It's not often you attend an industry conference and a speaker says something during a session that receives an unprompted, resounding round of applause from the audience. However, this is exactly what happened recently during a panel presentation at the Self-Managed Super Fund Professionals' Association of Australia annual conference in Brisbane when opt-in advice was being discussed.
"Opt-in is redundant, heavy-handed policy," FPA chief executive Mark Rantall told the packed room of delegates.
"It is overkill to the extreme given that we're already banning commissions, which we support."
Rantall's stance received generous applause that was not quite a standing ovation, although it wasn't far from it.
The reaction from the audience, however, only reinforced what a majority of the financial advice industry is currently thinking about the opt-in proposal contained in the government's Future of Financial Advice reforms.
The FPA and a host of other financial services stakeholders have opposed the measure, which requires advisers to get retail clients to sign an opt-in contract for the continuation of advice services.
"Opt-in is poor public policy with no discernable benefit - not for consumers, not for the advisory profession and not for the broader community," Association of Financial Advisers (AFA) chief executive Richard Klipin says.
"This so-called reform will hurt the very people it is designed to protect. The AFA is committed to going into bat for the millions of clients our advisers serve."
While industry bodies and broader financial services participants have all aired their concerns with opt-in, the proposed regime is causing similar angst for financial advisers, with some planners, such as Chrysalis Lifestyle Planning director Philip Windsor, feeling like they've been unreasonably targeted by the government's reform.
"To my knowledge no other Australian service industry has law compelling them to fall under an opt-in regime," Windsor argues.
"This will not be good for the next generation of our profession and does not provide an attractive opportunity to young advisers already wary about the level of risk and cost involved in operating as a financial planner in Australia."
Advisers' anxiety over opt-in
Complete Financial Balance principal Graham Campbell says one of his primary fears around an opt-in arrangement is that clients are likely to make irrational short-term decisions based on market movements and these decisions could fall at the time of renewing the opt-in contract.
"My other concern is where does the responsibility fall for the overall financial plan that has been implemented if a client doesn't renew the opt-in and the long-time advice and lifestyle planning stops? Clients will find it difficult to stay on track without engaging their planner," Campbell says.
Windsor shares this sentiment, noting opt-in will unquestionably impact on client behaviour.
"Typically clients do not know what is best for them. No time has highlighted client investor psychology better than the GFC (global financial crisis). I, like most planners, was inundated with client communications regarding their fears as they watched their account balances plummet," he says.
"It is during these periods that planners earn their keep. Many of us are paid less during these times but our workload increases dramatically. During these strained times our fees come under great client scrutiny.
"I shudder to think how many clients would have chosen not to opt-in during this period, thereby severing the tie with the only person best placed to protect them from making knee-jerk panic decisions which have long-term financially devastating implications."
He adds that if clients are encouraged to turn on and turn off relationships with their planner, the likelihood is clients will opt in and out of advice more regularly than they do now.
"Financial planners build their strategies around short, medium and long-term goals. I question whether it will in fact be possible for planners to pursue long-term goals with a client under the new opt-in regime," he says.
"My fear is that this change will drive people away from advice rather than towards it, that is, over a continuous long-term time frame.
"I believe it will for many exacerbate an already endemic short-term Aussie mentality. Long-term I believe the government will see savings shortages as a result and greater, not less, pressure on Centrelink assistance as a result."
The complexity around administration and the practicality of opt-in are other key concerns for Windsor.
"We are a small boutique firm with six staff. I am concerned about the additional and onerous admin burden placed on us on top of already significant compliance obligations," he says.
"Also, whether it is every year or three years, how will an opt-in practically work if my client is overseas or sick and cannot opt in when required?
"Clients will expect me to continue provision of service in the absence of their advice not to. However, if payment for our service has been withdrawn, we cannot commercially continue to do so.
"Also, of great concern to me and all planners is the impact this opt-in regime will have on planning practice values in the market. Most of us either are now or will soon be considering succession. What negative impact will opt-in have on the market value of our client income streams?"
