The implementation of the Future of Financial Advice (FOFA) reforms will require financial planners to embrace different business models  in which scaled advice will become a critical part of their services.

"I think part of the challenge is going to be a paradigm shift; there are many planners with their head in the sand, believing that nothing is going to change," AMP Horizons director Tim Steele said at a Finsia seminar yesterday.

"The current model [of] predominantly fixed expenses and predictable recurring revenue, based on trail commissions, has enabled the survival of some relatively inefficient or lazy business models," Steele said.

"Financial planners have known, given their cost base and their recurring income, before they get out of bed what their revenue profile looks like. They can appreciate how much new business they need to write in order to support their required lifestyle."

"In the new world, financial planners need to be far more bottom line focused, truly understanding the cost to serve at, at least, the segment level, but more likely the individual client level."

"It doesn't mean it is about billable hours, but they will need to understand what it costs to serve each segment of their clients," he said.

Financial planners will need to develop targeted services for each client segment, Steele said.

"We are going to have to segment our client bases. I think financial planners have traditionally done that by default, just knowing who their highest revenue clients are and delivering value to them, but we are going to need to have a more structured way of doing it, a structured program where we have specific packaged offers appreciating the underlying costs to deliver that," he said.

Depending on the specific detail of the legislation, scaled advice is likely to become a critical part of an adviser's service offering, because research has shown clients prefer receiving advice bit by bit.

"We are seeing transactional, or scaled advice becoming a critical part of the overall proposition of financial planning practices," Steele said.

Steele also predicted that the legislation is likely to see mid-size financial planning practices struggle, resulting in market domination by large vertically integrated financial institutions and boutique advisory firms.

"You are either going to have to be able to charge a premium, or it is going to be a volume play," Steele said

But Steele said advisers should embrace FOFA for the opportunities it provides, especially in driving a greater professionalism in the industry.

"We are going to have to work in a world of fee-for-service and I think that is a great opportunity."

"Fee for service can in fact be the most profitable business models. It is a myth to suggest that fee for service is less profitable than a model that is reliant on trail commissions," he said.

"It makes sense that we have an industry business model where clients understand what they are getting and understand what they are paying for," he said.