At the Financial Services Forum last week one of the big questions was about the future of financial advice. This is also known as FOFA, which is what the government is calling it. The changes to the nature of financial advice were the backdrop to many of the presentations I went to, with this one (pdf) from Paul Swinhoe and Sarah Woodhouse being the best summary of the current situation.
So what is happening?
A whole lot of rules about financial advice are changing. Here are the main ones:
- Opt in financial letter – all customers who currently pay a commission to a financial adviser will be asked whether they still want to do so (unless the financial adviser has signed up to a code of conduct
- best interest fiduciary duty – advisers must make sure all their advice is in the best interest of clients
- scaleable advice – advice can be tailored for the client’s needs, and need not cover all of their financial situation if it is appropriate
- removal of conflicted remuneration – advisers can not provide advice which is remunerated in a conflicted way (i.e. commission is now banned)
- Volume related payments (such as bonuses for exceeding certain sales targets) – are also now effectively banned
- planner capability – planners must be appropriately trained
How do financial planners get paid?
Historically, most retail long term savings products (unit trusts, unit linked superannuation, allocated pensions) have had a few key players along the value chain. The main ones are the adviser, the dealer group that the adviser belongs to, the platform provider, and the asset manager. All of these players have been funded with an upfront fee (as a percentage of the funds invested) and an ongoing fee (as a percentage of the funds managed). But that means that the customer has no understanding of how much they are paying for any aspect of the value chain. And in particular, the amount they are paying for advice.
Generally, advisers have received the vast majority of the upfront fee (which most customers would have understood), and around 30 basis points “trail commission” (out of the 150-200 basis points annual fee). The trail commission is worth quite a lot more than the upfront fee, and, with up front fees often waived, is effectively how the adviser managers to get paid for the advice they are giving.
But most customers don’t know that. And mostly if they knew how much their planner was going to be paid in total, they wouldn’t be that pleased about it.
Will people actually pay for financial advice?
The big question for me is whether people will actually pay for financial advice. And if they won’t, what will happen?
Most people I’ve talked to recently think that customers with a lot of money will probably pay for it. The kind of customer who is about to retire with upwards of $500,000. But customers at the saving stage, or retiring with $100,000 – $200,000, are much less likely to pay a fixed dollar amount for a full financial plan.
So many financial planners will be struggling to convince their clients to pay their fee, once it is explicit. My view is that we will end up with a shakeout in financial planners – ironically, the ones who aren’t great sales people will be the ones who will struggle, as they struggle to sell their product (financial advice).
What if you don’t get financial advice?
Ironically, the main value from financial advice, in Australia’s complex superannuation system, is advice into how to navigate the tax and pension system. So more mass market retirees will try and go it alone, and probably end up with a less tax efficient outcome as a result. Perhaps that was the government’s aim with these reforms all along.