Meanwhile, Favero Insurance and Financial Services principal David Favero says that if a planner delivers what might essentially relate to a five-year plan, the fees might be levied at 20 per cent a year of the total value of the service.
Favero explains the problem in this instance is that 100 per cent of the plan is presented and implemented in year one, with the option for the client to now walk away any time thereafter.
"You try signing a two-year mobile phone plan where the cost of the phone itself is included, and then telling the telco you no longer want to pay the remainder of the contract after only one year of repayments," he argues.
"Some funds offer a deferred fee structure, however, there are exit fees attached, which means that the fund is not out of pocket if the client moves on before all fees are recouped.
"Advisers may be looking for a similar contractual arrangement, but as the legislators are now stopping mortgage lenders from charging break costs for refinancing home loans, this may not fly."
He says he would prefer a three-year opt-in arrangement, similar to a binding nomination of beneficiary.
"Why aren't these renewable annually - would the annual administration be too onerous? Does a person's big picture not change that much year to year? A client can revoke a nomination at any time. I suggest the answers would be the same for opt-in," he says.
"The focus, and therefore distraction, will be getting the client to sign on for another year, before you review - just in case they don't opt in again.
"The industry will be full of gimmicks and incentives to encourage opt-in and on-time. I just hope the more successful advisers aren't the ones with the best 'set of steak knives'." How will opt-in impact on an adviser's practice?
Campbell says opt-in will have a significant impact on how he runs his business. "It will require additional time and resources, which would be better spent with clients," he notes.
"Renewal dates will have to be locked in, so deadlines are not missed. Advisers may consider higher upfront fees to be implemented as there is no guarantee that the client will be maintained if we do not exercise the opt-in on time.
"This is not favourable for the client. Along with time restriction and additional fees, it makes planning and the ability to get advice less affordable to many."
On the other hand, KNP Financial Services financial adviser Ben Hall says opt-in will have a minimal impact on his business.
Hall explains they've been introducing service agreements with their clients over the past 24 months and, therefore, opt-in would just be an extension to what the business already has in place.
"We employed a business coach around that time and we identified the market push quite early. At that time we decided that we would like to push for a fee-for-service business," he says.
"But if you are not reviewing your clients regularly, the opt-in model could cause concerns."
Depending upon the final rules of the operation of opt-in, Windsor says he will need to restructure Chrysalis's business systems to generate the required paperwork at the relevant time and process this to and from the client.
"We will need to establish registers and have staff spend time reconciling the client lists with expiry dates. I imagine the opt-in will lead to opt-in-based fee discussion meetings - a meeting I currently never hold," he notes.
"We will then need to develop systems whereby platforms and product providers are contacted to remove clients. My staff will now be adding the chasing up of opt-in signatures from clients as a priority to the many other practice follow-ups already undertaken in order to maintain the client relationship."
He adds this will then impact on business efficiencies in completing business duties.
"There are bound to be other unforeseen implications that are as yet unknown. This new additional layer of administration and bureaucracy will ultimately lead to higher costs and lower productivity and therefore lower profit for the firm. This may put jobs at stake," he admits.
"We may need to reconsider certain clients on our client base as to whether we can continue to provide our services to them under the new regime. We will explore this when the extent of the impact of opt-in is clearer."
Likewise, the impact opt-in could have on Albert Nellini's advisory practice, Lasan Financial Services Group, will revolve around the cost of managing the arrangement.
"This may involve the need to 'offload' quite a number of clients. Unfortunately these will be clients with small balances and/or small sums insured," Nellini says.
"To handle the increase in administration burden, it would seem that we would need to increase staff numbers. However, the opposite is likely to be true as the cash flow will be affected to the extent that costs will need to be reduced, including a reduction in staff."
Calculating the costs of opt-in
According to estimates provided by Treasury to a recent Senate Estimates Committee hearing, opt-in will cost around $100 per person per client annually. Windsor's practice has 200 clients. Based on the estimate, opt-in will cost Chrysalis Lifestyle Planning a minimum of $20,000 a year.
"This is the equivalent of employing a part-time admin assistant to further increase productivity of the practice, which I will no longer be in a position to afford," he says.
