There is no doubt that the Future of Financial Advice reforms (FOFA) will significantly transform the advice landscape, and there is debate around which sectors of the advice industry will be the winners, and how long the losers can survive. At this stage, it is too early to call where the strategic ripples will land, but there are some emerging signs which look interesting:
The new regulatory settings seem to provide superannuation funds with some strategic advantages over other advice providers.
Many of the structural adjustments required by FOFA do not have the same bite for superannuation funds. After both FOFA and StrongerSuper reforms, fund trustees can still provide advice about the fund and options within the fund ("intra-fund advice") without directly charging a fee. External financial advisers, on the other hand, will need to address all the FOFA issues, including conflicted remuneration and fee transparency, if they wish to provide advice to fund members about their interest in a fund.
Superannuation fund trustees also enjoy ready access to their members and are consistently ranked as among the most trusted financial professionals by their members. In-house superannuation fund advice teams are also more culturally aligned to a fee-for-service environment than many external adviser networks. All of this means that superannuation funds are in an excellent position should they wish to talk to their members about a wider range of advice issues than they have in the past.
Not all trustees will have the capacity to capitalise on this opportunity with existing internal resources and some may choose not to. This could create an opening for external adviser groups looking to partner with under-resourced fund trustees.
Scaled advice will require careful scoping around discrete subject matters.
With advice fees becoming more transparent, clients can be expected to be more prescriptive about the scope of the advice they are seeking. Despite initial industry concerns, Australian Securities and Investments Commission's (ASIC's) guidance on the FOFA best interests duty, makes it clear that advice about a narrow subject matter will often be appropriate. However, determining the subject matter with the client will be important and, in particular, the one crucial question is: "Is there anything else you want advice about?"
ASIC has emphasised the need for advisers to use their professional judgement in discussing the subject matter of advice with the client. Advisers must be satisfied the subject matter is consistent with the client's relevant circumstances and is in their best interests. Getting the subject matter right is vital and, without it, the adviser's best attempts to follow the safe harbour steps will amount to nothing.
The increased importance of the scoping discussion warrants greater consideration of Statements of Advice (SOA). The SOA should record not just the subject matter of advice sought, but also the adviser's consideration of other relevant issues, and the subject matter finally agreed upon with the client.
Cross-subsidies within vertically integrated organisations will be limited.
While FOFA's conflicted remuneration ban is widely seen as positive for vertically integrated operators, ASIC has clearly signalled its intention to tackle remuneration structures which reward the recommendation of in-house products.
Performance bonuses can continue to be paid to individual advisers under FOFA but ASIC intends to ensure they are carefully structured to avoid incentivising conflicted advice.
ASIC guidance says product issuers may also fall foul of the conflicted remuneration ban simply by giving personal advice about their own products and collecting volume based management fees for those products. This is an expansive reading of the ban and would significantly erode the perceived vertical integration advantages. The practical impact on the industry will depend on the extent of ASIC's enforcement activity and the response by vertically integrated providers.