Financial Advice Regulatory Changes - 5 Critical Issues

Written by Kate McCallum, Multiforte

1. Commencement delayed until 1 July 2013. The regulatory changes do not come into force until 1 July next year. This means that if an individual seeks advice before then, they could be charged commissions, pay for kick-backs and other conflicted remuneration.
   
   
2. New clients / new business only. Did you know that the changes to conflicted remuneration apply to new clients only or to new products for existing clients. They do not apply for an existing client with existing investments, nor to additional monies contributed into an existing product. Importantly this includes reinvestment of distributions from an existing investment.
   
   
3. Personally owned insurance commissions are out of scope. Here we are talking about life, total & permanent disablement (TPD), income protection (also known as salary continuance) and trauma insurance. The changes do not ban advisers from charging commissions on life insurance policies that an individual holds in their own name. Importantly, there will be a ban on commissions for any insurance policies owned within a client's super fund. Individuals need to be aware of this potential distortion - and be wary of an adviser recommending insurances outside of super.
   
   
4. In-house product push has not gone away. This is without doubt the biggest issue hiding beneath the covers of the reform agenda. More than 90 percent of financial advisers are employed by or affiliated with product providers - and have product sales targets to achieve. In fact, Rice Warner Actuaries found that an affiliated adviser's investment and insurance product recommendations typically included 80 percent in-house product. This is not to say that these products are no good, in fact, many are excellent, but you can see the inherent conflict. Removing commissions doesn't necessarily stop that mindset.
   
   
5. The danger of percentage based ongoing fees - commissions with a new name. The chair of consumer rights body Choice, Jenni Mack, warns consumers to be aware of ongoing fees - specifically fees that are calculated on a percentage of the client's assets. "We do not want to be in a position in five or 10 years where we find that 'ongoing fees' have replaced commissions".
   
   
   What can you do?
   
   

• Select a financial adviser that is not affiliated with a product provider - or with a dealer group that has ties to a product provider. We also suggest finding an adviser that is no-commission on all products including insurance.
  
  
• Negotiate an agreed flat fee. Jenni Mack of Choice advocates that all clients negotiate flat or hourly-based fees with their financial planners rather than fees calculated as a percentage of assets. Mack says: "Consumers should ask if they can pay by hourly rates or an agreed amount for advice. Consumers should ask if they can pay the amount over time rather than a lump sum".
  
  
• Re-assess existing products. If you have an adviser and are paying commission on existing products, it is worth assessing the cost/benefit of transitioning to products with no commission. Otherwise the commissions you pay on existing investment and insurance products will continue regardless of FoFA for the life of the product.