Which direction should advisers take when it comes to opt-in, the biennial requirement for financial planners to seek acknowledgment from their clients in writing that they are happy to continue to receive and pay for the financial planner's advice? Despite the looming July deadline for implementation, the road ahead still remains unclear, and is shadowed by industry doubts about the increased costs and potential client backlash.
Fears around opt-in include the concern that poor market conditions might influence clients to opt out when they might need advice most, and that the increased costs associated with complying with opt-in will only add to the cost of advice, making it unaffordable to many Australians. And financial plans are typically long term, with a lot of the work being done upfront but the costs usually staggered over time - so, short of charging a very large initial fee, how will advisers recoup costs if clients opt out while the plan is still in effect? In the same instance, how will advisers help clients stay on track with their financial plans?
Will clients tick the box?
While implementing opt-in, many financial planning businesses will also be coming to terms with the other changes required in a post-Future of Financial Advice (FOFA) landscape, including changing business models to become fee-for-service, finding ways to articulate and cost their services, and communicating all of this to clients - along with educating them about why it's all changed. If this is not well managed, many clients may choose to opt out when the time comes to seek their continued patronage.
Opt-in can be acquired via a variety of recordable forms including email, facsimile, SMS, online facility or printed material, and will only be applied to clients secured from July 2012. Industry experts say it assumes clients are engaged and motivated enough to open all of their mail and respond to an opt-in request.
Russell Investments head of practice management John Nolan points out that it's unclear how many times a financial planner can follow up with a client who fails to respond before it becomes a privacy - or even a harassment - issue. Nolan says the chances of many people unintentionally opting out through lack of action are high, with potentially disastrous consequences.
"For example, what happens if the client inadvertently opts out by not replying to the opt-in request, and there is a change in legislation that affects them - but the adviser now cannot inform them?" he says.
"Or, what if the client comes back to the financial adviser seeking advice after the financial planner has notified the product provider to stop deducting fees? Does the financial planner have to treat them as a new client? It's quite confusing."
Since opt-in only applies to new clients, many businesses will be forced to take a two-tier approach, almost running two businesses within one, with different systems for new and existing clients. And then there's the three additional levels of reporting that will be required as a result of opt-in. Once the client informs the adviser that they're opting out, the adviser must inform the licensee, and the licensee will have to inform the product provider, who will need to keep track of whether or not to charge clients for products. These factors will all contribute to an increased cost to the client - conservatively estimated at anywhere from $10 to $120 per client, depending on who you ask.
"Whatever the cost, it's unnecessary and it will only be passed onto the client," FPA policy and government relations general manager Dante De Gori says.
"If the client doesn't opt in, then the law is quite clear: the client will be unprotected by the adviser, who has no ongoing obligation to advise or inform them. It puts all the risk with the client. How do you justify this? There is no benefit for the client at all."
The opt-in nightmare
For many, opt-in is nothing short of a nightmare, and industry stakeholders such as the Association of Financial Advisers (AFA) and FPA have been consistent in detailing its many flaws.
"In short, opt-in is poor policy. It doesn't do anything to protect consumers, it just adds red tape and increased costs. It goes against both the spirit and intent of FOFA," AFA chief executive Richard Klipin says.
De Gori says the frustrating thing is if you put it in context with the rest of the FOFA legislation, which bans trail commissions and includes a best interests duty for clients - not to mention the potential double up with the annual fee disclosure requirement - opt-in becomes redundant.
"The FPA fundamentally doesn't support opt-in being legislated into law - it's a measure which is designed to counteract trail commissioning - this is an old approach no longer in use," De Gori says.
"At best it should be a best practice model to aspire to - but not legislation. When you think about it, that's the government telling small business how they can collect fees. It's not the place of government to be so prescriptive - each small business should be able to implement what suits them."
It's not just the financial planning industry that's anxious about the implications of opt-in. At the Parliamentary Joint Committee on Corporations and Financial Services (PJC) hearing in late January, the Financial Ombudsman Service (FOS) raised serious concerns about its inability to deal with a potential increase in complaints that may arise as a result of the opt-in clause. Calling for greater clarity, FOS warned that increased education would also be needed to avert widespread confusion.
Boutique independents, such as Professional Investment Services and the Boutique Financial Planning Principals' Group (BFPPG), also slammed opt-in at the PJC, pointing out their concerns around responsibility for advice - for example, being unable to give clients who fail to opt in advice because they are not covered to do so by their professional indemnity cover, or the potential for legal action where a client failed to opt in but then had an event such as a collapsed investment. BFPPG president Claude Santucci suggested the onus for opt-in should be on the client to return the paperwork, with the fees continuing until the client does so.
