It is abundantly clear that ripping apart the financial planning sector’s current licensing structure will not lead to advice becoming lower cost and therefore more accessible for all Australians. The major changes that have driven up the cost of advice are related to over-complicating the advice delivery process and disclosure requirements, and the loss of funding mechanisms and certainty of future income for the delivery of ongoing planning services.
The licensing regime has not to date had a significant impact on the increase in advice costs. Therefore, I believe the government must rectify the fundamental causes that have driven advice costs beyond reach of the common citizen.
Cutting red tape
Let’s start with cutting red tape, which I believe will have the biggest impact in making advice more accessible and affordable for the 80 per cent of Australians who do not access advice. Research clearly shows that the main reason for avoiding advice is its expected prohibitive cost.
The government must conduct a detailed study of each step of the advice process, and where possible implement a plan to reduce the red tape involved in delivering advice.
This would include simplifying disclosure requirements, particularly statements of advice (SOA) and file keeping obligations, two of the biggest factors driving up the cost of advice.
The high level of scrutiny and low level of certainty around ongoing fee arrangements (OFA) also needs to be addressed. The government should repeal the opt-in requirement or make it less frequent than every year, provided OFAs are clear, fair and consented to at the outset.
The advice sector strongly supports disclosure, consent, and the concept that clients should be treated fairly and receive value for money. However, the anticipation of an annual opt-in provision has increased the entry-level cost for clients to receive advice, because where there was a higher level of certainty for advisers around the receipt of ongoing adviser service fees (ASF), services could be lower touch or less frequent for lower fee-paying clients.
In this case advisers would be prepared to provide the initial advice for a fraction of what they would need to charge to recover all the cost of their time as they consider this an upfront opportunity cost to bring on a client that will be profitable to service over the long term. Annual Opt-In creates extra red tape and forces advisers to only consider OFAs with clients who are able to pay them enough so that they can deliver enough ongoing services to a client in a year to get them to actively opt-in. Furthermore, implementing the opt-in process adds another layer of cost which is passed onto clients.
Ongoing adviser service fees are disclosed in the financial services guide, SOA and application form that clients sign prior to them being implemented. Once in place, ongoing ASFs are then generally disclosed in cash statements made available to clients quarterly and annually. In addition, their adviser sends them a fee disclosure statement (FDS) annually, equating to six disclosures a year.
A solution for a problem which doesn’t exist
Though it did identify levels of non-compliance with FDS’ and opt-in, ASIC Report 636 did not identify any systemic incidences of fee-for-no-service (FFNS) within the 30 AFSLs it examined.
FFNS appears largely to be an institutional problem, and it is being dealt with. Furthermore, FDS and opt-in were created to deal with possible incidences of FFNS. If FFNS is not prevalent then a high compliance cost is imposed for a problem which may not exist in the non-institutional space.
As a result of the royal commission, which publicly highlighted the possibility of being charged FFNS, and the level of disclosure that already exists, there is no way to hide ASFs from clients. If anything, the sheer number of times the same thing is disclosed probably causes confusion.
Clients have – and have always had – the ability to opt-out of ASFs. If we repeal opt-in or make it less frequent and implement a law requiring advisers to clearly tell their clients how to opt-out of the ASFs if they choose, there would be no problem if clients were not happy, because they could simply leave. Obviously, this would be monitored and if systemic problems arose the rules would be reviewed.
Funding mechanisms for advice
The Life Insurance Framework has been an utter disaster for consumers as predicted by most, including Lifespan in our 2015 “No Winners” paper. Premiums have increased, the issue of underinsurance has worsened, and the advice community has suffered significant losses in its ranks, with major reductions of income and value.
The government needs to protect and preserve existing funding mechanisms for financial planning such as life insurance commissions, which ensure the viability of the sector. It should also make initial advice tax deductible to reduce costs and incentivise consumers to take their first step towards financial planning.
It would be a low-cost initiative for the government but would greatly boost the industry. The advice industry generates around $6 billion in revenue annually, of which probably only 30 per cent is generated from initial advice and not currently subject to being tax deductible.
Assuming even the top marginal rate of deductibility, this would only cost the government less than $900 million a year. However, what it would save the government through lower Centrelink benefits as more Australians save for their future will far outweigh that figure, particularly as the government then receives more in tax receipts thanks to each Australian’s strengthened investment income.
Higher advisory incomes will result in more tax being paid by the sector and consumers will be less inclined to apply their savings to frivolous expenditures, so there should be a better allocation of resources. The government should do all it can to help their constituents be as well organised financially as possible.
