FOFA - a 'grimm' tale for financial planners

Being a financial planner feels like living a fairy tale, but perhaps one written by the Brothers Grimm. Bryan Ashenden tells a story about Jack and Jill, two advisers who are faced with FOFA, FUM, fees and fines.

“Fees, fines, FOFA, FUM, 
I feel the influence of a politician.
Be they alive, or be they dead, adapt
and survive, or perish instead.”

(Adapted with sincere apologies to the original author.)

Once upon a time ... there lived a financial planner.

Let’s call him Jack.

Jack was struggling to make ends meet but wanted to do the best he could to help out a struggling family. So Jack went to the stock market to trade their wares.

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But on his way to the market, he found that a detour had been put in place.

Instead of going about his business the way he always had, Jack had a choice to make. He could follow the new path and whilst some new hurdles would no doubt be encountered, he could be assured of reaching the market and his customers.

Or, Jack could opt to head down the old (but familiar) path.

There was an old labourer standing at the intersection.

The labourer told Jack that if he wanted to, he could continue to use the old path for the next 12 months.

But if he was keen, he could opt for the new path right now before the old path was closed forever in 12 months time.

Jack was faced with a difficult decision. Should he head down the new path, or wait for others to go first, let them deal with the new hurdles and determine the route for others to follow in the future.

The old labourer could see that Jack was struggling with the decision. So he offered to give Jack some free guidance (certainly not advice since he didn’t know anything about Jack’s personal circumstances) and gave him some papers to read.

These papers contained initial thoughts on how Jack might be able to navigate the new path, albeit they weren’t actually finalised.

Not sure which way to turn, Jack took these papers back home and showed them to his business partner Jill and they spent that evening reviewing and understanding their options.

The next morning, Jack and Jill went up the hill to fetch their emails.

Upon opening one email from their licensee, Jack was astounded to see that the professional bean-counter association (of which he and Jill were both members) had decided to throw some extra obstacles onto their path to the market.

Obstacles which only they, and other members of the bean-counter association (who also provided financial planning services) would need to negotiate.

Astounded and flabbergasted, Jack fell down and Jill came tumbling soon-after.

They ended up at the bottom of the hill and found a man whose spirits appeared to be broken. This man introduced himself as Hugh Umpty.

Humpty (as he was better known to his friends) had experienced a fair amount of bad luck in recent times.

His wealth had significantly deteriorated as a result of a crash on Wall Street, he was injured with little insurance, and after talking to many accountants, no-one could find a way to help him get his life back together again.

So, what did Jack and Jill decide to do?

Life, as a financial planner, may feel a bit like living in a fairy tale at the moment, although perhaps one written by the Brothers Grimm rather than Mother Goose.

The degree and extent of regulatory reform currently occurring is phenomenal, with not just the fundamentals of the Future of Financial Advice (FOFA) reforms to negotiate, but for many the proposed introduction of the new limited Australian financial services licence (primarily focussed on accountants) and the recently released draft APES 230 Standard applying to members of the three major accounting professional bodies who are involved in the delivery of financial planning services.

If, like Jack and Jill, you are in this position, what do you make of all this change? How do you deal with it? Can you adapt, how will you cope, and can you survive into the future?

Dealing with FOFA

The FOFA legislation was passed by Parliament and received Royal Assent in the last week of June. It is now law and you need to be aware of it.

Whatever your political persuasion and whether you believe an alternative government will unwind some of the measures in the future, the fact remains that an election is not due to be called until the second half of 2013 (after the current transition timeframe expires).

Further, I think it a safe bet to assume that any changes to FOFA would not be an immediate priority of an alternative Government as there are other items likely to occupy their initial agenda (such as carbon and mining taxes).

To ignore the arrival of FOFA would spell the end of your business. To defer thinking or taking action around the FOFA changes until just before 1 July 2013 would almost certainly be fatal as well.

Whilst most licensees are unlikely to ‘opt-in’ for full FOFA compliance earlier than 1 July 2013, this doesn’t mean that you can’t start adapting and making changes over the remainder of this transitional period. Indeed, some licensees have already made the call to opt-in earlier.

Best interests

Under the best interests duty, planners will have a duty to act in the best interests of their retail clients when providing personal advice.

And frankly, so they should.

The lawyers can get into the detail of what is the best way to codify this requirement in the legislation, regulations and guidance papers from ASIC (and this is in fact a very important aspect that needs to be resolved), but it’s important not to miss the essence of this duty – to act in the best interests of your clients.

For the vast majority of planners, this is what you already do!

Do you really just sit there and come up with a recommendation that is just “appropriate” for your clients, or do you actually think about what is best for them?

And do you distinguish between your retail and wholesale clients in this regard, or do you treat them all equally?

The new ‘best interest duty’ will introduce a higher legislative standard by which advice will be assessed – at the time it was given – not based on whether it was ultimately successful or not.

If this higher standard has the effect of restoring the trust and faith of the community back into financial planners and the industry as a whole, this must be embraced.

It is only by taking these sorts of steps that the adverse impact caused by a minority of planners and arguably the majority of the mainstream media can be overcome.

Opt-in requirements

The opt-in requirements only apply to new clients after the date that the FOFA legislation becomes effective for you.

