With all the focus on financial adviser business models, the changes fund managers will have to make to their business models to comply with regulatory changes have been largely overlooked.
Instreet Investment managing director George Lucas told InvestorDaily that Future of Financial Advice (FOFA) changes are further reaching than most people would have thought, particularly with the changes to remuneration structure that will be imposed on other parts of the value chain - including fund managers.
Because fund managers often use a third party responsible entity who is technically the product manufacturer, and they pay a funds under management (FUM)-based fee to the manager, this fee will be caught up in the conflicted remuneration ban, Mr Lucas said.
"So if you're a product issuer you can't on-pay a fee based on FUM unless you've got the consent of the client to sign off on it," he said.
Fund managers could also now be deemed to be providing general advice in the act of promoting their funds to advisers, he said.
"So suddenly, the fee that's coming from the issuer is now linked to the general advice you're giving to retail clients as a fund manager," Mr Lucas said.
This fee would then get caught up in the 'client consent' requirement laid out in the Australian Securities and Investments Commission's RG 246 guidance.
"If you're a fund manager talking to financial advisers, you're giving them general advice which the client has to sign off on if you want to get it paid as 'conflicted remuneration', but it will make it even harder for the independents to promote their funds to financial planners," he said.
He added this is currently unclear from the guidance, but based on the included example, this would seem to be the case.
That means there are now two levels of conflicted remuneration: the fee being earned by the adviser, and the FUM-based fee being earned by fund managers, according to Mr Lucas.
"The bottom line is a lot of fund managers will have to change their models too. It's not just general advice - a lot of websites give what you'd call general advice - but they may have to be dumbed down to 'execution-only' advice," he said.
Although most changes tend to favour the vertically integrated model, those types of businesses will have huge challenges with how they remunerate their staff, given that salaried advisers will not be able to earn sales-based bonuses.
"All of them will have issues with restructuring how people get paid. It will be easier for a small firm compared to a vertically integrated firm - that's one of the handicaps that the vertically integrated and larger groups will have," he said.
