Managed accounts could breach Standard 3

14 July 2020

Financial advisers using managed accounts could be in conflict with the Financial Adviser Standards and Ethics Authority (FASEA) code’s Standard 3 on conflicts, according to The Fold.

An analysis by the law firm said the majority of managed accounts were white-labelled by, or associated with, financial advice licensees which made them in-house products. When advisers recommended them to clients they would generally receive a direct or indirect benefit and this created a conflict of interest.

The analysis noted that FASEA said Standard 3 only prohibited advisers acting in the fact of actual conflicts and did not apply to potential or perceived conflicts. Managing a potential conflict would ensure that it did not become an actual conflict.

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It said advisers needed to manage any potential conflicts by ensuring the advice provided was in the client’s best interests.

The Fold said advisers thinking about recommending a managed account should consider:

  • How the managed account is likely to satisfy the client’s needs, objectives and preferences; and
  • Whether the client is likely to be in a better position if they follow the recommendation.

“Many advisers have some form of ownership interest in the business that operates the managed accounts they recommend,” the analysis said.

“According to FASEA, sharing in profits generated by the provision of ancillary products and services (like managed accounts) doesn’t breach Standard 3 provided that the ancillary products and services are:

  • Merely incidental to the adviser’s dominant purpose in providing advice; and
  • In the best interests of clients.

“An adviser will breach Standard 3 if the dominant purpose for providing advice is to derive profits from ancillary products and services.”

The Fold said it expected that advisers who recommended related-party managed accounts would attract more regulatory scrutiny in future but that Standard 3 “isn’t a death knell for managed accounts”.

Advisers, it said, could still recommend managed accounts by following a robust advice process that included:

  • Identifying the client’s needs and objectives. Ask questions to draw out the client’s preferences and priorities. Find out which product features and benefits (if any) are important to them;
  • Researching investment solutions that are capable of satisfying the client’s needs, objectives and preferences. Learn about the benefits, risks and costs of each option;
  • Investigating the client’s existing investment solution and conduct a detailed comparison of that solution compared to the managed account;
  • Benchmark the fees and costs of the managed account you’re considering against the broader market. This is to ensure that the fees and costs are reasonable and represent value for money for the client;
  • Tailoring advice to the client’s circumstances. Link each recommendation back to the client’s needs, objectives and preferences;
  • Explaining how the managed account satisfies the client’s needs and objectives and why it is likely to leave the client in a better position; and
  • Taking steps to ensure the client understands the benefits, costs and risks of your recommendation.



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Oh, you mean like an indirect benefit for inhouse staff who receive a salary & BONUSES for providing Intrafund (personal) advice, where a fund members doesn't receive any advice, hasn't provided any informed consent for paying those advice fees, and has no way of "Opting Out" of those advice fees?

Steve - this highlights a serious aberration. So intra-fund advice can pretty much flaunt the new Standards?

Intra fund advice can completely ignore both the FASEA Code and the Corps Act Best Interests Duty. Those things only apply to licensed advisers. Intra fund advice is primarily given by unlicensed call centre staff and workplace representatives. It is a massive loophole in the regulations which union funds are exploiting to the max.

You clearly have no idea about how it works, all advice is scaled irrespective of who provides it. How many advisers provide advice to a client about every aspect of their situation? Intra-fund just deals with how advice for certain topics can be paid for, but it has to be provided by licensed advisers. Not sure where you were going in terms of call centre workers and workplace reps, but you are wrong. Further, I have yet to see how advisers upset about intra-fund advice have shown how this is robbing them of business. Which advice groups are focused and setup to help fund members with investment choice and basic super questions? It's not one or the other, both forms of advice (limited and holistic) which have a role.

