The Future of Financial Advice reforms should become law. They have been years in the making and were prompted by the loss of billions of dollars, mostly from retirees, because of poor or negligent advice where big commissions played a role.
The reform package, which will come before Parliament in two parts, includes the banning of commissions and puts planners under legal responsibility to act in their clients' best interests.
Clients will also have to actively renew their contracts with planners every two years by "opting in". If the client does not sign the contract the planner stops getting paid. Most of the financial-planning industry accepts the changes.
The industry has been given big concessions by the government. Opt-in will be every two years instead of every year as originally planned. The banning of commissions and opt-in will not apply to those already paying commissions to planners. The ban on commissions will apply to new clients only and newly recommended products from the middle of next year. That means most of the planning industry's commissions will be protected for years.
One of the key benefits is that the reforms will help to make advice available to all. Commissions incentivised planners to advise those with big retirement savings. The bigger the lump of money being advised, the bigger the commission, regardless of how much work was involved.
The reforms will help to align the price of advice with the work involved. Those with simple needs will pay less for advice than those with complex needs. Superannuation funds are leading the way on providing simple, limited advice to fund members after the government made changes in 2009 to address the "advice gap" - where a fund member who wants limited advice could not get it from financial planners.
Super funds are getting together with financial-planning firms to offer comprehensive financial planning that is affordable.
The Coalition supports the statutory best-interest duty on planners but it does not support opt-in.
The Labor government needs the support of the independents to pass the reforms. But a couple of the regional independents have indicated they are against opt-in because they believe opt-in will add to the costs of small financial-planning businesses operating in their electorates. However, Rice Warner Actuaries says opt-in will cost financial planners not nearly as much in administration as the financial-planning industry has been saying.
The opt-in provision is essential to the integrity of much of the reform package. Only some clients will pay by the hour or pay a scheduled fee for a particular service. Most investors will pay an asset-based fee, which is a percentage of the money they have invested on the advice of the planner. Opt-in is an important check on what can happen now with commissions - when a client never hears from the adviser but keeps paying the asset-based fees nevertheless.
Frequently Asked Questions about this Article…
What are the Future of Financial Advice reforms and why were they introduced?
The Future of Financial Advice reforms are a package of changes that include banning commissions for new business, imposing a statutory best‑interest duty on planners, and introducing a regular opt‑in requirement for clients. They were prompted by large investor losses, mostly affecting retirees, where poor or negligent advice and big commissions played a role.
How will the ban on commissions work and who will it affect?
The ban on commissions will apply to new clients and newly recommended products from the middle of next year. It will not apply to existing clients who are already paying commissions, so many current commission arrangements will be protected for years.
What does the opt-in requirement mean for clients and financial planners?
Under the opt‑in rule clients must actively renew their contract with a planner every two years by 'opting in'. If a client does not sign the contract, the planner stops getting paid. The government has allowed opt‑in every two years (instead of annually) as a concession to the industry.
What is the statutory best‑interest duty and how does it change planner responsibilities?
The statutory best‑interest duty places legal responsibility on financial planners to act in their clients' best interests. This is intended to reduce negligent or conflicted advice driven by commission incentives.
Will the reforms make financial advice more affordable and available to everyday investors?
Yes. The reforms aim to make advice available to more people by aligning the price of advice with the work involved—so those with simple needs should pay less, while those with complex needs pay more. Superannuation funds are already offering simple, limited advice and partnering with planning firms to provide more affordable options.
Are small financial planning businesses likely to face higher costs because of opt‑in?
Some regional independents say opt‑in could add costs to small planners in their electorates. However, Rice Warner Actuaries has advised that opt‑in will not be as administratively costly for planners as parts of the industry claim.
How will clients typically pay for advice under the new rules, and why is opt‑in important for fee transparency?
Some clients will pay hourly or a scheduled fee for specific services, but most investors will pay an asset‑based fee—a percentage of the money invested on a planner’s advice. Opt‑in is an important safeguard because it prevents situations where clients continue to pay asset‑based fees without ongoing contact from the adviser.
What is the political outlook and timeline for the reforms becoming law?
The reform package will be brought before Parliament in two parts. The Coalition supports the statutory best‑interest duty but does not support opt‑in. The Labor government needs support from independents to pass the measures—some regional independents have expressed opposition to opt‑in. The commission ban for new clients and products is scheduled to start from the middle of next year.
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