With Parliament having risen for the final time before the Federal election and the new legislative settings now largely in place, Lisa Claes says that when the regulatory ingredients are put together with consumer sentiment and digital technology, significant change must be the inevitable result.
A perfect storm is brewing in financial services – and the forces being unleashed will change the way the industry works.
Regulatory change, combined with increasingly savvy customers armed with digital research and comparison tools, are conspiring to create a new world order.
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Make no mistake, some in financial services will harness the power of the change to grow and develop, others will flounder.
The Future of Financial Advice (FOFA) legislation is just the start.
While 1 July is an important date in the financial services calendar, customers have been driving the change for some time now. They want transparency, fairness and value for products and services, and they want it now.
Customers can research and compare with immediacy, courtesy of Apple and Google et al, and they can telegraph their preferences courtesy of social media.
The reality is that FOFA enshrines in law the principles of transparency and fairness that customers are already demanding. It also demands that that advice must be in the client’s best interest – that it is fit for their client’s particular purposes.
However, FOFA goes further. The regulators are mandating the requirement of ‘quality advice’ which goes beyond the investigation of a client’s relevant circumstances and can include the impacts of the broader financial environment (such as tax and social security).
The ‘best interests’ test may also call into question the approved product list to ensure it meets bespoke advice obligations.
Pushing products will go the way of the dinosaurs. There is no longer a tolerance for an adviser’s behaviour to be confined to product/broker type activity.
Furthermore, high-profile regulatory scrutiny and investigations have heightened consumer sensitivity around the need for advice uncontaminated by any conflict of interest.
With vertically integrated models (product manufacturers controlling advice channels through full equity ownership) dominating the Australian financial services industry, this increases the rigour with which any product recommendation is made.
Advice must go beyond product identification and selection to financial strategy. Products will be an outcome of the advice, not the purpose of the advice, and in some circumstances product selection may not even be made.
The process of advising clients will ultimately become a way of enabling the client to be more self-directed. The role becomes that of the “trusted adviser”, rather than the adviser being assigned a full range of decisions.
Ultimately clients will be able to bypass “gate keepers” if they want to, so the emphasis will be on delivering valuable advice.
The adviser mindset must become one of empowering the client with knowledge of how they may best optimise their financial wellbeing through understanding the choices available (strategy, structure and product) and their impacts, rather than simply providing access to products.
As an example, managed funds with fee-laden structures unrelated to the return on the investment are increasingly out of fashion.
They are being replaced by vehicles offering direct access to assets with low fee structures which appeal to the consumer appetite for transparency, accessibility and value.
Direct models are increasingly being sought by investors. Consumers are becoming comfortable with accessing financial services products digitally.
The substantial self-managed superannuation fund (SMSF) sector pays homage to this direct style of investing, and even retail customers are demanding that manufactures provide direct investment vehicles for their superannuation.
Customers are also demanding greater control over their finances.
Our own research in developing Living Super clearly showed that control was a critical factor that consumers would seek in any new superannuation product. Customers understand the power of technology and expect digital access and transparency.
So what does all this mean? Well, the financial services adviser is rapidly morphing from a professional who began with a product in mind and who fitted the client’s needs around it, to a professional who understands the client’s financial needs and works out strategies to optimise a client’s present and future financial wellbeing.
Compounding the urgency of the mind-shift is the reality that the “advice” space is being crowded by accountants and mortgage brokers.
The adviser of today and of the future will not only need to develop a rigorous understanding of their clients’ overall financial needs but also have the flexibility to deliver more complex and comprehensive full advice.
So, my top tips to “win”...
- Forget about one-size-fits-all.
- Understand your client inside-out now, and as much as you can into their future.
- Align with your client on a strategy before you consider recommending any products.
- Think outside your “approved product list”, if that is in your client’s best interests.
- Arm your clients to be self-directed in order to give them as much control as possible (if you don’t, they will find someone else who will).
Lisa Claes is executive director, distribution at ING Direct.