The Future of Financial Advice (FOFA) reforms have been finalized in federal parliament. FOFA is designed to address potential instances of conflicted remuneration models amongst financial planning licensees. Any benefit that could give rise to a potential conflict of interest in the financial recommendations provided to retail clients is banned.
The legislation does not explicitly deal with professional negligence. For example, allegations of inappropriate or aggressive use of leverage (in the context of the 2008 global financial crisis) by Townsville company Storm Financial are at the forefront of retail clients’ minds. The company’s collapse resulted in lawsuits by the aggrieved investors and the Australian Securities and Investments Commission (ASIC), which enforces the Corporations Act on behalf of investors. Investors also allege the Commonwealth Bank subsidiaries failed to exercise the necessary duties to Storm clients in the provision of margin loans. According to journalist Mike Taylor:
Indeed, recent events within Parliamentary Committees have raised serious questions about what, precisely, the regulators knew about Storm Financial and Trio Capital, and the actions they decided to pursue thereafter.
According to academic Warren McKeown, CFP:
The advice was based around “double gearing” – by borrowing against the client’s house and then using margin lending to invest heavily in the sharemarket. The undoing of this strategy was the global financial crisis when share values fell heavily and the lenders called in loans – both against the shares and against the client’s house. Yet Storm had complied with procedural requirements of the law at the time. The model used by Storm could exist in the future for some clients, except for a modification to the remuneration method.
Union-affiliated Industry superannuation funds utilize a large advertising budget. Throughout their respective political careers, union interests have been associated with the minister in charge of FOFA, Bill Shorten (pictured) and the Prime Minister, Julia Gillard. Industry funds may offer lower fees because financial advice including portfolio construction research is not available to prospective members.
Notably, the federal Liberal National coalition introduced Super Choice in 2007, a form of market deregulation, which allowed employees access to corporate funds – not just industry funds. Accordingly, some commentators see the FOFA reforms as the incumbent ALP government ‘restoring the balance’ more towards industry funds rather than strengthening statutory protection for investors. Columnist David Potts says FOFA will:
…Come in several legislative instalments, naturally containing more regulations and red tape, the highlight of which is banning commissions to financial planners. Or, same thing, giving union-run industry super funds a leg-up.
Similarly, accountants have historically implemented self-managed superannuation funds for clients for tax purposes. Typically, accountants may generally act in a limited capacity without an Australian Financial Services (AFS) license from ASIC, due to exemptions under the Corporations Act.
Both the industry fund sector and accountants indirectly compete with financial planners for clients without the expense of an AFS license, nor regulation. Naturally, sectors which compete for client assets have a vested interest in criticizing the existing regulatory framework and oversimplifying the value in the provision of ongoing financial advice for prospective clients. In this interview, Peeyush Gupta, executive in residence at the Australian School of Business at UNSW, suggests:
Australia already has the most onerous legislation around the disclosure of interest, and has done for some years. Unlike the US, Canada, the UK and others, Australian advisers have to put in writing whatever compensation they will receive from commissions and fees, both in dollar terms and percentage terms.
Regulatory guide 146 ‘Licensing: Training of financial product advisers’ (RG146) is the minimum training required under the Corporations Act for financial planners. According to CPA Australia:
For example, a financial planner who only advises on superannuation may need to complete RG146 compliant courses in financial planning, superannuation and probably managed investments. However, a financial planner who offers a complete financial planning service to clients would need to be compliant in all specialist knowledge areas.
Despite the minimum training standards enacted under RG146 through the Corporations Act, statistics from employers (also known as principals or licensees) supplied to Money Management indicate that the overwhelming majority of currently-employed financial planners have earned post graduate qualifications. Universities offering Masters include Curtin, Deakin, Latrobe, UNSW & UWS. Seventeen universities offer undergraduate degrees in financial planning.
An undergraduate degree in a relevant discipline (presumably an economics or commerce degree would qualify) is the minimum requirement for membership to the Financial Planning Association (FPA), the peak representative body for the financial planning industry. Since 2003, the FPA has required prospective applicants into its Certified Financial Planner (CFP) programme to hold a degree, according to the Australian Financial Review. Applicants must also be experienced practitioners.
The Financial literacy and behaviourial change report was compiled by ASIC in 2011. In this report, ASIC cited a Financial Literacy Foundation study in 2007 which found that “54% of Australians aged 18 and over had used a financial adviser for information or advice”. It is estimated that only 37% of Australians over 14 years of age “had ever met an adviser” based on Roy Morgan Single Source data in 2009, according to the ASIC report.
Licensees face additional compliance costs as a result of this new federal legislation. Accordingly, the cost of financial advice may rise for prospective investors. Investment Trends senior analyst Recep Peker told Money Management, “Australians are not willing to pay as much for financial advice, which makes the low-cost advice provided by super funds more attractive”. SuperPartners is one example of super funds now providing limited advice. According to journalist Leng Yeow:
The cost is borne out of administration fees. The retail sector has been critical of the MySuper intra-fund advice concessions because it creates an unequal playing field. They also argue the basic, limited nature of the advice fails to understand and address the member’s total situation and needs.
Yeow cited a recent CoreData report which suggested this advice offered restrictive options to members. Accordingly, Industry Fund Financial Planning (through its administrator SuperPartners) rated poorly in comparison to independent and bank-aligned financial planning practices.
This burden of red tape is potentially a concern for financial planning licensees, whose employees must comply with FOFA reforms by July 1, 2013 in the context of a unstable European markets. The federal opposition have now indicated they will reverse the more onerous aspects of FOFA, citing legislative bias to union interests.
This is an updated version of an entry originally published on May 9th.