In around a month, Australia's financial services industry will learn part of its fate for the years to come.
Financial Services and Superannuation Minister Bill Shorten is expected to release the Labor government's final announcement on its Future of Financial Advice (FOFA) reforms.
If the government's proposals are pushed through to draft legislation, it is likely the industry will see the end of commission payments and volume bonuses on retail investment products, including managed investments, superannuation and margin loans, the introduction of opt-in, adviser charging, changes in percentage-based fees and expansion in low-cost simple advice.
The proposed reforms will also bring with them a change in fiduciary duty in that financial advisers must act in the best interests of their clients.
What is perhaps most interesting about the proposed changes is that if and when the reforms are introduced, financial advisers, in particular, will be forced to operate in a changed world, not only in regards to a regulatory standpoint, but also a changed world of client needs.
Just as the industry has evolved, albeit for some by force, the experiences and needs of clients have also changed.
Brave new world
"I think the practice evolution has effectively sped up. Good practices are now getting better. Those that have been waiting and watching have really gotten on the change management process," Association of Financial Advisers (AFA) chief executive Richard Klipin says.
"Some of it is FOFA driven, a lot of it is GFC (global financial crisis) driven and a lot of it is consumer driven - you know, consumers requiring better services. It doesn't matter whether you are running a financial advice business, a supermarket, an airline, consumers can access information on the Internet. So being an information provider is not the sole role any longer [for an adviser]."
Klipin says in light of the changing nature of clients, the notion of codes, standards and education levels is clearly on the industry's agenda.
"I think it's clearly the intent of FOFA and the associations have to step up in this regard, and that is to lead their members, in a sense self-regulate the industry and also set standards so that their members, our members, are really clear about conduct that is appropriate, but also provide them with guidance and leadership and interpretation around how to achieve best practice and how to address some of the conflicts that arise in the industry," he says.
For FPA chief Mark Rantall, the association is monitoring the potential flow-on effects the FOFA changes may bring to its best practice standards.
"Those professional practice standards are at a high level and really articulate what best practice is and should be," Rantall says.
"We don't anticipate having to make too many changes to that because they are already at a high level and any modification we believe will be minor subject to obviously the legal framework that might come out from FOFA."
He says the FPA's practice standards do dictate that members should be engaging their clients every year with full and open transparency with fees, but making it a legal requirement is taking another step.
"One of the attributes of the profession is whilst they act in their members interests, their prime mover is to act in the public's interest," he says.
"Continuing to raise standards of engagement with clients to the most professional level should be an aspiration goal for any individual profession. As such we shouldn't be waiting for legislation to create those minimum standards."
What will FOFA mean for best practice?
In the minds of large tied and non-tied dealer groups and financial institutions, FOFA is of little concern.
For MLC, changes to areas of best practice such as remuneration and client engagement have been front of mind since 2006.
"We've been working on this for some time since we announced we were going to move to fees in 2006. At that point we started to work through exactly what that meant for us as an organisation and how our advisers should operate," MLC general manager of advice solutions Greg Miller says.
"We've been really using this time to work out with our advisers through a process of how it is that they best engage with the client and how they deliver value to the client and demonstrate that value, which was more important than the decision about fees."
Miller says one of the major issues from moving from commissions to fees is the fact it's no longer connected to the product but connected to the adviser, the advice and the strategy that goes with it.
"So we've spent considerable time with our advisers working through a process so they can demonstrate the value to the client and therefore they can charge the fee," he says.
"I think that the major impact for the broader industry will be for those advisers to say they used to get paid a commission, now it's a fee. The client will think about that differently in the way it's positioned and I think it will take some time for them to adjust, whereas we believe our advisers are well adjusted to that."
AMP Financial Services financial planning, advice and services director Steve Helmich says the company has always seen the need to increase consumer confidence by being more professional and more transparent.
"Whether the Ripoll report happened or not or the reforms [happen], we see this as a real opportunity to just have a competitive and comparative advantage," Helmich says.
"That's what we want to focus on and that's probably the reason we have more CFP (certified financial planner) professionals than any other player in the market. I think when we come together with Axa we will have over 1000 CFP professionals out of 5700 in Australia. That's a great strong position so we've got to make sure people know about that and keep pushing those standards up."
He says in line with the company's belief in pushing up standards, AMP has implemented a professional year and plans to introduce new education levels for advice entrants.
"While there is talk of FOFA, we're reading about what's happening but understanding what's good anyway," he says.
"We've implemented the professional year for advisers who graduate from our Horizons practice and that is in place now, and it really makes a big difference and it really makes sure planners are well supervised and come out a lot more confident and competent to do the job."
As well as focusing its attention on its professional year, in the coming weeks AMP will be busy with the integration of the Axa Australia and New Zealand businesses.
When asked whether AMP will need to make any major changes to best practice guidelines as it integrates the two groups, Helmich says he does not believe so.
"What we have seen is there are a lot of similarities between the people in Axa and the Axa planners," he says.
"We see great opportunities there to basically make sure we've got the best position and best supported financial planning group in the market and a real challenger to some of the other players, especially those who don't have wealth management as their main game."
For privately-owned group Synchron Business Services director Paul Riegelhuth, the proposed reforms will bring with them rigorous practices for Australia's best practice framework.
Riegelhuth says with such change in rigor, good software and client management systems are going to become of paramount importance.
