The fiduciary duty proposal contained in the Future of Financial Advice (FOFA) reforms is flying under the radar.
With more contentious issues such as opt-in payments stealing the spotlight, fiduciary duty has become the biggest sleeper issue facing the financial planning industry.
Yet it has the potential to shake the structural foundations of the financial planning industry.
Described by one principal as the "don't tell me you love me, show me" reform, at the heart of the issue is why financial planners recommend the products they do and draws into question the construction of approved product lists, the role of research houses and licensing arrangements.
"Much of the energy is focused on opt-in and volume payments, but I would suggest getting a fiduciary duty and the affordability of advice are the big sleepers," FPA deputy chief executive and head of professionalism Deen Sanders says.
According to the Association of Financial Advisers' (AFA) "Tides of Change" research released in January, adviser support for the introduction of a statutory fiduciary duty is the strongest out of all the FOFA reforms.
This is not surprising.
"On the face of it, fiduciary duty looks like what is already enshrined in how practices practice," AFA chief executive Richard Klipin says.
However, there is much unknown about this fiduciary duty. What it means and how it needs to be demonstrated and proved are two key questions financial planning business need answered. There is no room for complacency on this issue.
"Fiduciary principles are well and truly understood at Matrix," Matrix Financial Planning managing director Rick Di Cristoforo says.
"But it's about how it's defined; the devil is in the detail so we will have to wait and see."
What does it mean?
In April last year, then financial services, superannuation and corporate law minister Chris Bowen made
the first reference to a statutory fiduciary duty to be included in the FOFA reform package.
It followed a recommendation by the Parliamentary Joint Committee on Corporations and Financial Services that the "Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFSL (Australian financial services licence), requiring them to place their client's interests ahead of their own".
It was in ASIC's submission to the Ripoll inquiry that the introduction of a legal fiduciary-style duty was first suggested to government.
Townsend Lawyers principal Peter Townsend says a fiduciary duty really has two spectrums in terms of how it is practised. At one end, the client must be put first and no conflict of interest can exist. At the other, if a conflict exists, the client's interests must still be put first.
Townsend says it is the latter which is now being discussed as a fiduciary-style duty and most agree a fiduciary duty in its purest form is unlikely.
"It is the highest standard of care and it is not going to be possible for planners to be across all products, so it can't be a fiduciary duty," Centurion Market Makers managing partner Chris Wrightson says.
"It won't work based on where it is now. We could end up with a fiduciary duty obligation.
In practice and under a dealer group structure, a fiduciary-style duty means a planner would have to show that at no time did the benefits they received for the advice they gave impact on the sort of advice that was given or the product recommended.
In the case of a bank planner who generally works off smaller product lists and with strong bank product representation, an adviser would have to be able to show they selected a product not because it was on the list or because it was a bank product, but because it was a reasonable product for their client.
It is generally accepted financial planning has been held accountable to a fiduciary standard in the form of a financial standard endorsed by the court system.
However, introducing a fiduciary duty is not all that simple. It requires changing the corporations law because currently the structure of the financial planning industry with a licensee in the middle of a licence holder and an adviser does not allow for a workable fiduciary standard.
The issue is then how to make the structure of the industry fit within the Corporations Act.
Do we have to?
There is a strong feeling within the industry that the fiduciary duty obligation was the Ripoll inquiry's reaction to Storm Financial.
"We were quite vocal at the Ripoll inquiry," Professional Investment Services (PIS) managing director Grahame Evans says.
"The big institutions and the banks were saying the value that is offered through quality advice had benefited far more clients than those caught up in Storm."
Given most in the industry think advisers already operate with a fiduciary duty, they also feel the reform is unnecessary.
"I have difficulty in seeing the benefit of the reform," Townsend says.
He says in the case of Storm Financial, having a fiduciary duty would not have changed the outcome for clients. "I don't see how the introduction of this would give them any more rights than they already have," he says.
Others believe the industry was already working to remove conflicts of interest and it does not now need this legislated.
"I don't think it's [fiduciary duty obligation] needed," Evans says.
"They do act in the best interests of the client. If you remove commissions and move to fee-for-service, a lot is doubling up."
However, client perception is everything. There is the view in the industry that formalising a fiduciary duty is more about consumer confidence than it is about cleaning up the profession.
"Fundamentally it makes sense. It's in the clients' best interests. In an attempt to improve things, any improvement for clients is a good thing," Di Cristoforo says.
Klipin agrees. "If the profession is going to take its place as a profession, it needs to sign up to things that play to the public's best interest. It is the AFA's view that the future of this conversation has to be framed in terms of where consumers are coming from," he says.
In its submission to the Ripoll inquiry, ASIC raised the issue of introducing a fiduciary duty as a way of providing greater consumer protection as well as improving financial advice and increasing confidence.
"It's a way of increasing professionalism in the industry and at the same time bringing in fee-for-service to make financial planners be seen as a profession," Townsend says. Klipin agrees. "The strategic intent of FOFA is to increase the transparency and trust in the industry so more people get advice," he says.
There is also a sense that not a lot will have to change when a fiduciary duty is introduced.
"The government is not about to put bank planners out of business," Townsend says.
"Tied planners will have to be able to comply. So they can use bank products but have to demonstrate it is in the client's best interests."
Preparing for change
The draft legislation for the fiduciary duty obligation is expected to come out in the next four to six weeks, giving the industry about 15 months to prepare.
Sanders, who saw Treasury's draft version of the legislation before Christmas, says it incorporated some "worrying language". The FPA's attempts to shift Treasury's focus on best advice towards adviser conduct and motivation seemed to be failing.