"It absolutely concerns me. Chrysalis is nowhere close to having recovered from the financial pounding it sustained from the GFC. We can't afford $20,000 to $40,000 additional overhead on the bottom line without corresponding new production.
"I also believe that $100 is likely to be a conservative figure. Everything in this industry costs more than anticipated. Twice that figure is probably going to be more realistic."
Campbell agrees. "With the additional time and resources required, our firm estimates the cost is closer to $200 per client," he says.
"Let's say you have 2000 investment active clients; the financial impact would mean the cost will have to be passed onto the client. The additional cost of $400,000 to a firm's bottom line would have an impact on most businesses of this size."
Hall says KNP Financial Services currently has 170 active clients and 50 non-active clients.
"I don't see it costing anything for the active clients as I see them every year anyway. The 50 non-active clients will cause a few concerns though," he admits.
"The non-active clients are a chance of leaving our practice if we don't provide a service that they value."
Conversely, Nellini points out another significant issue that opt-in poses for his practice is a large part of his business revolves around the corporate superannuation market. "A question that I don't think has been answered yet is exactly who is the client? Is the client the business for whom we have set up the super fund or is the client the individual fund member, or indeed both?" he questions.
"We have about 2500 clients on our books. About 2000 of those are members of various corporate superannuation funds. Some of these clients would not generate $100 per year in fees to my practice.
"If each member is classified as a client and it does cost about $100 per client annually, this equates to a cost to my business of $250,000 per year. This is obviously not sustainable."
He says if it does come to pass that it is the corporate fund that is the client, this would reduce the cost to about $50,000.
"It's a much lower figure, but one that is also unsustainable to my business," he says.
"Generally a business will increase its costs commensurate with an increase, or expected increase, in revenue. Opt-in will increase my costs but my income will not increase to the same degree."
Changes to client selection
It seems opt-in will also undoubtedly impact on a planner's selection criteria of individuals they will take on as clients in the future, which will only further alienate those people who are needing advice but cannot afford it. "Moving forward, the only clients that we will take on are those who are willing to pay for our service now and into the future," Hall says.
"Those clients wanting advice on under $50,000 will struggle to find a planning practice willing to spend time with them unless a large flat fee is paid." Meanwhile, Campbell says his advisory firm would need to enforce its selection criteria to only service high net worth engaged clients.
"Due to increasing legislation, financial planners will all move to this space, which will mean the majority of Australians who need advice will miss out," he says.
"Long-term regular engagement with clients is important to secure their financial security, however, the cost to do so will increase.
"Impact on the client will be the potential that the adviser will focus too much attention on the short term at the expense of advising based on the client's longer-term objective. The client loses as a result."
Windsor also admits opt-in will force him to be far more selective with new clients in terms of the likelihood of them being a flight risk after an initial honeymoon period.
"I will also be unlikely to take on anyone who wants control and may quickly look to commoditise or compartmentalise our service as a result of opt-in," he says.
"Any clients who are unwell, regularly absent or poor communicators now become a threat to financial planners under an opt-in environment where they would have otherwise been considered a quality client.
"Most of the planners I know, myself included, absolutely love what they do, but they naturally expect to be paid for their service and expertise."
Similarly, Favero says his firm too may be forced to choose only clients it thinks will have the capacity, both financially and logistically, to meet the opt-in criteria.
"However, this will mean trying to evaluate the long-term potential of the client from just one initial consultation, and then asking a client to make long-term commitment before we have had a chance to prove ourselves. That's not what this 'relationship' business is about," he notes.
Furthermore, Nellini also agrees opt-in will have an impact on the type of client he will deal with in future. "The regulations as they now stand, in my opinion, have disenfranchised clients with relatively small balances in their super funds," he says.
"Prior to giving advice, an adviser must provide an FSG (financial services guide), undertake a fact-find process, including determining the client's risk profile, and provide any advice in writing by way of a statement of advice.
"This process takes considerable time and resources. Clients with relatively small balances are generally unable or not prepared to pay our fee for providing this service/advice.
"Opt-in will impact by introducing a new strata of costs to my practice and ultimately to my clients." «
