Fund managers facing their own FOFA challenges

Dealer groups are not the only financial services companies being forced to adapt to the new FOFA environment, with Instreet Investment’s George Lucas explaining that fund managers are facing similar challenges in positioning for change.

Think of most of the media coverage around the Future of Financial Advice (FOFA) reforms, and the overwhelming impression is it has everything to do with financial advisers, dealer groups and platform operators.

By and large, how fund managers, especially boutique fund managers, will have to operate in a FOFA world has been ignored. 

This is an oversight, and as business models at financial adviser firms change so will the business models of fund managers.

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Fund managers will need to adapt if they are to remain relevant to the financial advisers who recommend their products.

That said, it’s an understandable oversight. After all, the Ripoll inquiry that laid the groundwork for the FOFA legislation was largely about the failings of the financial planning industry, with the focus on such well documented financial implosions as Storm.  

But fund managers who outsource the responsible entity (product issuing) of their funds would be wrong to believe their world will not change when the FOFA regime takes effect on 1 July 2013. It will. 

There can be little doubt that FOFA will change the balance of power between fund managers and financial advisers and affect the way they interact.

Fund managers will need to update their business models and provide more relevant investor services and information to gain the attention of financial advisers and communicate the benefits of their products. 

Fund managers who do not issue their own product may provide general financial product advice to retail clients if they are not the product issuer; it may be given via a website, educational material or financial advisers.  

However, not all financial advisers can be assumed to be wholesale clients. Financial advisers who are authorised representatives of an AFSL holder and not acting as agents may be considered retail clients. 

Thus promoting a product may now be more difficult, as the fee paid by the outsourced product issuer to the fund manager is likely to be conflicted remuneration for those fund managers who provide general advice to promote their products to financial advisers.    

So what options will be available to those fund managers who are not product issuers to get their products before the consumer and adviser without breaching the FOFA regulations?

In a nutshell, it means restructuring offer documents to become FOFA-compliant, as well as becoming more dependent on the adviser who will need to persuade the client that they should pay the fund manager their conflicted remuneration.  

Advertising using direct means such as websites and investor seminars to retail clients and advisers will need to be tailored to be either ‘consider execution’ only or, if general product advice, explain clearly the conflicted remuneration issues.

Advisers will be best placed to explain these issues and ensure retail clients pay any conflicted remuneration to fund managers who do not issue their own product. 

For advisers, this is obviously a positive outcome from FOFA in the brave new world of fee income; some fund managers will find it more difficult to bypass them and pitch directly to the consumer, unless the end investor agrees to pay them their conflicted remuneration, or they restructure their business model to get rid of that type of fee altogether. In effect, advisers will become the gatekeepers.  

Fund managers affected by this will still be able to distribute a product disclosure statement (PDS), although it will need to be restructured so that the conflicted remuneration issues associated with promoting a fund is clearly disclosed and the final investor agrees to pay any conflicted remuneration paid to them by the product issuer.   

If information is provided on a website, care will need to be taken to ensure general financial product advice is not given if there is a potential for conflicted remuneration to be charged. 

Instead, either the relevant conflicted remuneration will no longer be able to be passed on from the product issuer to the fund manager, or the website needs to be “execution only”, resulting in far less information being provided, making it that much harder for some fund managers to differentiate their products in a competitive market.

In a very real sense, it’s somewhat analogous to what the Federal Government has done with cigarette branding. 

As with many aspects of FOFA, the wisdom of such a move can be questioned? Fund managers are best placed to explain their products, but now may opt not to simplify the conflicted remuneration issues.

Planners are in a better position to understand how a financial product fits into a client’s long-term strategy, especially in an era where planners are being urged to adopt this approach in their practices. 

The other significant changes will revolve around remuneration inside the fund management firm. As general product advice is being given to retail clients to attract inflows into the fund, employees will need to be rewarded on KPIs that are not linked to the increase in revenue due to the increase in inflows. 

There are other ways in which FOFA has changed the rules of the game between fund managers, consumers and financial advisers. While fund managers will still be able to sponsor educational seminars for financial advisers and dealer groups, there will be restrictions.

Just how onerous they will be is yet to be decided. 

Boutique fund managers may be at a disadvantage to the vertical integrated groups, and will need to restructure fees inside their offer documents as well as have to engage financial advisers in a more relevant fashion. 

But even if managers (especially boutique) change the way they market their products or change how they are remunerated, it remains a moot point as to what degree financial advisers will be receptive to these “low touch” approaches, or whether they will opt for the less painless route of using products provided by a vertically integrated parent. 

If advisers still decide to use a boutique manager, certainly we can expect them to be far more diligent in their questioning of them.

The product’s performance will remain front and centre of any review (as it should), but fees, transparency, and giving the adviser access to information that can be related to their client will also be very much part of the mix. 

The financial advisory model is changing as it moves to a fee-for-service model. More than ever advisers will need to engage their clients and justify value. It will not be just about performance, but also communication and service, with each adviser finding a business model that suits their style.  

They will expect the fund manager to assist with information and service in line with the advisers’ new business model to assist them achieve these outcomes in their new environment. Advisers will be far more demanding of fund managers – and any manager who thinks otherwise will struggle in the world of FOFA and fee pressure. 

George Lucas is managing director of the boutique investment house Instreet Investment.