Hi there, Mr Bonus collection Intrafund Adviser! We know exactly how this scam works, as it is clearly outlined in most FSGs today. The 1000 intrafund advisers are in addition to any call centre staff. There have been a number of real life examples provided on this site, of various intrafund advisers, who are giving PERSONAL advice, who go to the prospective client, offer to provide that advice "for free", while in reality they are collecting ongoing salary & bonuses from millions of fund members. Ie this is a lie. And these intra-fund advice fees are charged to members not receiving advice, who haven't given informed consent to have their funds charged like this and do not have the ability to switch off those ongoing intrafund advice fees. This is THEFT. Your game is up buster.

There's two different issues here Steve & Really.

Intra fund advice can be given as personal advice by licensed advisers employed by super funds. Those advisers would be subject to FASEA Code & BID. As Steve intimates, there is a high likelihood those advisers are breaching these, if they are recommending their employer's product without due consideration of better alternative options.

Intra fund advice can also be given as "general" advice by unlicensed employees of super funds. These employees are not then subject to the FASEA Code or BID. This is the big loophole which effectively allows sales staff to give very bad advice, cheaply, with no consumer protection. Direct insurance companies also exploit this loophole.

With all the increases in adviser regulation many super funds are transitioning their intra fund advice away from the licensed adviser channel, to the unlicensed sales staff channel.

When you go back & look at the actual 2013 legislation that refers to "Intrafund" advice in the Explanatory Memorandum, you will find in the actual legislation there is only "personal" advice and "general" advice. There is no such thing in the actual legislation as "intrafund" advice. Effectively it is a quirk in the law that allows product manufacturers to charge an ongoing fee, without requiring informed consent from those members, & with no option to "opt out" of those advice fees. While these fees are used in part to cover administrative general advice, the reality is that a good part of these fees are being used to pay the salaries & bonuses of Industry Fund linked advisers who are actually providing PERSONAL advice. You only have to read the series of UniSuper FSGs to see this link. No such resrictions exist on advisers who are providing personal advice to wholesale sophisticated clients either. This abberration is a total scam against most honest ethical retail advisers, who are totally banned from receiving bonuses, and banned from receiving ongoing fee based income without ongoing opt ins etc. It is the most unfair arrangement I have ever witnessed in 30 years of advising. Such a remuneration disparity cannot continue long term, as it is an unjust industrial relations issue pitted against personal retail advisers.

Have you actually read the legislation? It's not a "quirk" in the law, they intentionally put in the legislation that there is some types of advice that can be charged collectively across the fund.

Just reading the Explanatory Memorandum that you reference it literally says "it is appropriate that superannuation funds continue to be able to provide a member with simple, non-ongoing personal advice relating to the member’s interest in the fund — commonly referred to as intrafund advice".

Intrafund advice can be personal advice, it just cant be complex, ongoing or about anything outside of their interest in the fund. If you want to actually read the legislation it is section 99F in the SIS Act that explains the types of advice that can/cannot be charged collectively to the fund.

SECTION 99F COST OF FINANCIAL PRODUCT ADVICE
99F(1) The trustee or the trustees of a regulated superannuation fund must NOT directly or indirectly pass the cost of providing financial product advice in relation to a member of the fund (the subject member) on to any other member of the fund, to the extent that: (b) the advice is PERSONAL advice;

Ie the Super Fund Trustee can only legally charge for GENERAL advice, NOT personal advice. End of story.

Not end of story.

You are not reading it in its entirety. Right after the end of what you have quoted is the word "and". There are numerous conditions that all have to be met and it which says it can't be personal advice AND blah blah.

If you are not going to read the legislation properly then read the guidance from ASIC https://asic.gov.au/regulatory-resources/superannuation-funds/superannua...

Here is a quote from that guidance "A superannuation trustee may collectively charge for personal advice where the advice is not ongoing and does not fall within one of the prohibitions".

Yes, and as MM reported previously, Danielle Press has admitted that "intrafund" per se is "undefined". Press said that at the end of the day the removal of the cross-subsidy was a recommendation of the Commissioner, Kenneth Hayne,

It is a "terminology" that exists in an Explanatory Memorandum, but not enshrined in the legislation. The only advice that can exist is "personal" or "general", in law. SIS Act Sn 99 does not use the word "Intrafund".
https://www.moneymanagement.com.au/news/financial-planning/asic-denies-k...

