Hot Topics Panel - What is the likely impact of the FoFA repeal?

Ian Knox, Mike Crivelli and Kate McCallum join our Hot Topics Panel this week and give their views on the FoFA regulations overturned in the Senate last week - the subsequent Grandfathering resolution announced yesterday - and the likely impact on consumer confidence, practice operation, and product distribution.

Mike Crivelli

Chair, Perennial Value

How is the overturning of the FoFA regulations likely to impact:
a. consumer confidence in financial advisers?
Overall it is probably too early to tell. The final deal is done when the vote happens.
The rapid growth in DIY fund numbers tells us quite a lot about consumer confidence in financial advisors.
This tug of war only serves to undermine confidence even more. Consumers look at senior federal politicians and think that as most of them are grandfathered under the old incredibly generous pension arrangements, they simply have no appreciation of the financial issues surrounding retirement incomes and treat the financial advisory industry as a political football.
After the latest deal announced yesterday there may well be some settling down and a slow lift in confidence.

b. the operation of financial advice practices?
ASIC has declared that the deadline for compliance will be June 30th next year. Given many advisors expected the wind back to pass into law, they are not ready and there is a lot of scrambling around in front of them.
So the genie is well and truly out of the bottle for the planners and short term, for many, it will be a struggle to meet the deadline of mid next year.
Assuming the wrangling ends here, then the emphasis in financial advice will need to be more and more on quality advice including better education and better communication skills.

c. the distribution of managed funds products?
If there is no more negotiation in the Senate then clearly life becomes much more difficult for the major financial institutions. Using financial planners as a distribution channel will become increasingly less attractive to the banks etc. and consumers will end up with a better choice of product.
The way the community could usefully approach protection of consumers is through financial education. Starting in primary school. However it's a fact of life that just about every minister involved in this issue from the PM down is a qualified lawyer. Not much financial acumen there.
Wouldn't it be great if the Federal Government saw children's education in this area as just as much a priority as ethics and religion. Then one day we might really be "open for business".

Ian Knox

Managing Director, Paragem

How is the overturning of the FoFA regulations likely to impact:
a. consumer confidence in financial advisers?
Consumers are only able to grasp the headlines which imply the Government is intent on watering down best interest and feather bedding the banks with general advice. The overturning of FoFA looked like the Senate was trying to protect consumers and by only allowing grandfathering through this is now being re-enforced. Consumer confidence will be at a low point as a result of the CBA and Macquarie scandals which concern most people because of the expectation of brand reliability and trust. It will take time to heal.

b. the operation of financial advice practices?
The greatest impact was in grandfathering, elimination of future volume payments, backdating of disclosure paperwork (FDS's) - which all imply the need for practice changes. Practices are looking to either replace this income loss with vertical integration to product (perverse for conflicts) or focussing on advice and strategy as the backbone with outsourcing investment to low cost transparent models such as SMA's and ETF's. With grandfathering protected, a more seamless change can occur.

c. the distribution of managed funds products?
No real change with the repeal, still the challenge of being true to label and delivering reliable results. The arrival of SMA's will cause some structural change and more HNW advisers will use these, meaning the role of managed funds will decrease and be replaced by SMA's and platforms that can offer them. Managed funds are more challenged by ETF's, dynamic asset allocation for alpha and the expectation of SMSF trustees. Good managers chasing alpha and delivering it will be un-fussed.

Kate McCallum

Director & adviser, Multiforte Financial Services

How is the overturning of the FoFA regulations likely to impact:
a. consumer confidence in financial advisers?
In the short term, I don't think this will impact consumer confidence much at all. I do see, however, that it will increase consumer confusion around the advice offer - and that could easily cause greater inertia around seeking advice.
Taking a longer term view, I believe that keeping regulation around fee disclosure and opting in for ongoing service will promote enhanced transparency - and that, I believe, is essential for confidence in our profession.
On a different note, I do think the amendments being proposed today (Wednesday) regarding training and education provisions (being excluded from conflict of interest terms) is sensible - I believe education is essential to improving the professionalism of our industry and lifting consumer confidence.

b. the operation of financial advice practices?
The single biggest issue is cost. This is driven by the additional disclosure requirements, which for every advisory practice - including those like ours which operate on a 100 percent fee for service basis - will increase administration and systems overheads. We also are seeing an increase in professional indemnity insurance premiums, and with many in the industry raising concerns around increased claims under the tighter best interests requirements, we anticipate these could increase more.
Chances are we will see, across the industry, an increase in the cost of advice.

To join the conversation, or to suggest a topic for future panel sessions, contact us at - [email protected]