A financial future to safeguard everyone
When the Future of Financial Advice legislation comes into effect there will be two classes of investors in Australia, those with old money and those with new.
When the Future of Financial Advice legislation comes into effect there will be two classes of investors in Australia, those with old money and those with new. People with old money will have to make it work harder as their returns will continue to be eroded by commissions. Those with new money will have their investment returns protected by FOFA.Despite the huge pressure exerted by financial planning and investment industry groups the FOFA reforms as they were first announced will remain intact with few changes.One of the changes does effect when the reforms will become a mandatory code of practice. Originally FOFA was to apply from July 1 this year, but now the new code of practice will be voluntary for the first year and not come into full effect until July 1 next year.The delay does provide this important question that investors can ask after July 1 this year when seeking financial advice, "do you voluntarily comply with all of the FOFA reforms". If the answer is no, keep looking until you find an adviser who says yes.The two most powerful components of the reform are the best interest obligation and the ban on conflicted remuneration. The best interest obligation requires anyone giving financial advice to put the interest of their clients ahead of all other considerations, especially before their own ability to earn income from clients.That this component of FOFA had to be included is a damning indictment of a large section of the financial planning industry.Its inclusion means that there have been many financial planners that have put their interests ahead of clients.The ban on conflicted remuneration is effectively a ban on commissions. From July 1 next year all licensed financial service companies and their representatives will be banned from receiving any benefit that might have influenced financial product advice given to retail clients. The exceptions to this ban include general insurance, life insurance, stockbroking services, and advice provided to wholesale clients.One win the financial planning industry had in relation to the reforms was the compulsory opt-in requirements. Originally all advisers would have been required to obtain their clients' permission every two years to continue to charge a fee for ongoing financial advice.The opt-in requirement was included, as the Minister for Financial Services and Superannuation, Bill Shorten, put it, "to ensure clients do not pay open-ended, ongoing fees while receiving little or no service". As a result of the changes advisers can be exempted from the opt-in provisions if they are bound by a professional code of conduct. The exemption must be in writing and will be issued by ASIC if it is satisfied that the code of conduct means the opt-in requirement does not need to apply.The FOFA regulations will apply to contracts entered into only after July 1 next year, effectively creating the new money class of investors from that date. Anyone who invested before then will need to review their existing investments, including superannuation, to make sure their returns are not being impacted by commissions. This applies specifically to trailing commissions that are often embedded in financial products and superannuation. Those with old money investments can either change the investment product they are in after July 1 next year, or they can change to an advisor now that has always been fee-for-service and will rebate in full the trailing commission.The important message is people must make the effort to review their investments.