SIS Act Section 99: contd...

and

(c) the advice is provided in any of the following circumstances:

(i) the subject member has NOT yet acquired a beneficial interest in the fund when the advice is given, and the advice relates to whether the subject member should acquire such an interest;

(ii) the advice relates to a financial product that is NOT a beneficial interest in the fund, a related pension fund for the member and the fund, a related insurance product for the member and the fund or a cash management facility within the fund;

(iii) the advice relates to whether the subject member should consolidate that member's beneficial interests in 2 or more superannuation entities into a beneficial interest in a single superannuation entity;

(iv) at the time the advice is provided, the subject member reasonably expects that a person mentioned in subparagraph (a)(i) or (ii) will periodically review the advice, provide further personal advice or monitor whether recommendations in the original or any later advice are implemented and the results of that implementation;

Yes the term "Intrafund" is not defined in legislation but it is a term used to describe the type of advice that is permitted to be cross subsidized under section 99F. The problem is when people don't understand what it means and use the term intrafund incorrectly it distorts the argument.

If you want to argue for the removal of the cross subsidy then fine but at least understand that intrafund advice can be personal advice.

My question would be, what do you hope to gain from them removing intrafund advice? I think it would just result in a lot of people that need very basic advice not being able to get it. The compliance costs on advisers providing comprehensive advice is so much that it is not worth it for them to give advice to these members. The members using intrafund advice are not going to pay $3k-$4k for advice.

It sounds to me that your real goal is to go back to times where you could be paid a trail commission and that's just not going to happen. You would be better off arguing to reduce the compliance burden on advisers and remove the opt in or fee disclosure requirements etc.

Yes, it sounds like you are either a Super Trustee paying bonuses to your intrafund advisers, or you are a bonus collecting intrafund adviser (which is illegal for other advisers providing personal advice to receive). The premise is that all retail clients are paying $3,000 pa, which is not true in many cases. It is quite feasible to have clients providing informed consent to pay $330 pa for support services, which is highly cost efficient if "Opt In" was reversed to "Opt Out".

So what you are essentially saying is that it is OK for millions of Industry Fund members to pay ongoing trailing fees for advice they may never receive, they never provide informed consent for these fees to be deducted out of their accounts, and have no way to "Opt Out" of. Given the fast moving pace of change, of 15,000 advisers waking up to being screwed over by insto, I would suggest "Never say never". Not unlike the recent $20,000 Covid19 early access payments that Industry Fund Trustees didn't think was going to happen either.

I'm neither of those but that is besides the point.

I can see a need for members to receive basic advice delivered at low cost. The way the government has addressed that is through the carve out in s99F and i am fine with the way that is worded. I am also for reducing the compliance burden on advisers because i think it has gotten ridiculous. That being said, they need to weed out the advisers that are doing the wrong thing and that is why there needs to be some level of compliance. The balance just isn't right.

Also, its not just industry funds providing intrafund advice, majority of retail funds provide it too so stop turning this into an industry fund vs retail.

Hi Steve,
UniSuper charges advice fees for all personal advice and prices are set so that 99F is not breached

Yes, UniSuper has a clever arrangement of overlapping FSGs that are found on different web links. Based on recent SoA transactions outlined by the head of UniSuper Advice, the bulk of the remuneration and BONUSES received by UniSuper advisers is paid via the Intrafund fees fleeced off their fund members, with less than ten percent of their income from Personal Super. All looks very innocent, but it is still a racket, based on the BONUSES that their competitor retail advisers are BANNED from receiving. Retail advisers are being stitched by the product manufacturers, big time.

Steve & Tom, whether or not personal advice can be paid for via the intrafund rules is a moot point. Super funds are transitioning to a model where all intrafund advice is provided as "general", and only comprehensive fee for service advice is provided as "personal".

