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Investor Education > Financial Advice > Future of Financial advice

FUTURE OF FINANCIAL ADVICE

In the wake of some high profile collapses that seriously burned retail investors, a series of industry-transforming amendments to the Corporations Act were introduced on 1 July 2013. Called the “Future of Financial Advice” (FOFA) reforms, the goal of these reforms is to put the best interest of consumers at the heart of financial products and services. The key measures include a prospective ban on conflicted remuneration, a best interests duty on personal financial advice, an ‘opt-in’ requirement on ongoing advice fees and the introduction of scaled advice.

 

The reforms

Ban on conflicted remuneration

Under FOFA, any monetary or non-monetary benefits that could “reasonably be expected to influence the financial advice clients receive” will be considered to be conflicted remuneration and there will be a prospective ban on upfront and trailing commissions as well as a ban on any form of volume-based payments in relation to distribution of and advice given on retail investment products.

The intention behind this is that only you the investor should be paying your adviser and you can be assured when a product is recommended to you that the adviser was not tempted by the size of the commission on offer.

Updated 20 December 2013: the Government has proposed general advice is made exempt from the ban on conflicted remuneration.

 

Opt-in and fee disclosure requirement

Under FOFA advisers must give each client an annual statement disclosing the ongoing fees the client has paid and the services they received for it. In addition, every two years they must receive consent (opt-in) from each client paying ongoing fees to continue charging these fees.

This provision provides clients greater transparency regarding the fees they are paying their adviser; whether it puts them in a better position and to determine whether they are getting value for money from their adviser. It provides protection for clients paying for services they don’t receive.

Updated 20 December 2013: the Government has proposed removing the two year opt-in requirements to ease the administrative burden on advisers. In addition, the Government has proposed removing the fee disclosure requirements on advisers for clients who entered into an arrangement prior to 1 July 2013.

 

Best interests duty

Advisers must act in the best interests of their clients. Seems obvious right? Well the current rules simply state that clients must receive appropriate advice, which does not prevent the recommendation to be influenced by incentive payments from product manufacturers. The best interests rule closes this loophole by removing any incentive for an adviser to recommend a product for any reason other than it is the most appropriate given the client’s needs, financial situation and objectives.  

Updated 20 December 2013: the Government proposed amendments to the best interests duty to allow advisers to provide scaled advice.

 

Scaled Advice

The Government wants to ensure financial advice is accessible by a wider range of Australians. Under FOFA, scaled advice will be available to clients who require advice on one area such as insurance or saving for a home. In an industry where there is a large gap between full advice and no advice, being able to seek scaled advice will give consumers a low-cost advice option for obtaining simple or limited advice on a specific need.

 

Get the most out of FOFA

Whilst these reforms are a step in the right direction, it doesn’t cover every product within the wealth management industry, nor does it protect every advised client.

Beware the churn factor

The ban on conflicted remuneration relates only to investment products like managed funds and superannuation products. Only insurance product commissions within superannuation will be banned, so the ban does not extend to insurance commissions bought outside of super, which is quite lucrative when you consider upfront commission on new risk policies. Renewal commissions are much smaller in subsequent years so some advisers “churn” client policies by either cancelling the policy or letting it lapse before taking up a new one either with the same or different insurer to earn the upfront commission. Advisers giving risk advice will still be subject to the best interest duty so ensure that insurance recommendations are valid and appropriately based on your needs and circumstances.

Better advice?

What constitutes tainted advice however goes beyond whether or not a commission was received on the product sold. The largest financial advisory groups in the country are bank-owned. The banks in turn also happen to own the largest fund managers in the country. Advisers are obligated to provide the best advice and will no longer receive commissions but don't be surprised if these advisers recommend products owned by their employers. Investors should not t take it on face value that FOFA will automatically mean better advice. Your adviser will need to disclose these affiliations with you and if they are recommending one of their bank-owned products, make sure they demonstrate these products are truly in your best interests.

 

Grandfathering

FOFA obligations may not apply to arrangements entered into and products purchased before the reforms commence. For example commissions paid by product manufacturers to advisers in relation to existing investments will not be banned and can continue to be paid.

Financial advisers will be obligated to provide all clients who are paying ongoing fees for advice with an annual fee disclosure statement as part of the fee disclosure requirement; however you should be aware that the opt-in requirement will only apply to new clients or new advice. If you have an existing arrangement made before 1 July 2013 and you don’t feel like you have the best advice, or you simply wished to have your arrangement fall under the new regime you may wish to seek new or updated advice with your existing or a new adviser, which will have to fall under the new best interests duty.  

The idea behind FOFA is to improve the quality of the advice industry and to improve the quality of advice you receive. Consumer protection only goes so far, you as the client need to play an equally important role. Speak to your adviser, and ask about the extent to which the reforms apply to you and take advantage of the new disclosure requirements to ensure that the fees you are paying is in line with the service you are receiving. 

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