The Financial Services Council’s (FSC’s) green paper proposals to reduce the cost of financial advice will produce marginal improvements, at best, according to the chief executive of major licensee Countplus and former Financial Planning Association (FPA) chairman, Matthew Rowe.
After examining the FSC’s proposals, Rowe said he believed it was important to recognise that the FSC green paper was referring to fees increasing to clients at the same time as failing to look at the total cost to clients and the total cost to serve those clients.
“With grandfathered commissions now falling away as at 31 December, 2020, we are seeing in some cases the total cost to clients falling – the engaged professional fee component might have increased but this has been offset in some cases by the ending of commissions and rebates,” Rowe said.
“Frankly, clients will not pay a fee if they don’t see value – so it is not the amount of the fee that is an issue for financial advisers – it is whether they are financially sustainable and profitable and this comes to the total cost to serve relative to what they can charge.”
“We know that a number of business models reliant on commission and product rebate structures are under financial pressure – market forces will determine what clients will pay for the service they want,” Rowe said.
He said that with the total cost to serve, the removal of the safe harbour provision cited by the FSC would not have a material impact on economics.
“From an adviser perspective removing these explicit requirements will reduce the detailed evidentiary requirements relating to documenting compliance with the safe harbour provisions. However, financial advisers would still need to ensure there is a reasonable basis for the advice (via fact finding/know your client) and ensure that the advice given is appropriate, meets the client’s needs and objectives and places the client in a better position,” he said.
“The need to document, in great detail in some cases, the processes that lead to the recommendation; the alternatives considered and discounted; how potential conflicts have been addressed and resolved; and the other ancillary matters required to be considered would be reduced and my estimate is one hour per client total cost to serve,” Rowe said.
He said that given that it was taking between 12 and 15 hours from initial discovery to a Statement of Advice (SOA) being issued, a one-hour saving was marginal.
Nonetheless, the SOA would remain a key document upon which to base an assessment of the advice, rather than by reference to detailed file notes and other documentation that is currently obtained and retained purely for the purposes of evidencing compliance with the safe harbour provisions.
Rowe said the real time cost savings to advisers would come via innovation – from their overall review of their advice process and systems.
“When there were five key players that dominated 80% of the adviser market there was little innovation in advice as the focus was on product distribution. The issue with product manufacturers is they think the answer to every problem is to sell more product,” he said. “The FSC represents product manufacturers.”
Rowe said that licensees were service providers, not product distributors.
“The safe harbour provision is generally inward focused, in terms of adviser regulatory compliance, rather than being client-centric requirements that impact the quality of the advice provided. In fact, it is common for audits/advice reviews to identify many breaches or concerns re compliance with the safe harbour provisions, but the overall assessment is that the advice is appropriate; meets the client’s stated needs and objectives; and does place the client in a better position.”