They are doing this to avoid the higher regulatory requirements associated with personal advice. This reduces the costs associated with intrafund advice, but it also massively reduces consumer protection.

Where did you read this? I haven't heard of any funds transitioning to a model of only general advice.

If any funds are trying to frame personal advice as general advice to get around the regulatory requirements then that should be looked into closely but that is a different issue all together.

When the ridiculous level of compliance is wound back on personal retail advisers (ie change Opt in to Opt Out), you might find that they won't be overly concerned about the lack of informed consent provided to the 1000 salaried & bonuses sales teams in operation at the moment. Or maybe they just might continue to expose this fee for no service scam, regardless, with same ferocity that Commissioner Haynes did against retail advisers.

I agree there is a ridiculous level of compliance but opt-in really isn't that bad. Just move to 12 monthly service agreement model, have been doing it for years. If an adviser actually services their clients each and every year, its not hard to get them to sign a quick form to confirm that.

It's not hard if your clients are bored retirees who love popping into the office for a cup of tea and a chat.

But it's quite difficult to do if your clients are busy professionals who have lots of work, travel, and family commitments. They pay their adviser to unburden them from financial admin issues. The last thing they want is being constantly hassled to sign bureaucratic forms that add no value.

Agreed. When did you local Telstra shop pop around to get you to sign for anything? No, you pay monthly until you opt out. Retail advisers who service a large number of smaller clients are being stitched by product manufacturers who are hiding behind the Intrafund racket.

This is the unfortunate reality of financial advice regulation in Australia Tom.

Super funds trying to frame personal advice as general advice should be stopped. But they're not.
Direct insurers trying to frame personal advice as general advice should be stopped. But they're not.
Unlicensed accountants providing super fund and investment advice should be stopped. But they're not.
Real estate agents providing superannuation and investment advice should be stopped. But they're not. (Unless they recommend early withdrawal from union funds)
Mortgage brokers providing superannuation and investment advice, and selling insurance, should be stopped. But they're not.

The majority of bad financial advice given to Australian consumers comes from unlicensed sources that are completely ignored by the regulators. Regulators are more interested in persecuting licensed advisers than protecting consumers.

Dear Tom, Check out Qsuper's recent announcements. Planners being made redundant, and only general advice.

for all AMP's issues their CEO did make some sense recently when he pointed out he could spend $1M on a property with virtually no due diligence ( in fact you can buy it sight unseen), but if you want to put 20K in your super with a bit of confirmation advice it's a good idea and without considering the rest of his life, you have to go through a 20 page fact finding process, have an adviser write file notes, send an advice doc, read it, have a client sign off before you can proceed.

No, they announced they were moving away from comprehensive advice. Still offering personal advice through the intrafund advice model. It didn't say they were moving away from personal advice to general advice only.

Or those who set up Managed accounts when a perfectly good and cheaper public offer scheme is available. When you go to KFC it’s pretty obvious you’re going to get KFC chicken. These accounts are absolutely a conflict of interest. Just ask Sam Henderson..., Evans Dixon

No doubt the regulators will go after these. They sprang up as a clever way to get away from the use of the cheaper public offer multi-strategy funds and to retain FUM. Yes all sorts of plausible reasons are used why they are advantageous, but in many cases the reasons are red herrings. The regulator, if history is any guide when the private sector appears to get cute, will go after them.

Managed accounts can actually provide legitimate benefits to clients over and above multi funds. However they have also become the new way for mid tier licensees to generate conflicted inhouse product revenue.

Whenever you see a licensee saying "individual licensing will never work", they usually have an inhouse managed account product they need captive advisers to distribute.

Any adviser worth his salt knows that the money is in the product, not the advice. Start off, get some reasonable FUM then spin up your own models in a MA and off you go.
Standard 3 is currently unworkable in the current form. It should simply mean that your product needs to hold its own against the market. If you can build a product that meets items 2-4 from Simon's list then you shouldn't have a problem.

