FoFA's failings: Advisers off the reforms hook

The long-awaited Future of Financial Advice (FoFA) reforms are finally here … but they have some shocking defects.

The central aim of these reforms was to improve the quality and availability of financial advice available to Australian consumers, largely through the banning of “conflicted remuneration”. This includes trail commissions – the ongoing fees many financial advisers receive from product issuers every time they sign up a new client.

In that regard, the reforms have failed, because while the conflicted remuneration ban comes into force today, few in the industry will be affected. For most, a ban will only come into effect in a year’s time.

According to new regulations released by the Australian Securities & Investments Commission late last Friday, “for benefits paid by platform operators, the ban will apply in relation to new clients from 1 July 2014; and for non-platform providers, the ban will apply in relation to new clients and investments in new products by existing clients from 1 July 2014.”

So that's it, the industry has succeeded in extracting trail commissions on new clients for another year.

Grandfathering provisions

Michelle Levy, a partner at legal firm King & Wood Mallesons, explains the development, saying: “Under the grandfathering provisions, conflicted remuneration provided under an arrangement in place on 30 June 2013 can continue to be paid.

“An existing arrangement is likely to be the agreement between product issuer and licensee and it is likely to say that the product issuer will pay commission for all new clients/products issued.

“This means that for existing dealer group arrangements, grandfathering will allow commission to continue to be paid for existing clients and products and new clients and products. The grandfathering regulations are intended to prevent grandfathering applying to new clients after 30 June 2014.

“From today, if a product issuer enters into a new agreement with a licensee, they will not be able to pay a commission.

“Also from today, if a product issuer adds a new product to its product list for existing licensees, it will need to ask the question whether there is a new arrangement or whether this is just a variation to an existing arrangement.”

Staying on the trail

Despite all the crowing from the financial services industry, despite all the talk of change, the easy money will be coming in for another year.

On the face of it, this backpedalling also seemingly contradicts the new legal obligation on financial advisers to act in the best interest of their clients.

As long as conflicted remuneration is permitted, how can consumers be sure that their adviser is not influenced by the fees they receive for recommending a product?

Many consumers may not even be aware that the products they’re invested in, including cash management accounts and managed funds, could be paying a trail commission to their adviser.

And don’t count on the annual fee statements that financial advisers are required to send from now on to fill you in on the trails they’re getting on your investments. Trails don’t have to be included in annual fee statements, because these statements relate to a grandfathered arrangement for commission between the product issuer and the adviser rather than ongoing fee arrangements between you and your adviser.

Unless there is a separate agreement between a client and adviser for that commission to be paid, then it will not have to appear in the fee disclosure statement.

Levy says that there is another way clients can get this information.

“Annual fee disclosure statements may well not reflect all of the payments that are being received by the adviser. But statements of advice (SOAs) require disclosure of conflicted remuneration, so you would expect that those arrangements would be disclosed in those documents.”

Under current legislation, SOAs must include “information about remuneration, commission and other benefits capable of influencing the providing entity in providing the advice”.

So make sure you are well informed, read the finer details of your SOA. And if it contains information about commissions, including trail commissions, ask yourself whether you’re comfortable working with an advisor who is getting paid a commission to offer you certain products.

If you’re not comfortable with this, perhaps it’s time to consider finding another adviser. There are a growing number of advisers and product issuers in the industry who have moved on from antiquated commission-based models and offer more competitive products to clients.

Watered down reforms

Hailed as a new era in financial advice, the FoFA reforms were supposed to improve our trust and confidence in the financial planning sector. Conflicted remuneration was to be a relic of the past, replaced by low-cost conflict-free advice, while annual fee disclosure statements would increase transparency.

But the industry fought tooth and nail at every turn, even over the opt-in obligation, which was originally required every year. The opt-in obligation requires that advisers request their clients renew their advice agreements if they are paying ongoing fees. Now, not only is the opt-in obligation only required every two years, but some advisers may be exempt if they meet certain conditions.

After years of negotiations, lobbying and delays, what we’ve ended up with is a watered down set of reforms that by no means live up to expectations. Perhaps next year, when the conflicted remuneration ban really comes into effect, consumers can have a bit more confidence in the industry. Only another year to go … again.