If your FOFA compliance date is not until July 2013, then it is only your new clients after that date to whom this measure will strictly apply.

And a new client is one that you have not given personal advice to in the past, and is one who is in an ongoing fee arrangement with you.

Based on a 1 July 2013 compliance date, the first date that you will have to ensure you have met the opt-in obligations is 30 July 2015, which only arises if you enter into an on-going fee arrangement with a new client on 1 July 2013. It is therefore almost three years away.

But the stance to take now is to decide if this is something you should be doing with all your clients – both existing and new, and whether you should wait to do it every two years.

If you have a good relationship with your clients now, then you can start introducing the concept now.

Incorporate into the annual review process a part where you ensure the client is satisfied with the services you are providing.

If they aren’t, then it’s probably better to find out now and start adjusting your services where appropriate.

In the future, all you would then need to do is ask them to confirm in writing that they wish to continue with the arrangement.

And the simplest way to do this could well be as part of an annual meeting.

Conflicted remuneration

Under this element of FOFA, the acceptance, receipt or payment of conflicted remuneration will be banned.

Arguably, this remains the most contentious, or perhaps least finalised area of the FOFA reforms.

This is particularly the case in respect of how grandfathering of existing arrangements in place before 1 July 2012 (or perhaps 1 July 2013 or your relevant application date) will work.

The Government has previously indicated that regulations to deal with these arrangements (particularly for payments from platform providers) will be released in the near future.

Again, taking it back to its fundamental premise, it is reasonable to assume and expect that you shouldn’t receive any form of benefit if it is likely to influence the advice you are providing.

Whilst arguably the best interests duty should ultimately achieve the same outcome, the complexity of the financial services industry and the manner in which value is transferred and attributed has required a separate measure.

What is more interesting around conflicted remuneration is that way in which the Accounting Professional & Ethical Standards Board (APESB) has approached the remuneration for financial planning services in its recently released second draft of APES 230.

Under this standard, affected members will be banned from receiving commissions completely. If received, commissions must be rebated immediately back to clients.

If finalised in its current form, APES 230 will apply to new clients of members from 1 July 2013 and to existing clients from 1 July 2015.

Whilst the FOFA reforms generally allow for the receipt of commissions on most insurance products, members covered by the standard will be prohibited from receiving them.

Other than in relation to geared investment amounts, FOFA permits percentage-based fees and recovery of fees from the invested monies. APES 230 prohibits this.

With up to 10,000 financial planners believed to also be members of one the major professional accounting bodies, the stance of the APESB and the impact of APES 230 cannot be underestimated.

If you are a member of an affected body and cannot abide by the requirements of APES 230, will you cease being a financial planner or cease being a member of the professional accounting body?

If you give up your individual membership, are you still caught, as you are employed by an accounting firm that is a member?

Will you need to restructure the ownership of your financial planning business so as to negate any potential impact of APES 230?

From a client’s perspective, this means that a client will need to pay you for financial planning services on a strict fee- for-service basis. How many clients can actually afford to do this?

For many clients, the ability to pay fees from the money invested makes it affordable to obtain much needed advice.

Both of the above scenarios have the potential to increase the cost of advice to the end client, again pushing it out of the reach of those who could actually benefit from receiving it.

And planners that are members of the accounting bodies may be at a disadvantage to those planners who only have to comply with FOFA itself.

Annual fee disclosure statement

Irrespective of your FOFA compliance date, the annual fee disclosure statement (AFDS) is something that you need to comply with now.

This is because the legislative requirement under FOFA is to send an AFDS (to existing and new clients) within 30 days of the client’s anniversary date.

Putting aside the question of who is in an on-going fee arrangement with you (and therefore who is technically required to be provided with an AFDS), the FOFA requirement is to send the statement within 30 days of the first anniversary date arising after commencement of these new measures.

If your FOFA compliance date is 1 July 2013, then by 30 July 2013 you may be required to have issued an AFDS for clients with a 1 July anniversary date. And if you can’t identify the anniversary date for your existing clients, then you need to assume a 1 July anniversary.

What is vitally important to understand is that while the duty is to send the notice, the period it covers has potentially already commenced.

For clients with a 1 July 2103 anniversary date (actual or deemed), details of services provided and fees arising since 1 July 2012 will need to be captured and disclosed.

Are you in a position to be capturing these details now, and have you been doing so since 1 July 2012?

Go early or wait?

For many licensees, the decision around choosing a FOFA compliance date has already been made – and will likely be 1 July 2013 in the majority of cases.

This makes sense for many reasons, from waiting for final regulations from Government and further clarity from ASIC, as well as ensuring business partners (platforms, product providers etc) are also in a position to comply, so that the licensee isn’t lawfully being paid ‘conflicted remuneration’ even though it is illegal for the licensee to receive it.

Others may see a commercial advantage for opting-in early and can justify this approach.

Whilst there is no single right time to choose for a FOFA compliance date at a licensee level, at a planner level there is only one time to start preparing, and that is now.

Continue to act in your client’s best interests. Value the advice you provide and ensure your clients do the same.

An ongoing advice relationship is the key to a sustainable and profitable business.

After all, life is not a fairy tale. And money doesn’t grow on trees (or beanstalks).

Bryan Ashenden is senior manager for technical consulting at BT Financial Group.