Instead, he says Treasury was focusing on the issue of financial interest, which is just one measure of best interest and is "a very blunt measure".
Given no-one really knows what the fiduciary duty will actually look like, there are mixed levels of preparedness in the industry.
"We are structuring our business to remove any potential conflict wherever we can that may create a question mark over fiduciary responsibility," Evans says.
"That way our advisers can act without a question mark."
This includes levelling out reward systems not relating to products or platforms but to the income advisers earn. PIS also runs Associated Advisory Practices (AAP), which is made up of 168 boutiques. Evans says it is meeting every week to work out what to do next.
According to Klipin, his members are confused over what a fiduciary duty could mean. The AFA is in conversation with its members and is discussing with them whether practices are acting in the best interests of their clients and what this actually means.
"Members are grappling with what does the best interests test look like," he says.
He does not believe the impact of the fiduciary duty reform will be much, saying good advisers live inside independent and inside large listed entities.
Meanwhile, in the past 12-18 months Matrix Financial Planning has been working at being FOFA ready and is currently implementing its fee-for-service package.
"We are saying to our planning businesses don't just see this as legislation, see this as reinforcing good business," Di Cristoforo says.
He says the business is concentrating on being in a position where multi-options in terms of strategy and product can be considered, explained and shown. Also, if the business is going to tell clients it can do things on an ongoing basis, it must be able to do it.
"The core plan of fiduciary duty is you might be doing it now but how do you show it?" he says.
To do this, the business is using software to model different products and generating executive summaries to explain why. It also provides an ongoing service package so it can deliver on its promises. Preparing for the unknown is difficult. As a result, many businesses find themselves in a situation of devising a number of paths they may take depending on the final legislation.
"There are a number of forks we can head down, so it depends on what comes out from [Financial Services and Superannuation Minister] Mr [Bill] Shorten," Evans says.
One of the key elements of the fiduciary duty is demonstrating a client's interests have been put first. As a result, devising an objective test will help planners confirm they are in fact operating with a fiduciary duty.
Treasury has devised an example of an objects test based on a financial interest assessment of best interest of the client. However, Sanders says this just measures whether it is cheaper to go in product A or B.
Rather he says one of the best ways to prepare is to check that the business rules or business practices do not inhibit best interest.
Impact on research houses
Research houses are expected to be impacted on quite dramatically by the introduction of a fiduciary duty. The view is they will have to change their service offering to ensure they are providing the information required by planners.
They're going to be held to account more. They're going to have to specialise more," Wrightson says.
Further, it will be the planners dictating to them what they need rather than the other way around.
Research houses will have to work harder when the duty exists.
"I believe planners do not ask enough of research houses. They [research houses] need to as a group to be a bit more proactive to provide information that is truly relevant," Townsend says.
The FPA agrees. "Research houses need to have more wide-ranging assessments based on cost, access and entry fees. I expect to see more reporting," Sanders says.
This in turn will mean more pressure on product manufacturers to produce this information.
As a result, research houses will continue to have a very important role to play in the industry. Many businesses are saying they are not altering the way they structure their relationship with research houses because they do not see any conflicts in the business model.
For example, Evans does not subscribe to the view that fund managers pay for research and this influences the ratings their products receive. He says the variance in the ratings products receive is evidence of their independence. He therefore believes PIS's current involvement with research houses will stand up against the fiduciary duty obligation.
"I'm comfortable with the current structure we have, although it can be tightened," he says.
However, he says in a fiduciary duty environment the intermediate step of constructing an approved product list (APL) becomes especially important, where an investment committee is responsible for the APL and who can provide an independent view of the world.
Matrix Financial Planning's primary research house is Morningstar, but it draws on the resources of other research houses. Di Cristoforo says he is satisfied it will stand up in a fiduciary duty environment because it is independent, it is the largest research house in the world and it is paid for by subscription.
Impact on APL
There was a view APLs could increase under the expectation that advisers would need to have access and some knowledge on all the products available in the market, but that would not be practical. "You can't expect to consider every product in the marketplace," Townsend says.
"You need to review the sorts of products available in a class and reach a view that's reasonable in all the circumstances.
"And that's not much further than what we have at the moment."
Evans says PIS has a large APL and for this reason it has been criticised. He expects under a fiduciary obligation, APLs will contract and while choice on its list will be reduced, it does not want this contraction to go too far.
Di Cristoforo agrees. "There is a risk there will be a contraction in APLs, but that is contrary to what fiduciary duty is about. It is an unintended consequence," he says.
Matrix Financial Planning says it already has choice in terms of more than one platform and product in each sector. It does not expect to make any changes, and its focus will be on providing planners with the support they need.
"There is a question whether something is said to be different or known to be different. It's not just about having it on a list. Advisers need to be able to use it and recommend it," Di Cristoforo says.
Impact on industry structure
The introduction of a fiduciary requirement will see the rise of the adviser and the legitimisation of their role. This is because a licensee will have to find a way to support their advisers to service their clients' best interests.
"So there is a shift to the adviser and the importance of the adviser. But with this comes more obligations," Sanders says.
Some say if the fiduciary duty is too onerous, it could mean a return to the broker/agent model as found in the United Kingdom, where advisers either work as brokers or they sell product.
"For example, I can see a place for people who only sell NAB stuff," Wrightson says.
However, it could be argued a quasi-agent/broker model exists now. "The institutions who own dealer groups have the responsibility of establishing APLs now and much of the products on it. The difference between the old days and now is platforms," Wrightson says.
