Providing ongoing service

It is the adviser and their licensee’s obligation to appropriately evidence that such services have in fact been provided and that their fees are fair and reasonable.

The changing revenue model

The financial advice industry has and continues to experience unprecedented change, ranging from legislative to technological. These changes have had a major impact on the financial planning industry and operating model, including; financial product manufacturers and their distribution channels, cost and revenue models, marketing approaches, the financial advice process, the customer value proposition, the increasing level and complexity of compliance, and inevitably the bottom line and book value of financial planning businesses. Financial planning businesses have thus had to re-evaluate their strategic position, business viability and focus their resources on either harvesting or transformational growth, each with its own challenges.

The evolution of the financial planning from an industry to a profession, where client best interest is paramount, has been thrusted forward via legislative change having a direct and disruptive impact on the way that financial advisers are remunerated and the service that they provide to their clients.

Many traditional revenue streams that have been viewed as possibly conflicted have ceased impacting business valuations and livelihoods. To survive and grow, financial advice businesses must adapt their service models accordingly, both quickly and compliantly.

As financial advisory businesses transition to non-conflicted revenue models, it is important for advice providers to be cognisant of their obligations relating to the fees they can apply, the corresponding service offering and evidencing that their client(s) received the service(s) that they had paid for and were entitled to.

Revenue sources viewed as conflicted and prohibited

Remuneration that is considered prohibited includes commissions relating to (excluding personal insurance):

1. Provision of general advice;
2. Initial/upfront and trail commissions;
3. Fee for service as an asset-based fee on geared products or investment amounts; or
4. Volume based rebates/bonuses/incentives:
   • paid by product providers to advisers;
   • paid by the licensee to advisers; or
   • based on shelf-space fees.

Permitted revenue sources

1. Fee for service:
   1. as a flat fee;
   2. as an asset-based fee on ungeared products or investments; or
   3. a combination of the above.

This shift in revenue model has had an initial significant and negative impact on the value of financial planning businesses in terms of return/profit/cash flow and inducing a rethink of the client value chain and service offering.

A non-exhaustive list of possible service offerings may include one or more of the following services:

1. Annual or more frequent advice review;
2. Advice review implementation fees;
3. Modular or goals linked approach, i.e. a fee for each area of scoped advice i.e. a fee for superannuation, investment, retirement, risk etc and an implementation fee for each, with each area being reviewed on an ongoing periodic basis as a core service offering with other additional ancillary services;
4. Provision of topic related general advice;
5. Management fees;
6. Financial coaching;
7. Newsletters and seminars;
8. Regular reports on investment portfolio(s); and
9. Other administration and/or support services such as phone or email access to an adviser or an associate.

Ongoing service offerings and fee arrangements

The Corporations Act 2001 describes an ongoing fee arrangement as a scenario where a representative of a financial services licensee gives personal advice to a person as a retail client; and that person enters into an arrangement with the representative or the financial services licensee; and under the terms of the arrangement, a fee (however described or structured) is to be paid during a period of more than 12 months.

Advisers that enter into ongoing service agreements with retail clients must give a fee disclosure statement each year and a renewal notice every two years unless an ASIC approved code of practice applies to the adviser.

The client can opt-out at any time and if the client does not opt-in the adviser cannot continue to charge any ongoing fees.

It is essential to reliably evidence the delivery of all service packages and demonstrate that the services were provided e.g. the provision of advice may be evidenced via the retention of an SOA/ROA, relevant file notes and client email correspondence. In relation to a 'mere offer of services' (particularly services relating to an annual review), ASIC info sheet 232 states that such an offer is unlikely to satisfy ASIC’s expectation that the licensee/adviser has taken a client-focused approach. Therefore, possibly raising the question of whether the licensee has acted efficiently, honestly and fairly in such circumstances.

When a client does not receive a service that they were entitled to (e.g. an annual review), ASIC expects that the licensee will pay the client compensation. ASIC has provided guidance that an AFS licensee or adviser must consider whether compensation should be paid and implement an independent quality assurance process to confirm that clients have received the services for which they have paid.

The financial planners and advisers code of ethics and revenue

The beginning of 2019 has seen the Financial Adviser Standards and Ethics Authority (FASEA) introduce a code of ethics (Financial Planners and Advisers Code of Ethics 2019) that has 12 standards, of which standard number seven has implications for revenue and possibly the advice process.

Standard seven states that the client must give free, prior and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged.

Except where expressly permitted by the Corporations Act 2001, you may not receive any benefits, in connection with acting for a client, that derive from a third party other than your principal.

An adviser must satisfy themselves that any fees and charges that the client must pay to them or their principal, and any benefits that they or their principal receive in connection with acting for the client, are fair and reasonable and represent value for money for the client.

It is relatively clear that good record keeping is crucial to evidencing and demonstrating free and informed client consent to the benefits that the financial adviser will receive.

Less clear is what constitutes ‘fair and reasonable’ benefits and what impact this will have on future revenue and advice processes and offerings.

Reasonable cost can generally be regarded as a price that is consistent with what a ‘reasonable person’ would pay in the same or similar circumstances for the same or similar item.

When developing a pricing/service model the advice provider should have regard of the following:

1. the complexity of the advice;
2. the time and skill involved in constructing and delivering the advice;
3. the costs that might be applicable to the advice;
4. the level of skill, experience, specialisation, seniority and responsibility involved; and
5. the urgency of the requested advice or service.

In each circumstance, the licensee/adviser should consider whether their service agreements justify significant annual fees and if it is acting efficiently, honestly and fairly.

Nikolas Kloufetos, managing director, Advice Compliance Support

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].