Due to new laws, the Australian Financial Advisory Industry is in a severe state of turmoil. Known as FOFA (Future of Financial Advice), this legislation was passed by the Australian parliament in March 2012. What is FOFA all about? There are two key outcomes to FOFA.
- Providing non-conflicted advice.
- Increasing affordable advice.
Conflicted advice occurs when an additional benefit arises to the adviser or their controlling entity from recommending one product over another. Unfortunately, 85% of Australia’s advisers could be seen as being conflicted. Most of the large product manufacturers (the Australian equivalents of Old Mutual, Investec or Momentum) either own or can influence their “product distributors” i.e. advisers, directly or indirectly.
In Australia, most advisers are licensed through what are known as “dealer groups”. What most dealer groups normally provide, at the minimum, are regulator registration, commission/fee collection & payments, PI insurance and compliance.
Some advisers may be running their own practices e.g. called Bruce and Sheila Financial Advice. It could be based in a side street in a dusty rural Australian town. The advice practice may have their own branding etc. There may be very little reference to the dealer group except in compliance documents. Others would take on the branding of their licensee, much like an Old Mutual agent, even though they would be able to offer products from other providers.
Research by the Australian regulator ASIC (similar to the FSB in South Africa) shows that the majority of product recommendations are for “in-house” i.e. licensee products, even where alternatives exist on the approved product list1.
Where a dealer group has many advisers, negotiations with product providers for volume payments would form the “cream” in that dealer group’s profits. For every $ million in risk premiums or $ 100m in funds under management (FUM), maybe 5% to 10% additional commission or 20 basis points would flow back to the dealer group.
Under the FOFA regime, going forward, volume payments will be limited. This has meant that many dealer groups, especially those not “owned” by a product provider, will now be under profit pressure, as these kick back payments will reduce.
One of the most contentious issues is the paying of ongoing product commissions or fees to advisers where no pro-active service is being provided.
In Australia, ongoing “trail commission” on personal risk policies can be as high as 33% of the ongoing premium if level commission is selected, or between 10% and 18% if full upfront commission was taken. FUM ongoing advice percentages can be up to 1%.
One of the FOFA changes now requires advisers to send out “opt-in” letters to ongoing customers. The letter needs to show charges in trail advice fees. The ongoing service provided by the adviser of the preceding period needs to be included. The customer is given the option of opting in for future service. If the customer does not respond, there is an automatic cancellation of the ongoing commission.
In a number of cases, the customer’s contact details are so out of date that even if the adviser wanted to get in touch, they would not be able to. This presents a problem for the opt-in requirement, as the adviser would automatically lose those trail commissions as the opt-in letter cannot be sent. Having an up to date CRM with current client details is becoming even more important. What happened, however, is that, as a result of lobbying, it was decided that existing trail commissions for products on the books prior to July 2013 will be preserved, or “grandfathered“. In addition, risk products have been excluded.
In conclusion, the outcomes of FOFA in Australia warrant consideration in strategic business plans for South African advice businesses. In the end, the desired outcomes of FOFA are in the client’s interest. As pointed out in my previous article, the focus in one’s practice should be client centric.
In future articles in this series, more practical Australian FFS examples will be provided.
1 See www.asic.gov.au/ Report 279