Our industry is currently undergoing a massive state of change. FASEA and the Royal Commission are two key agents leading to much anxiety in the world of financial advisers. Everything from fee structures and remuneration to “structural separation” to deal with the problems of vertical integration to educational and qualification standards is under consideration, with the potential for change. Some advisers have accepted they will have to conform whatever change is delivered, hoping their industry associations and other can negotiate on their behalf and trusting in the process. Other advisers have brought forward their plans to leave the industry. Yet others are actively lobbying politicians against mooted changes in moves that are sure to be supported and condemned by various different industry stakeholders. We take a brief look at some of the arguments here...
What sort of industry do we want – and what will we end up with? Opinions about what the landscape and structure of the financial advice industry will look like after the Royal Commission and the FASEA changes are finalised (and the benefits or otherwise of mooted changes) are like backsides - everybody has one. The conclusion of the commission leaves us to now wait for Commissioner Hayne's final report in February. However, anyone believing the inquisition is over would do well to note that there are already calls for a “Royal Commission 2.0”, in particular to hear from more victims of the finance sectors malfeasance.
FASEA
Adviser Ratings strongly supports FASEA in principle. FASEA’s draft Code of Ethics is a statement of high level principles to which no one could possibly object, but will industry take it seriously? We support moves toward higher qualification standards which are intended to move financial advice to a more ‘professional’ grounding. Even though higher standards do not guarantee good behaviour, they will be seen only as a positive in the court of public opinion, a place where our industry is struggling for positive authority.
We also understand there are challenges in the details, and that drawing the demarcation lines on what will and will not be considered recognised prior learning (RPL) for example, are very contentious. These decisions will have major impacts on many advisers, particularly for more experienced advisers, including whether they remain active in the industry. The potential loss of these advisers would no doubt contribute to an unintended “advice gap”, as occurred in the UK when similar reforms were introduced.
Royal Commission Recommendations
Probably the biggest issue to come out of the Royal Commission is that of “conflicted remuneration”. Sales targets, conflicted commissions resulting in part from vertical integration, as well as grandfathering, have been thrust into the public spotlight by the commissions hearings.
Robert Brown has argued in 'Professional Planner’ for 'the removal of all forms of conflicted remuneration and sales incentives, without regard to ownership.' He recognised that, although it’s usually the big bank models of vertical integration that come under scrutiny amid calls for “structural separation”, many smaller dealer groups and participants in the ‘non-institutional’ sector 'have conflicted remuneration at the centre of their so-called ‘independent’ (or similarly described) business structures.' Regarding any positive change for consumers, he notes 'Nothing would change for the benefit of consumers when (if) new ‘independent’, non-aligned and independently owned firms of financial planners continued to receive commissions and asset fees and promoted their own in-house products through white labelling arrangements with institutions.'
Adviser Ratings also supports the removal of grandfathering and conflicted commissions, again in principle. In a consumer’s mind, there would be no other way to ensure that advice being received was conflict free. Of course, how these potential changes might be implemented remains the major concern.
Activated Advisers
Which brings us to the coalface of change. In October, a group of concerned advisers wrote a submission about the unintended consequences of the FASEA qualifications regime on the financial planning industry, and how the current timeframe discriminates against women and older advisers. They are lobbying for an equitable, responsible framework to achieve this standard 'in a realistic timeframe based on common sense and within the constraints of running a business and family life.' Without changes, they believe up to 25,000 staff redundancies could occur as a result of thousands of advisers leaving the industry.
It is their belief that making this argument direct to politicians is the only course of action after being, on the whole, disillusioned by various industry representation up to this point.
In efforts likely to put them into conflict with more reformist sections of the industry, they are also seeking real life factual examples and case studies regarding the impacts of many of the mooted changes - including the potential drawbacks of ending grandfathering and implications for CGT, Protected Guarantee’s, Centrelink aged pensions, and business valuations – directly from advisers facing these issues including how their clients will be effected. To this end, they have set up a Facebook group which will also act as a support group for advisers providing a safe place and space for advisers to post and share their concerns, get assistance from other advisers, and share information.
Fallout
The deadline for advisers to be considered “current”, thus qualifying for extra time to meet FASEA’s education requirements is fast approaching on December 31st. We have seen a 25% jump in the number of new advisers registered with ASIC in November compared to the average and expect similar figures in December as advisers and accountants engage in a scramble to meet the deadline. More broadly, there is no doubt that financial advice and the finance industry in general is in flux. The Royal Commission has displayed an obvious need for structural and regulatory changes to be made to the industry to better protect and service the community. Playing the waiting game till the Commission's recommendations in February unfortunately adds to uncertainty. Similarly - who knows what recommendations will be taken up by government and when - especially with a Federal election due within months.
This uncertainty around changes will undoubtedly take a toll on the industry and its participants. And when any changes are finally enacted, like any reform upheaval, there will be collateral damage and unintended or unavoidable consequences as a result. As well as making different cases for change, stakeholders would do well to recognise the potential costs, and to plan for and mitigate as much damage as they can.
