It seems strange that the financial planning industry needs to be told to act in their clients’ best interests and yet, it’s true. Since the Financial Services Reform Act 2001, financial planners have only been legally required to give personal advice that passes the reasonable basis test. However, from July 1, 2013, a much higher fiduciary duty will be imposed under the federal government’s Future of Financial Advice Act.
The reforms, which arose from a 2009 Parliamentary Joint Committee into the collapse of Storm, Westpoint and Opes Prime, also include a ban on conflicted forms of remuneration, the introduction of annual fee disclosure and a requirement for clients to opt-in for ongoing advice.
Commissions attached to superannuation and investment products, group life insurance policies and rebates paid by administration platforms will also be banned. However, financial planners will be able to continue to take commissions on individual life and risk insurance, general insurance and mortgages.
Further, percentage-based fees will only be banned on geared portfolios. Financial planners will still be able to charge percentage-based fees, which is currently the most common way they calculate their fees. Other methods include an hourly rate, a project-based fee or an annual retainer. Existing commission and rebate arrangements will also be grandfathered under FoFA. Once those contracts expire, they will not be able to be renewed.
The new requirement for financial planners to issue clients with an annual fee disclosure statement and force them to opt-in for advice in writing every two years, was designed to ensure consumers don’t unwittingly pay for ongoing services they don’t receive. For decades, product manufacturers built upfront and trail commissions into their superannuation, insurance and investment products with the view that those ongoing payments would not only entice advisers to sell their products, but also cover the cost of ongoing advice. However, the PJC found many consumers received little to no service for the trails being paid.
Financial planners can gain an exemption from the opt-in provision if they are bound by a code of conduct that achieves the same aim as opt-in and has been approved by the Australian Securities and Investments Commission.
The annual fee disclosure statement must state the ongoing fee paid by the client in the previous year and list the services that the client is entitled to alongside details of the services actually provided.
The ban on commissions will change how many financial planners charge and will require new systems and technology to be implemented, which the industry has already spent millions on.
But parts of industry argue FoFA will lift the compliance burden on businesses, making it more costly to provide advice, with the costs to be borne by the investor – making advice unaffordable for many.
One solution is a new low-cost, limited advice model whereby consumers only pay for one-off, specific advice. The Stronger Super reforms will support this model by allowing default superannuation funds to subsidise the cost of intra-fund advice through administration fees.
It’ll take sometime for the full effects of FoFA to be seen. For the time being, platforms will be able to continue charging funds managers for a spot on their product menus.
There are currently strict anti-avoidance laws in place making it illegal for advisers to rush out and shore up lucrative commission and platform contracts before July 1, 2013.
In addition, FoFA’s new fiduciary duty will ensure that regardless of the grandfathering provisions, planners must act in the best interests of clients.
Compliance for now is voluntary.