Klipin suggests that an opt-out provision - along the lines of "if you want to terminate at any time, you are able to do so by taking the following steps" - is another option that would be more appropriate and less costly for practices.
Opt-in, software providers
and platforms
The lack of clarity has had implications for financial planning platforms and software providers, which have increasingly less and less time to adapt their platforms to accommodate the proposed FOFA changes.
Coin has a taken a wait-and-see approach, hoping for greater clarity before rolling out any major changes to the software. Coin head Kirk Pitman says it is aiming for a spring release - though those who use the system can customise it to start collecting data whenever they like.
"We're seeing interest in reporting, workflows, task documents, note reminders, standard templates and using different configurations for fact finds," Pitman says.
"We're all consistently working towards simplicity. Software can be quite complex and financial planning can be quite complex, and when you put the two together you can get something really complex. FOFA just adds another layer of complexity."
IRESS assumed FOFA would be passed, and Xplan is already FOFA compliant (available to all Xplan users via a free upgrade). The system offers four main options for complying with opt-in: automatically generated mail complete with a bar code for tracking and filing purposes; an email with optional opt-in 'button'; SMS; and the Xplan client portal. Xplan also displays each client's current opt-in status and the date that it next needs to be reviewed.
"Whilst most of the industry's attention has been centred on the cost of managing the opt-in process, the exercise can be managed very efficiently if technology is utilised effectively," IRESS wealth management solutions senior business development executive Michael Kinens says.
More likely to cause headaches for some advisers is FOFA's annual fee disclosure requirement. The production of this document will, in many cases, require software systems and platforms to talk to each other. FirstChoice product and channel development general manager Peter Chun says there is a strong link between the annual fee disclosure requirement and fee deduction, which is generally linked to the platform.
"There has been some talk in the industry about financial planning software helping planners with this - and there is a lot they can do - but they don't have the fee deduction, which naturally links to the platform," Chun says.
"We're in ongoing dialogue with the software providers . we have talked about opt-in but at this stage there's no cross-functionality."
He says FirstChoice will be FOFA-ready by 1 July, at no extra cost to users. The platform has created a flexible system that offers three models - full service, a hybrid or mid-level service, and a low-touch approach. FirstChoice users can segment their databases by choosing a combination of any or all three of these models to help them comply with opt-in.
Change is inevitable
Nolan believes the reality is even if FOFA is delayed, times are changing. He says people are seeking more regular contact with their advisers - though smart advisers will become more selective about which clients they choose to take on.
"We tell advisers to become a specialist - for example, in pre-retirement or SMSFs - which feels strange to advisers who want to help everybody," he says.
"We tell advisers to assess the client based on their practice's needs and to say no if the client doesn't fit their business model . as a result, our advisers might have less clients, but the average client revenue per client goes up."
He says many advisers will need to take a good look at their client databases and decide whether they can move them to a higher level of service or whether they will need to move them out because they no longer provide a worthwhile return on investment. "The FPA's position is it will continue trying to remove opt-in, but it's inevitable. I'd suggest advisers look at a solution now rather than later. There are too many hoping it will go away - it won't. You need to work towards a deadline of having something costed and shaping up by July 1," De Gori says. «
Preparing for opt-in
Perth-based financial planner Steve Salvia of Southern Financial Strategies says his business is FOFA-ready. Here are his top three tips for preparing a business for the opt-in and annual fee disclosure requirements.
Sort out your value proposition and costings. Map everything out on a whiteboard - every step from first contact to the client's file put away. Use this information to establish an hourly
rate. The next layer is what value do you offer? We do something
we call a value stack - a big, long list of what we do for the client.
We find if we articulate it well, it makes the fee seem valuable and therefore cost effective.
Segment your database. Decide whether you will apply opt-in to new clients only or new and existing clients. If you just do new clients, how will you facilitate this within your system? Remember that all clients deserve the same courtesy and respect, but not all require the same level of service.
Provide clients with options. Try to provide a 'capture all' so there's a service offering for everyone. We have several client care packages offering different levels of service. When clients come in for a review, we make sure they have a clear understanding of our value proposition, then give them a choice of options and service levels. This is also an opportunity to educate clients on the dangers of opting out, and seek their opt-in if it is due.