It doesn't matter how The Fold interprets Standard 3. It doesn't even matter how FASEA interprets Standard 3. The only interpretation that matters is that of the Code enforcers. At the moment that is potentially AFCA, ASIC, and the Courts.

Standard 3 says "You must not advise, refer or act in any other manner where you have a conflict of interest or duty". It is then at the discretion of the code enforcers to interpret what that means. It could easily be interpreted to preclude not just managed accounts, but also commissions, asset based fees and even fee for service. It ultimately comes down to the bias and prejudice of the enforcer. Unfortunately there are people within all those enforcement agencies with extreme bias and prejudice against financial advisers, who are quite likely to use a literal interpretation of the Code as a tool to implement their adviser persecution agenda.

The wording of Standard 3 needs to be changed to put an emphasis on managing the conflict so that client's best interest is not diminished, rather than the current wording about avoiding all conflicts.

We all know that Standard 3 was imposed on the industry without consideration of just how it would operate. If there was any market testing of its full implications then that testing was seriously flawed. My assumption is that no such testing took place.

Taken literally, Standard 3 requires advisers to meet an impossible level of separation from product. Why do I use the word "impossible"?

Standard 3 is impossible, as it ignores completely the context in which advice is delivered today. That includes the costs, complexity, and the ever-increasing barriers to entry (under the label "professionalism") for new advisers. Put it all together, and it is impossible to deliver cost-effective advice across the nations' demographic. The only viable pathway is to either:

1. Limit yourself to those who can afford the more costly advice
2. Limit your product to that which can be delivered most cheaply and effectively (APL's help here)
3. Bring a product in-house, and get some form of cross-subsidy going
4. Seriously limit your service offering to whatever you can successfully peddle to a particular market segment

There may be more, but they're likely to be variants of those 4 options.

Intrafund advice is a great idea. It reduces the scope of work, reduces the associated costs, and delivers precisely to the client's perceived objectives. It would generally fail a full FASEA test, which is why it needed a carve-out.

At some stage there will need to be a variant of intrafund advice that is available to planners - the RoA is a half-hearted attempt but it does not go far enough.

Standard 3 could work, but it would take a massive adjustment to the pillars of the industry to made it do so. You'd definitely have to ban any form of in-house product such as SMA, you'd have to kill vertical integration - which the RC did not have the courage to do, you'd have to destroy APL's and rework them as negatively-engineered "won't use" listings. You'd have to destroy the AFSL regime and licence advisers individually. IF you did all of those things, Standard 3 would shine.

Standard 3 is a beautiful piece of ethical objective-setting. It just doesn't gel with the reality of the marketplace and the public it is supposed to be assisting. It's just another example of well-intentioned but incredibly poorly thought-out legislation.

Advice and the distribution of product should be separate full stop. I have no problem with Standard 3 and consumers also would have no issue. There is nothing wrong with the sale and distribution of product, it's just that it should be very clear and have an extra layer of regulation. As mentioned by someone here, you walk into KFC and you walk out with a chicken, nothing wrong with that, it's when you the restaurant is re-badged and advertises they give food advice that needs to be corrected. Just stop selling in house products and eventually less regulation will result.

“Standard 3 is unworkable” seems to be coming from those who just don’t get it. the days of using advice to sell your in-house product where you conveniently get to snip a few basis points on the way through is dead. When everyone wakes up to the fact that “financial advice” can no longer be a ruse for selling a financial product where you have a direct or indirect interest by way of payments from that product, then we’ll be getting somewhere. Until then, fight all you like, but realise that the battle and war is lost. There is no public, regulator or any support for the “old ways”. Move on or move out.

Big_Trev, I am from the "Standard 3 is unworkable" camp and I am also opposed to inhouse product sales. Yes, Standard 3 could be used to stop inhouse product sales, but it could also be used to stop a wide range of other legitimate practices including fee for service advice. Standard 3 has the potential to be overly destructive. Like fishing with dynamite.

I totally support stopping inhouse product sales with more targeted measures. But Standard 3 in its current format must be changed.

Your comments are spot on Anon

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