Asking clients to opt-in every year in an advice relationship is one of the recommendations of the Future of Financial Advice (FOFA) reforms.
The advice professions of law, medicine, dentistry, accounting, engineering, and computing have long embraced the concept of opt-in, but the financial planning industry seems to be stumbling with it.
A consistent thread of articles and correspondence in the media over the summer holiday period has painted the large institutions in our industry as reluctant implementers.
An example was the Roundtable feature in the Australian Financial Review (“Financial Planners Prepare for Regime Change”, 12/01/2011), conducted with four heads of financial planning operations and the CEO of FPA. One participant claimed that, as financial planners were selling ‘delayed gratification’, the implementation of proposed FOFA reforms required more ‘prodding’ from the product side of the industry.
These talented financial product distribution heads rightly believe that it’s the client’s choice as to what type of fee approach they prefer.
At first glance, this is logical, but it misses the point of the FOFA reform. The point is not so much how clients should pay (i.e. via commission, via flat fee, via hourly rate), but more fundamentally what they pay for and how much they need to pay.
FOFA reforms will encourage and drive the marketplace to develop offerings that provide consumers with choice as to what they want to pay for, how much they want to pay, and, of course, how they want to pay.
Whilst the views from the financial product industry are important and deserve consideration, it is also important to consider the many different aspects of the debate regarding how our advice profession is evolving.
Ignoring the debate isn’t a clever option – it’s like trying to ignore the internet. As with climate change, smoking in public, and salaries of CEOs, the drivers for the reform agenda are fast becoming sentiment, but misconceptions will continue to abound.
For instance, I buy my electricity, mobile phone plans and airline tickets without much consideration for any factors other than price. My electricity, mobile phone and travel plans work pretty reliably. I certainly can’t get excited about the offerings they provide, but I’m satisfied with them.
Lots of people have been buying the services for ongoing management of their superannuation savings like I buy my electricity. But these unfortunate consumers haven’t been given a choice each year.
The proposed opt-in legislation recommended in the FOFA reforms provide the mechanism for the choice consumers have expected when buying their mobile phone plans, utilities, and accounting services each year, and it should be embraced by every financial adviser.
Why should advisers embrace opt-in within their businesses?
There are at least two good reasons.
1. Fundamentally, if consumers don’t want ongoing advice service, they shouldn’t be forced to pay for it.
If the current situation of having ongoing superannuation advice mandated in the fees is working, why is there so much uncertainty in the minds of most people with superannuation balances as to what to do with their super?
The annual mandated charge for ongoing advice slugged to the 12 million Australians who have a superannuation account isn’t working. They aren’t getting the advice they are paying for.
If Australians are getting value from their ongoing payment for advice, then:
- Why are more and more of them turning to DIY schemes, with 20% annualised growth in holdings from 2004 to July 2009?
- Why is the industry funds sector so successfully highlighting the imbalances between the earnings from not-for-profit funds compared to retail funds?
- Why are most Australians still so apathetic towards their superannuation?
These are clear clues that the ongoing charge for superannuation advice isn’t knocking anyone’s lights out in the values stakes.
2. The industry already has a precedent for this choice.
It’s called choice of fund and it was introduced 1st July 2005. The industry embraced (a tad reluctantly at the time, but again consumers’ apathy showed that the introduction was a yawn, with very few people adopting non-default fund options) the legislation to provide consumers with a choice of funds in which to place their superannuation balances.
So what’s the problem?
I don’t get it! When the legislation is about choice of funds, the industry accepts it, but when it’s about something more fundamental, such as choice of service, the industry seems dead against it. What’s going on?
What’s going on is a fundamental shift of the tectonic plates underpinning the foundations upon which today’s financial services industry has been built.
The incumbents don’t like it. These multi-billion dollar profit institutions fear that the separation of service from product will have consequences reaching beyond their product-based expertise.
If the separation of service from product becomes more explicit, as recommended in FOFA reforms, these large institutions are going to have to get bigger in order to achieve the margins they used to enjoy in a less transparent marketplace. There’ll be more good takeover fights like the NAB v AMP for AXA in the future. The institutions won’t accept change quietly, nor should we expect them to.
- Tobacco companies didn’t like the introduction of explicit warnings on cigarette packages.
- Pubs and clubs didn’t like the banning of smoking or introduction of random breath testing.
- Employers didn’t like the mandated superannuation imposed by the Hawke/Keating government.
All these changes were just as good and just as fundamental as the opt-in consideration is for the separation of financial service from financial product sales.
The big institutions have predictably come out saying that the move to opt-in will add to costs, complexity and confusion. They’re probably right in the short term. But in the long-term, granting consumers options, and helping the advice profession to stand up on its own two independent (and non-product) feet and learn how to state its value each and every year, is a much needed catalyst for the embryonic profession.
I predict those advisory firms that embrace the concept of providing annual choice to their clients each and every year (via an opt-in and clear unambiguous description of costs and value) will cease being the tail-end distributors of a mega-bank’s product departments, and instead enjoy the fruits of joining the emerging advice profession.
Good advisory firms will perform brilliantly in an opt-in environment where there is clear and absolute transparency regarding the service, the costs, and the value being delivered every year. Product pushing firms disguised as financial planning firms will struggle. Great result.
These are great times to be building great advisory firms.