Australia’s Future of Financial Advice (FoFA) regulations came into effect around the time of the UK’s RDR changes about five years ago. Both regulatory frameworks implemented a clear obligation to ensure client best interest, to eliminate conflicted remuneration, and other initiatives to protect consumers.
But what the Royal Commission has uncovered was that the advisers’ duty of care has not always been honoured in practice.
For instance, customers had been charged ongoing fees without actually receiving advice, and there were instances of misconduct and poor-quality advice that have left some customers in heart-wrenching circumstances.
What became evident from the hearings is that there is not always real clarity around what is acceptable or expected. It is clearly not appropriate to keep charging advice fees to the deceased, for instance. However, grandfathered commission arrangements have enabled, and perhaps inadvertently even encouraged, the acceptance of commissions for not providing ongoing advice.
The UK framework includes the simple notion that customers should always be treated fairly, irrespective of the literal rules. This is a powerful notion that sets a high bar, and I expect this will soon be the standard in Australia.
The trend towards greater regulation and higher standards is definitely in play in the UK and internationally with Mifid II, GDPR and the soon to be implemented senior managers regime.
And although it creates a heavy and sometimes onerous responsibility for practitioners, it is likely that we are on our way to the same ratcheting up of requirements into the Australian regulatory framework and elsewhere.
So, what happens now?
We wait.
The Royal Commission’s final report is due in February 2019 and we won’t really know what changes it will bring about.
However, I expect to see at least five trends:
- Drastic measures by the government. This is likely to be true irrespective of who is in office. The incumbents have egg on their face for having resisted the Royal Commission and will need to flex some serious muscle. The opposition, on the other hand, will feel vindicated for having pushed for the review and will have a mandate to implement some very wide-ranging changes.
- The shift towards the independent players. Over the past year, the big end of town has been losing around 70 advisers per month. We should see this trend accelerate given the loss of trust and the brand damage the major players have suffered. Equally on the platform side – the four key non-aligned platforms, who have just 4% of overall platform FUA, are capturing about 40% of net asset inflows.
- The winding back of the vertical model. Unlike what happened in the UK where the banks walked away from wealth management, Aussie institutions have held to the vertical model (providing advice while selling your own products) until recently when two of the big banks led the way by revealing plans to divest their wealth businesses. The trend towards independence could happen very quickly if other institutions follow this lead and divest or wind down their wealth businesses.
- A huge shakeup of the adviser market. With the average adviser age in the fifties, we should expect to see significant turnover as the industry retools to deal with much higher professional standards (including tertiary qualifications). This could accelerate if Asic decides to end the grandfathered trail commissions, creating a potential “advice gap”.
- The outsourcing trend gaining momentum. Advice businesses will continue to look for ways to create better client experiences within a fee-for-service framework that is independent of product. To do this they will increasingly outsource administratively intensive and non-value-adding activities, particularly investment management and portfolio administration. Well resourced investment managers and scalable, technology-driven platforms (like Managed Accounts platforms) will help advisers to better serve their entire client base.
Change is the only certainty
Some are calling for FoFA to evolve into SoPA – Separation of Product and Advice, which, if it comes to pass, will almost certainly end the vertical model. Some on the other hand argue that major structural changes would be harmful to consumers and that all that’s needed is better training, culture and systems etc.
We know that changes are coming, we just don’t know how dramatic the changes will be.
We are all watching with keen interest to see just how far the zeitgeist shifts.
