To break into wealthier class, take advice to save some cash
From Monday there will be two new classes in Australia. They will have nothing to do with birthright, wealth or poverty, but will have everything to do with when a person received financial and investment advice.
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.