To break into wealthier class, take advice to save some cash
These two classes will consist of the wealthy class - those that receive advice under the new Future of Financial Advice regime - and the poor class, made up of people that received financial advice before July 1, 2013.
The first class will have a greater chance of becoming wealthy because they will benefit from FOFA, while the second-class investors will continually have their wealth affected because of having a financial adviser's hand in their investment pocket by being paid trailing commissions.
The main reason for there being a wealthy class is that under FOFA, anyone receiving financial and investment advice from July 1 will receive the protection of a best-interest duty and a ban on conflicted remuneration.
To understand how the new system works it is important to understand the regulatory system relating to providing financial advice. Financial advice can only be provided by an individual or entity that holds an Australian Financial Services Licence, or someone appointed as an authorised representative by a licensee.
To become an authorised representative, a person must have passed a diploma-level training course authorised by the Australian Securities and Investments Commission and meet a requirement for ongoing training and education. When the licensing system was introduced, many financial advisers who had not completed any form of tertiary education were able to meet the licensing and authorised representative requirements by demonstrating their financial experience and knowledge by passing exams.
The FOFA system was introduced as a result of government inquiries into financial failures during the GFC, such as Storm Financial, and due to mounting evidence that authorised representatives and AFSL licence holders were putting their interests before their clients.
In some cases, the banks were happy to lend money to individuals investing in share-based investments recommended by advisers receiving huge commissions. This led to a situation where banks owned the companies that created, managed and sold investments, which were recommended by advisers employed by companies also owned by the bank. It is therefore no wonder that some banks swept under the carpet abuses by their advisers and left their customers suffering losses.
Under FOFA, advisers must act in the best interest of their clients by providing appropriate advice that prioritises the client's interests ahead of their own. Providing advice slanted towards investment products that benefit the adviser but leave the client poorer will be in breach of this best-interest duty.
The second and more important protection is the ban on conflicted remuneration or, in other words, a ban on commissions. The problem is the ban on commissions and putting your client's best interests first only applies to advice provided after July 1, 2013.
Anyone who received advice before this date, and has their investment returns reduced due to trailing commissions, will become the poorer class of investor, as the reforms don't relate to them.
The good news is investors can easily join the wealthier class by reviewing their investments, checking to see how much is being paid to their adviser, and either request the trailing commissions be removed or switch to an adviser who will rebate the commission in full.
Frequently Asked Questions about this Article…
The FOFA (Future of Financial Advice) reforms introduced a best-interest duty and a ban on conflicted remuneration for financial advice provided from July 1, 2013. They were brought in after government inquiries into financial failures during the GFC to better protect investors.
FOFA effectively split investors into two groups: those who received financial advice from July 1, 2013 onward (who benefit from the best-interest duty and the ban on conflicted remuneration) and those who received advice before that date and may still be affected by trailing commissions that reduce returns.
The best‑interest duty requires advisers to put clients' interests ahead of their own by providing appropriate advice. For investors, this means advice given after July 1, 2013 should prioritise your financial goals rather than recommending products that benefit the adviser.
Conflicted remuneration—often paid as trailing commissions—are payments to advisers that can influence their recommendations. These fees can reduce investment returns and create conflicts of interest. The FOFA reforms ban such commissions for advice given from July 1, 2013.
Only people or entities that hold an Australian Financial Services Licence (AFSL), or authorised representatives appointed by an AFSL holder, can legally provide financial advice. Authorised representatives must meet training requirements, including diploma-level courses authorised by ASIC and ongoing education.
You can review your investments, check how much is being paid to your adviser in commissions, and either ask for trailing commissions to be removed or switch to an adviser who will rebate the commission in full.
FOFA was prompted by failures during the global financial crisis—such as Storm Financial—and mounting evidence that some authorised representatives, AFSL holders and banks put their interests ahead of clients, using commissions and related-product structures that harmed investors.
Check your investment statements and adviser disclosures to see whether ongoing or trailing commissions are being paid. If you find commissions are reducing your returns, you can request they be removed or move to an adviser who rebates those commissions.
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