Close the safe harbour provision
While we strongly support the best interests duty (BID), the safe harbour provision of the BID should also face the chopping block.
It was designed to be an optional provision for advisers to help them demonstrate that they have met the BID, but instead it is often used incorrectly by auditors to show that the BID has not been met if advisers cannot demonstrate safe harbour. Many, including Lifespan, predicted this would occur during the formulation of FOFA and therefore most advisers will be trained to ensure they can demonstrate compliance with safe harbour even for very simple pieces of advice which should be done for low fees. Safe harbour causes confusion and the extra file keeping that goes with it contributes to increased advice costs.
Licensing and disciplinary body structure
As I argued in part one of this series, I feel it would be irresponsible to simultaneously reduce important extra layers of oversight and compensation whilst implementing these deregulatory processes, and therefore the AFSL structure should be left as it is.
If there is to be a disciplinary body, it should not be any of the existing industry associations, nor should it be dominated by academics. It should be led by practitioners who are specialists in a wide range of areas such as investment, superannuation, insurance and others.
Axe the Tax Practitioners Board
The Tax Practitioners Board should be removed as a regulator for financial advisers. Its responsibilities should be handed over to either ASIC or the disciplinary body, as it is unnecessary to have a separate regulator for one small area of financial advice. Instead, some tax experts should be embedded within the main regulator.
These are the core changes that need to be made to increase the accessibility of financial advice to more Australians.
Instead of messing around with the strong existing AFSL system, the government – and indeed the sector – should be focused on cutting red tape while not compromising oversight. Then we will have a well-regulated and policed advice system which is more affordable and accessible.
To do so will allow advisers to focus on what they love – helping Australians find their financial freedom. And importantly, it will enable advisers to extend their skills beyond Australia’s wealthiest 5 per cent.
Eugene Ardino, chief executive, Lifespan Financial Planning
While I can appreciate Mr Ardino’s efforts at exploring our options for improving affordability, I disagree with practically every single element of this piece.
From stating that the the objective of financial reform is simply to make advice more accessible (it’s not – it’s to do so while maintaining the level of protection for clients from the original sin of our industry – vertical integration) to reading, with some incredulity, his statement that it is ‘abundantly clear dismantling the expensive duplication of the current AFSL model will not reduce costs’ (how can the removal of $800m of annual licensee fees do anything but reduce costs?), there is very little in here that is of any real use in the debate.
Simply stating that ‘the licensing regime has not to date had a significant impact on the increase in advice costs’ does not make it so. In fact, this statement is so bold as to immediately invite questions – questions unanswered as there is no evidence or facts provided in support of this assertion.
Questions like:
How can $800m in annual licensee fees – as declared by Mr Ardino’s contemporary at Centrepoint – be seen as anything except a tax upon the financial advice industry?
How can having thousands of Compliance departments each interpreting the rules slightly differently, and requiring slightly different versions of the same paperwork, not be contributing to the costs?
How can the layers of ticket-clipping rife throughout this industry be doing anything but adding costs to the bottom line?
How – exactly – has the licensing model avoided contributing to the increase in advice costs?
There were other points of disagreement:
“In this case advisers would be prepared to provide the initial advice for a fraction of what they would need to charge to recover all the cost of their time as they consider this an upfront opportunity cost to bring on a client that will be profitable to service over the long term.”
This belief in commercial alchemy has contributed to the trouble we keep finding ourselves in. No, I wouldn’t want to run my advice practice as a ‘loss leader’ in order to fluff up a fat ongoing book. This kind of thinking was regressive ten years ago – and it certainly hasn’t aged well.
“FFNS appears largely to be an institutional problem.” Is this confirmation bias, or simply extrapolating from a limited set of results? The reason it looks like that is that ASIC have STARTED with the institutions. If Mr Ardino truly believes this to the case, I’m sure ASIC look forward to their invitation for a lookback audit across his advisers files.
To Mr Ardino’s points around insurance commissions – I appreciate this is an opinion piece, but some element of factual support might help make Mr Ardino’s arguments more persuasive. Has LIF been an utter disaster? By what measure? How? Has LIF contributed to premium increases? Has underinsurance worsened? Is LIF the sole reason for the drop in adviser numbers?
Not to say none of this is the case – but if we want to be taken seriously, we need to provide more evidence or a sounder basis than ‘well, because’.
