What’s wrong with the Future of Financial Advice (FoFA) reforms is that they have been hijacked. That’s right FoFA has been hijacked! I feel like a load has been lifted just saying those words. The reforms have turned into a battle that is being waged by the industry superannuation funds and banks, driven by ideology, vested interests and a desire for a greater share of the superannuation pie. They are not alone in this now very public “debate” as a range of respected commentators and journalists have sided with one of the two sides.
Alan Kohler says that “There is something very inconsistent about holding a Royal Commission into union corruption while legislating to allow the return of corruption in financial advice.”
Michael West’s sources have said “it will bring back the boiler rooms and precipitate a new generation of scams and legal claims”.
Christopher Joye says “integrity of financial advice threatened”.
Peter Martin says “the government plans to introduce legislation aimed at neutering parts of Labor’s finance advice reforms”.
And on and on it goes. Let’s all take a deep breath, and consider that FoFA was designed to improve the trust and confidence of Australian retail investors in the financial services sector and improve access to advice.
Trust | Confidence | Advice
Ever since these objectives were outlined, vested interests groups have been doing their best to disturb and alarm Australians, with the ultimate aim being to influence our legislators. They did a fabulous job throughout 2009-2012, via a significant lurch to the left which resulted in a vast array of laws and regulations being introduced, some of which actually met the brief. Not long after the new laws came into effect, the Coalition announced if returned to Government it would amend certain sections of the legislation, note the word amend.
Over the last several weeks, we have seen those same influential lobbyists, commentators and institutions doing what they do best, attempting to disturb the public and influence the process for their own reasons. Again, it’s all about controlling the market so that they can distribute product, it’s not about providing personal financial advice.
As a participant in this debate, I suppose I should declare my biases. I am a partner in a financial advice firm (Evalesco Financial Services) in Sydney’s CBD. Our business is independently owned, and only has one vested interest, to see our clients achieve their goals, and to enjoy their lives whilst we provide them with financial leadership and support.
How product manufacturers such as industry superannuation funds and banks have a place at the table when it comes to advice I will never know.
Some of the “controversial” amendments that were tabled in Parliament today, include:
Opt-in is designed to give investors the opportunity to formally reengage their financial planner every two years, and whilst it seems sensible, the reality is that investors have always had the ability to Opt-Out of an advice relationship at any time. The only beneficiaries of Opt-In are those institutions that wish to attract new clients through a continuation of a disturb + alarmist marketing strategies. Note that only one party recommended Opt-In to the PJC on Corporations and Financial Services in 2009, the Industry Superannuation Network, see section 6.95 on page 126.
Whilst the PJC did not recommend that it form part of FoFA, it still became law and is an additional level of red tape that does not need to be there.
Best Interests Duty
Much has been made of the Government’s decision to “abolish” the best interest rule. This certainly makes for a great headline, and it would be scandalous if it were true. What better way to disturb the clients of financial planners than claiming that they will no longer be required to act in their best interests.
Best interests duty obligations are now a statutory obligation in law, however the reality is that the best financial planners have been operating with their clients best interests at heart for many years. There is a very wide range of criteria that are used to determine if financial planners are acting in the best interests of our clients, all of which, with the exception of one clause will remain.
The one change relates to what is called the catch-all provision in Section 961B2(g) of the Corporations Act and it’s essentially just that, a catch-all provision that relates to anything the regulator has not thought of.
This clause is so wide you can drive a truck through it, and it’s possibly why some of the most vocal supporters are legal practitioners and those that wish to ensure that the unlevel playing field remains.
Scaled advice occurs where there is an agreement between the client and financial planner to provide advice on one specific subject.
By altering the best interest provisions to allow scaled advice it means that more investors will be able to access advice, without having to pay through the nose. The reason is that if a financial planner is required to do a full-scale review it will most certainly push the price beyond what many Australians will be prepared to pay for the advice.
General Advice and Commissions
Along with the Best Interest changes, this is the one that has grabbed the most headlines. Some commentators have even likened the changes to the second coming of the Wolf of Wall Street. Before I get to the explanations, let me be very clear that commissions have no place in the world of investment (general or personal), and they should not exist for Banks or Industry Superannuation Funds. Whilst this recent amendment is frustrating, and I do have concerns some will attempt to profit from the exemptions, there are elements that it does level the playing field.
For example, a recent report by ASFA confirmed that the median cost for intra-fund advice (that’s general advice in Industry Superannuation Fund terms) equates to $2.81 per member per year, with an average per member per year cost of $9.65. That $6.84 per member difference, between what it costs and what is charged, must surely be a commission by another name for more than 5,000,000 members – which has the effect of subsidising the cost of advice for those that request it from their fund? We should dispense with all investment commissions, that and only that would create a level playing field between the institutions and those that provide personal financial advice.
The reality though is that the banks have lobbied hard for this exemption to level the playing field when they compete with the industry superannuation funds, who are the beneficiaries of what is outlined above. What is being proposed is that commissions or bonuses may be paid to staff of a financial product provider (bank or industry superannuation fund) if they provide general advice to retail customers. The recently tabled legislation has some alterations, as it seems the Government has listened to consumer and financial planning groups, as it will only be available if it is for a direct employee of the product provider, those same customers have not received personal advice in the past twelve months and it relates to the institutions own products.
An example would be where you walk into a branch and apply for insurance over the counter, or make an investment in one of their products. Now if you go into a Commonwealth Bank branch, we all know you won’t be walking out with an NAB insurance policy – much like if you walked into an Apple store you don’t expect to walk out with a Samsung. If you don’t like the sound of someone being paid a commission for handing a brochure to you, then think of it as a bonus for them hitting their KPI’s. It’s no different from when you book your holiday at Flight Centre, buy a pair of shoes at The Athlete’s Foot or buy a new suit from DJ’s, these employees will all have KPI’s they need to achieve. A bank or industry fund representative that receives a benefit for recommending a product under the general advice category, must still adhere to your best interests, however it’s now crystal clear that they will receive a financial benefit for doing so.
Perhaps it’s time to consider that, just maybe, these amendments will ensure that FoFA becomes a more level playing field than it was when it first became law. Whilst there will be some institutions that do not like these changes, the reality is that FoFA was not created to protect their interests, it was created to protect the interests of investors. Investor protections have not been watered down.
Our team believes that in time, after the hysteria dissipates, Australians will see that financial planners are here to provide them with financial advice and leadership that is in their interests, free of conflict. Whether it comes to your personal investment strategy or financial services regulation, it pays to look past the headline and plan for the long term. If you find yourself getting caught up in the headlines, perhaps it’s time you checked into Team Evalesco for some personal financial advice.