"The ideal system is one which you run your entire office out of. You can flag tasks to staff members when they come to the end of the day. They have to actually carry out those tasks and mark them off as completed and it is passed on to the next person," he says.
"It's going to become in the best interest for both advisers and clients [and] will be a very important aspect of the day-to-day activities."
He says Synchron will have to upgrade its compliance regime so it can be satisfied that its advisers are at all times meeting whatever new regulations hold.
"I think we've had plenty of opportunity to get cracking. I think it's pretty well cut and dry that it's a done deal. Commissions will disappear out of investment products, out of superannuation and non-superannuation and advisers will have to embrace with confidence and comfort the world of charging fees," he says.
"We've done some work at our professional development training days in that making people aware of what the fee regime might look like. This is what your offer is and you've got to be able to price your services with confidence and you've got to instil in the clients' minds and make them comfortable with the fees you're charging are fair and reasonable. Then you're meeting their expectations."
Centric Wealth director of portfolio construction and management Brett Sanders says FOFA has never been a big issue as they are not "a commission shop".
"Whilst you keep an eye on FOFA and everything you do in managing your business and developing your strategy and wanting to make sure that you're not going to fall foul of some sort of regulatory change or requirement, but from our point of view it's really been about the natural evolution of the business and the normal process any business goes through about how do you serve your clients better," Sanders says.
"I think the GFC too was such a material event for any advice business that if you don't have some form of period of introspection after something like that [then you need to] look to take some learning out of it or use it as an impetus."
He says from a Centric point of view, FOFA highlighted the need for a lot of the plans the business was already working on.
"There is a lot more change happening within Centric beyond the issue of standards in terms of how we develop portfolios, how we engage with our clients, our pricing methodologies, how we even administrator client portfolios. All those things are changing and quite materially as part of this recognition that we need to look to optimal ways of serving our client base," he says.
Professional Investment Services managing director Grahame Evans agrees.
"The underlying concept of removing conflicts of interest wherever possible is something that we have been working on, but well before FOFA," Evans says.
"Obviously with regulatory guide 181 and other parts of the corps law we've been working on this now for some time. From a dealer group perspective we try to make sure we're able to put our hand on our heart and say there is either no conflicts and if there are any potential conflicts, we have managed them to ensure they don't impact the quality of advice that is actually provided.
"That's an important one for us going forward, so that separation between the licensee and our product provisions. Our own internal products, our All Star products don't pay rebates or they don't pay commissions so there are no margins back to dealer groups at all."
Clients are king
For Miller, client engagement is a strategy MLC has finetuned over the past three years through its client engagement program.
"That's been about how to skill our advisers in and how to present their value proposition, how to engage the client around advice, how to present strategy, and then how to present the fee on the back of that," he says.
"We believe that's enabled our advisers to hold quite rich conversations with their clients. In our minds there is nothing too new in this, but it's just in the way you conduct the conversation with the client where it is very much around strategy."
He says MLC asks its advisers to concentrate on five key areas in terms of client engagement: the client's immediate issues, their strategic opportunity, their strategic planning, their scenarios and then what they want to do in terms of implementation.
"Because we have focused on that and focused on the words and how to go about that with the client, in going through that process at the end of it the client can see real value in the advice or if they have no issues in those areas then they see they have no value in advice," he says.
In terms of FOFA, he says the group has taken a monitoring view to the proposed reforms.
"Part of the role that we have as a licensee is always to think about what's next, what does the future hold for customers and therefore advisers and then how do you position your business accordingly?" he says.
"So part of the reason we have been making these decisions over the last few years is that we really felt that we had to focus around the customer and the strength of strategy and advice we were putting out."
Evans says in respect to the advisers, there are two aspects, the first being the hard aspect of running people who are still not fee-for-service and how to convert their practice into fee-for-service.
"They are again removing any potential conflicts or perceived conflicts created by commission-based products. We've run a four-part series for our advisers in transitioning those over who are not fee-for-service now. That to us is actually another part of the best practice process," he says.
"On the soft side, it's about getting to know the client more than in the past and we believe that quality of advice has got a lot to do with actually the two-way process between the client and the adviser and actually having the client understand a lot more rather than just putting faith in the adviser and saying 'I trust them' and the adviser speaks all this jargon, just because they trust them they believe that is in the best interest.
In regards to the company's merger with listed financial services firm Centrepoint Alliance, Evans says its business as usual.
"We're obviously conscious of disclosure requirements now being part of a listed entity. So we need to ensure that everything said and done is considered from the point of view of the impact to the market and that accurate and complete disclosure is made where it is material," he says.
It is Riegelhuth's belief that even outside of FOFA or opt-in, regular reviews between clients and advisers will become more frequent.
"It won't just be when you want a review give me a call. In a best practice world it will be implemented that it happens at least once a year," he says.
"I mean, you can't over cater for clients who say they don't want a review. But I think most people who have a financial interest it is certainly in their interest to do regular reviews."
He says it also allows for both the client and the adviser to take into account any changes that have happened on a periodic basis.
"All genuine advisers have probably always used maybe not the text book best practice, but I think most of the advisers I know who are still in the industry today they all do have their clients' interests at heart, but I think the pending changes has been a catalyst to make us think a little bit harder about our businesses and how they are run and how we can meet these new demands and continue to exist and continue to have satisfied clients," he says.
While the answer to how Australia's advice industry will operate lies in the hands of Shorten and the Labor government, the approach many advice groups have taken to making changes to best advice practice will no doubt help point the industry in a positive direction.
