The Future of Financial Advice regime is slowly settling down. Well, perhaps. With the recent election of a Coalition Government, all bets could be off the table, as George Lucas writes.
When in opposition, the Coalition made a strong commitment to revisit the Future of Financial Advice (FOFA) legislation, although it remains to be seen what sort of priority it is for a new government that has come to office with so many priorities.
But, for the sake of the argument, let’s assume the FOFA regime as it now exists will provide the industry framework for the foreseeable future.
After all, any changes will have to be negotiated with the Senate, and it would seem fair to assume any attempt to water down “consumer rights” would not find many champions among the minority parties or independents.
Which is a pity, because it seems there are two big, legitimate questions to ask about FOFA, and whether it is best serving the consumer.
Will the industry consolidation that has been occurring in recent years, in part because of planner anticipation of what FOFA would entail, continue apace, and if it does, is this consolidation in the best interests of the consumer?
In my opinion, the jury is still out on the first question, despite the fact that the trend towards consolidation is not encouraging.
Since 2010, more than 2000 independent financial advisers – about one third of the industry – have left their boutique practices, with half of those leaving the industry all together, taking with them valuable knowledge, experience and skills.
Those who have remained in the industry – about half – have entered the ranks of the larger vertically integrated groups (major banks and large institutions), further consolidating the power of these groups as they aggressively chase market share.
Even with the entry of new advisers into the industry – a welcome trend – the number of total advisers (independent and institutional) has shrunk by about 2 per cent over the past year.
Remember, too, that these larger groups got a leg-up from the former Labor Government when it decided the service and operational offering a vertically integrated group could offer its advisers did not represent “conflicted remuneration”, a decision that may give advisers aligned with a vertically integrated group a competitive advantage compared with the independents.
In addition, Labor also decided to “grandfather” for another year the salaries and bonuses linked to fund inflows, and, to match this, they also “grandfathered” some commission payments to independent advisers.
How a Coalition Government tackles these issues will give a strong indication as to their thinking about FOFA because, taken at face value, both Labor’s decisions seem to be at odds with the spirit of the legislation.
Certainly if the Coalition decides to grandfather salaries and not commissions going forward, it will be a competitive advantage for the vertically integrated salaried adviser.
The banks and large institutions do not lack for political clout, so it will be a test of the Coalition’s commitment to a level playing field as to how they approach this issue.
On this evidence it would seem to suggest the tide is running very much in favour of the top end of town. But long-term, I am not so sure.
It might be wishful thinking on my part, but I am confident the independent adviser will not only survive but possibly thrive in the world of FOFA. It’s a judgment call based on three arguments.
First, more people are going to need genuinely independent advice.
For example, a recent report by Macquarie Bank and the SMSF Professionals’ Association of Australia has the number of SMSF trustees doubling in the next three years, and many will need professional advice.
Will they be happy with a vanilla service from a big bank or will they want the intimacy, the insights, and the personal knowledge of their affairs built up over years that an independent, doing their job well, can provide?
I suspect for many trustees it will be the latter, especially as they become more comfortable with a fee-based remuneration system.
Second, I wonder how many of those advisers, especially those new to the industry and who are now seeking the security of the banks and large institutions, will be happy to remain there, especially as they build a client base.
Will they will find more professional satisfaction to build their own businesses outside the confines of a large bureaucracy with its rigid rules? I suspect many will – which brings me to my third point.
The banks and large institutions are chasing the personal investor dollar – especially the SMSF investor dollar – with a vengeance. A market of $500 billion and growing exponentially is simply too lucrative to ignore.
But I wonder how many of these trustees have opted for an SMSF to get away from the banks’ and large institutions’ vanilla approaches.
Certainly it seems to me the notion of self-directed super will struggle to be accommodated by organisations that, by definition, have to provide broad-based vanilla solutions.
In saying this I am reminded of what happened in the broking industry 30 years ago when the banks, eyeing how profitable the brokers were in the run-up to the 1987 share market crash, began snapping up larger firms.
But having made the plunge they soon discovered the broking cultures they had inherited – especially as it related to risk – was anathema to how they did business.
Three decades later, it might just be history is about to repeat itself, only this time it will be SMSFs.
George Lucas is the managing director of Instreet Investment.
