how much less effective until ASIC – who Shorten has handballed to for opt-in – starts to outline what it thinks is reasonable in the way of a code of practice.
Most advisers will be breathing a little easier today. The most painful parts of the original draft of reforms have been diluted to an extent that will reduce some potentially high compliance costs.
But that doesn’t mean that consumers shouldn’t be cheering. They should. Over time, the changes will improve the overall quality of financial advice provided in Australia.
The reforms aren’t revolutionary, they’re evolutionary, and they continue a process that began in the late 80s.
The aim is to create an industry that Australians trust to turn to for help with their finances. It’s a step in the right direction.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.