Reforms of the financial services industry are designed to offer protection but asking the right questions can be a more effective strategy for consumers.
IF YOU use a financial planner, or are thinking about seeking one out, you should be aware that the way they are being remunerated is in the process of being changed.
Not everybody wants - or even needs - financial advice but if you do want it, you want to make sure you're not paying something for nothing. In the past, some advisers got into the practice of recommending products based on the commission they would receive. What the ...?
Well, financial planners, depending on the company they work for, often have a list of recommended products from which to suggest investments for you.
Of course they're supposed to suggest products that are appropriate to your circumstances and the level of risk you are comfortable with.
Unfortunately, some of them recommend products based on how much commission the fund manager that manages the product is prepared to pay them.
Even if a financial planner sets out to provide the best advice possible, it can be hard not to be swayed by these remuneration structures. If two products looked almost identical except for the commission an adviser could receive on recommending one, which one do you think they would suggest?
The Financial Planning Association (FPA) is the largest member association for financial planners and has long been advocating better professional standards among its members. But the Future of Financial Advice (FoFA) reforms, which are very close to being passed through parliament for the final time, are also new regulations designed to remove the conflicted remuneration structures in the industry.
Last week, the Minister for Financial Services and Superannuation, Bill Shorten, announced a quasi-extension for the implementation of these reforms. Although not yet through parliament, they were scheduled to be introduced from July 1 this year. They will now be mandatory from July 1 next year, with participation from July this year voluntary.
One of the key parts of the reforms is the introduction of an "opt-in" requirement. Under this requirement retail clients will need to agree with their adviser to ongoing fees every two years.
This is to stop advisers receiving commissions on products for clients they don't see on a regular basis, or even see at all. Although not common practice, if you only saw a financial planner once and invested in the products they suggested, that adviser could continue to receive a commission on that product as long as you held it, even if you never saw them again.
The FPA has lobbied long and hard for the removal of the opt-in requirement. They have been focusing independently on introducing a "best-interest duty" among their planners and the banning of commissions on investments.
"Taken together, these render the opt-in policy redundant and exposes consumers to unnecessary risk," the chief executive of the FPA , Mark Rantall, says.
The FPA has been on the front foot in the removal of commissions and the improved professionalism of the industry. From July 1 next year, all FPA members will be required to have a degree before acceptance as an associate financial planner. But the FPA can't guarantee the professionalism of the entire industry. Arguably, the only way that conflicted remuneration structures will be reduced is by law.
Other reforms that are part of FoFA include: a ban on upfront and trailing commissions on group risk within superannuation a ban on any form of payments relating to volume or sales targets from financial services businesses to dealer groups a ban on soft dollar benefits of $300 or more and it is also considering restricting the term "financial planner/adviser".
The "opt-in" is just one part of the reforms but, as you can see, an important one. The alternative to paying for advice via commissions on your investments is a fee-for-service that can be a fixed dollar amount, or an hourly amount.
But these fees can be quite expensive - $1000 for a couple of consultations a year is not exceptional and possibly cheap - so commissions can provide an avenue to pay for advice that you might not normally have.
The important thing is, of course, to be aware of what you're paying for and to ensure that you are getting value for your dollar.
So if you do seek out a financial planner, don't leave the room without a full understanding of how they are being paid. If you don't understand, go somewhere else.
From July 1 this year you might also seek out early adopters of the FoFA reforms. There will be some and they will probably be financial advisers or groups that were already offering appropriate advice in the best interests of their clients to start with.
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Frequently Asked Questions about this Article…
What are the FoFA reforms and why do they matter to everyday investors?
The Future of Financial Advice (FoFA) reforms are a package of rules designed to reduce conflicted remuneration in the financial advice industry and raise professional standards. For everyday investors this means changes like banning certain commissions, introducing an opt-in for ongoing fees, tighter rules on benefits and sales-related payments, and measures to improve adviser professionalism — all intended to protect consumers and improve the quality of advice.
What is the FoFA "opt-in" requirement and how does it affect ongoing adviser fees?
The opt-in requirement forces retail clients to explicitly agree to ongoing fees with their adviser every two years. Its purpose is to stop advisers receiving commissions on products for clients they rarely or never see. That means you must agree periodically to continue paying ongoing fees, helping prevent advisers from collecting commissions on inactive relationships.
When will the FoFA reforms come into effect and has the timeline changed?
The implementation timeline was adjusted: the reforms were originally slated to start from July 1 this year, but the Minister for Financial Services and Superannuation announced a quasi-extension. Participation may be voluntary from July this year while the reforms will be mandatory from July 1 next year. (Those are the timing details reported in the article.)
How can adviser commissions create a conflict of interest when I get financial advice?
Some advisers historically recommended products based on the commission the fund manager paid, not necessarily on client needs. When two similar products differ mainly by the commission paid to the adviser, there’s a risk the adviser will favour the higher-commission product. FoFA aims to reduce these conflicts by banning certain commissions and improving disclosure and professional obligations.
What are the alternatives to commission-based advice and how much do fee-for-service advisers charge?
An alternative is fee-for-service advice, which can be a fixed-dollar fee or an hourly charge. These fees can be costly — the article notes examples like $1,000 for a couple of consultations a year — but they can also align adviser pay with the advice you receive. Commissions can make advice more affordable for some clients, so it’s important to weigh cost against value.
What changes is the Financial Planning Association (FPA) pushing for to protect consumers?
The FPA has been advocating higher professional standards and removing commissions. Specifically, it supports introducing a best-interest duty for planners, banning investment commissions, and raising entry standards — for example, requiring a degree for acceptance as an associate financial planner from July 1 next year for FPA members. The FPA has also challenged aspects of the opt-in requirement.
Which specific bans and rules are included as part of FoFA reforms?
Key measures mentioned include a ban on upfront and trailing commissions on group risk within superannuation, a ban on payments tied to volume or sales targets from financial services businesses to dealer groups, a ban on soft-dollar benefits worth $300 or more, and consideration of restricting the use of the term "financial planner/adviser." These aim to reduce incentives that can bias advice.
How can I make sure I’m getting value for money from a financial planner and avoid paying for nothing?
Before you agree to advice, ask the planner how they are paid, whether they receive commissions, and how often they will review your situation. If you don’t understand their remuneration or don’t feel comfortable, consider going elsewhere. You can also look for early adopters of FoFA-style reforms or advisers who already operate on a best-interest or fee-for-service basis to help ensure value.
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