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Comments6
"Some interesting comments and thoughts here. I’m particularly alarmed at the prospect that legislation may be enacted precluding a client from seeking advice on their retirement savings and paying for that advice from their retirement savings - for those with modest super balances that need holistic advice, this is usually their only way of funding it, why should they not be allowed to receieve advice? Ongoing service is the same, my accountant allows me to pay my yearly advice and compliance bills monthly, why should we not be afforded the same privilege? Lawyers on a retainer are no different, a fact council assisting Michael Hodge seemed to forget in his grilling of Westpac - I daresay he was paid before, and while, his work was performed - as a professionally qualified individual why shouldn’t we be allowed to do the same? It ought to be up to my client to decide how and at what frequency they pay me. I have no issue with the intent of FASEA whatsoever, but let’s create a new category of adviser - a mentoring adviser who can sit with upcoming staff and help them construct meaningful, compliant advice and still have a well remunerated role in a boutique organisation. I’m in my early 30’s, own 50% of my business and our AFSL but would not feel comfortable without the support of my senior planner to bounce ideas and scenarios off, including tough clients. Finally, let’s end the carveouts for Industry and retail, advice is advice and super is super. Make it all fall under the same rules and let’s level the playing field."
LC 19:53 on 05 Dec 18
"It is a simple question and a simple answer, though as usual, once the self interest brigade, left wing loonies and interested inexperienced theorists put their 2 cents worth into the question and answer, we end up with a maze of contradictions. So, what is the question? How do we as a society and Government, provide a Best Interest Duty service to all Australians from the service / advice Industries? The Answer. Make EVERYONE responsible for their actions. Now to clarify this simple premise. When we make everyone responsible, I mean everyone on both sides of the transaction. This then puts responsibility back onto the real perpetrator. However, there must be an ability to build up a profitable Business that is not limited, except by ETHICAL and HONEST behaviour. The current framework has branded everyone as crooks or fools that need the harsh hand of regulation to keep all and sundry under control. This never has and never will work. What it will do, is destroy tens of thousands of honest, hard working people, their families, staff, Businesses, for what purpose? The end result will be the exact opposite of what it hopes to achieve. Only young or idealistic people with little experience, can look at what has occurred and what has been set as the fix, then say all is heading in the right direction. Everything in life is imperfect. The purpose of improving, is to keep the good and expel the bad. Clearly, this is not what has been done. Many people will be bankrupted through no fault of their own and all those ""experts"" whose actions helped bring this about, will sit back with smug satisfaction and make ridiculous statements, safe in the knowledge that their actions have not impacted on their own situation. "
Jeremy Wright 19:32 on 05 Dec 18
"I am concerned that this is all too rushed and ill-conceived. The outcome to the client - Best Interest and Best professional Advice - must be put first. Then a framework put around it that is practical, transparent and which favours nobody. not the large or small, SMSF or INdustry or public offer super fund, not the fund manager, not the educational establishments. ALL to be under one single piece of legislation and standard. That standard can be tailored for each segment eg risk. Property sales need to be in the same piece as well - make it a financial product. MOrtgage advice - same. Then, set defined terms of advice and adviser. Then re-work legislation such that it does not conflict with Corps Act or other legislation and change the one that makes sense to change - sometimes the old regs and acts just need to be ditched and started again. THen decide on the roles of monitoring and enforcing bodies... blank sheet so we are not stuck with ASIC/APRA/ATO etc. Build the right bodies using people best suited to the role and not rehashed public servants being pushed forward. Lastly, enforce a grace period for any senior staff in the regulator/monitoring bodies from working in senior roles within the (now broader) financial services industry. This would bring every sector into line and make responsibility at all levels accountable to a sensible and appropriate body. Real estate is the largest asset class in AUstralia so how is it so unregulated when most of the wealth of households is geared into it? I think we have missed a golden opportunity as former Treasurer missed a golden opportunity when he started with a so called blank sheet of paper for tax reform. It wasn't blank... vested interests be damned. Precedent be damned. Best interest of the country and public comes before all else. "
The Patriot 17:19 on 05 Dec 18
"I have just one question who the hell is going to supervise 1600 hours for someone new in the industry?. "
james walker-powell 16:13 on 05 Dec 18
"While I agree in principle with what FASEA is trying to do in increasing the education standards and public standing of financial advisers, I also believe that the government needs to put in place legislation which also helps promote registered financial advisers and further eliminates conflicted remuneration. I refer specifically to the fact that currently only certain super funds (mainly retail funds) will allow an advice fee to be deducted from a members account. Most industry fund trustees are still selective over which advisers can deduct their advice fee from the members account. In effect, it is only their employed advisers that can do so - this is a clear cut case of vertical integration and creates an unnecessary conflict for advisers that are looking at recommending the right super fund for their client. The solution is simple: it needs to be legislated that all defined contribution type super funds have to allow a member the option to have the financial advice fee paid to a registered financial adviser deducted from the member's super fund - no exceptions. This will go a long way to removing conflicted remuneration - especially as it applies to superannuation advice."
Brett 16:02 on 05 Dec 18
"I have no doubt that the industry will shed thousands of advisers as a result of the application of FASEA and the fallout from the Royal Commission. I also have no doubt that advisers will be the ones most effected and have the most to lose - personally. Large institutions may suffer a short term decline in their profits and have to come up with alternative revenue models, but they have the size to cope. Lots of advisers will have business models wiped out when changes to their remuneration are made. And for what - so a disinterested public can be made to feel safer? I am all for professionalisation but what is being proposed and the implimantation of it leaves a lot to be desired. It won't weed out dodgy advisers and won't stop misconduct on the part of the insto's - where so many of the industry problems come from. Make no mistake thousands will suffer for basically nothing."
Davis S 15:28 on 05 Dec 18