Frankly, Mr Ardino’s position as a licensee renders his opinion about the ‘irresponsibility’ of dismantling that structure irrelevant. When the average financial adviser is paying north of $50,000 a year to a middleman, then that middleman needs to work a lot harder to justify their position than ‘nah, this shouldn’t change’.
‘If’ there is to be a disciplinary body? Rather than speculate on what the body ‘should’ be made up of, licensees should instead focus on how the single disciplinary body will supplant their very existence and render them utterly obsolete.
I had to read this piece several times simply to come to terms with the fact it had been published at all. To effectively argue everything else BUT licensing needs to be fixed is like telling the firefighters to water the garden while the house is burning down.
very true, well summarised. It is abundantly clear that practitioners should have available choice of services from an AFSL depending on their needs and objectives and align to their customers through their business model. I don’t need to use all of Centrepoint’s services, only perhaps some. Therefore the $45k AR fee should be somewhere around $20k ? AFSLs are profitising from compliance and confusion, hello ASIC ??
No one appears to have asked AFCA what they would judge an acceptable minimum standard & content capable of the Adviser & their AFSL having a defensible position. ASIC, industry bodies, Advisers, AFSLs, et al can all have an opinion and maybe one day agree, but if the end outcome is that AFCA is able to pick holes in a SoA/File….?
Admirable and sensible words but the licensing model is obsolete for a different reason: A licensee and the adviser are both wholly responsible and liable for the advice given but the licensee has all the power in the relationship as they are the owner of the client. With ASIC’s current approach any licensee is in genuine danger of folding when audited. How many licensees have received a clean bill of health from ASIC after an audit? 50? 100? 20?
For the advisers, they are dealing with spooked compliance departments that are often engaging in predatory compliance and can remove clients from advisers at will. This includes licensees who have until recently been trustworthy but it is now dangerous for advisers to have a licensee. That understanding will take a few years and a few tens of thousand removed clients to sink in but then lots of advisers will take the consequences. Individual licensing is the only way to go.
We need to find a solution for the young folk taking out their first mortgage.
Insurance advice is required that is affordable.
Talking to the mortgage aggregators, business is booming, however there is little or no new insurance being placed.
Well put Mr Ardino, but who will listen? Should these issues not have been considered by the powers to be before? I understand the intent but the process has stuffed the industry. I have left my 18 year career in FP due to this, always acted according the now FASEA code but was disadvantaged financially as I could not just sell, sell and just have a bit of “mongrel in me”. If I had issues with running a profitable business then, I clearly was not enough of a sales person. Now its come a full circle, people like me are the ones the FASEA wants, but guess what I am out already LOL. Earning more money without the stresses of running a business, FP practice or the liability that comes with it. Good luck FP’s..
Eugene, perhaps you should simply tell the muppets (government) what to do. This is the most articulate article I have read and I agree completely with you (except the bit about the government must conduct a detailed study… etc.,)
How is it no surprise the head of a licensee doesn’t want to get rid of licensees talk about a conflict of interest
I have been an adviser for 21 years. Here is 50% of the problem or solution, however you want to see it.
1. Opt-in should become opt out.
2. No ROA should be necessary for intra-fund advice.
3. FDS’s should be scrapped altogether – the client is already advised what they pay me numerous times a year via other mechanisms.
4. Scrap everything and anything to do with the TPB.
5. Limited advice should be permitted and easy – Therefore Standard 6 needs to be rewritten.
6. ASIC needs to be removed as the watch dog. It is their approach which has led to SOA’s being ridiculously complex and lengthy.
7. Standard 3 is unworkable. It needs to be rewritten.
Until the above and much more is done, advice will be relatively expensive. I am staying in the industry however I predict 10,000 advisers remaining by December 2021.
100% correct. The ongoing Fee arrangment disclosure/Opt In should only exist in the statement of advice. When the portfolio is reviewed, the OFA/Opt in – informed consent should only be renewed at that point. When you sign up for a Telstra $55 a month plan, that remains in place until the contract is reviewed. If every teenager in Australia can afford that, then the same should exist for low income earners who desire a service support package for their super & insurance arrangements. $55 a month, with no more opt ins, until the plan is reviewed. If Telstra was forced to do Opt Ins, there would be a riot.
Maybe you should be selling internet plans not looking after the advice needs of Australians?!
thats a cheap shot – this person was merely making a comparison…and most agree the opt in regime has not provided any greater consumer protection but has created red tape headaches across the industry…so tell us why it wouldnt be a good idea to scrap it?