Financial Advisers & Brokers

"Even without a recommendation on vertical integration, the recommendations will accelerate the forces of change already reshaping the industry that collectively amount to a revolution in financial advice, as distribution models, incentive structures, professional standards, compliance obligations and client fee models are fundamentally changed.

The proposed reforms when coupled with FoFA and Professional Standards changes will drive changes to the business models of product manufacturers, dealer groups and adviser practices and will ultimately give rise to a new generation of advisers operating under a new paradigm."

Relevance & consequences for industry

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The revolution in financial advice, which started with the FoFA reforms and continued under the Professional Standards reforms, will be accelerated.

There was no recommendation aimed directly at limiting vertical integration but the Commission’s focus on conflicts of interest may require changes to policies in this area.  Changes will be felt first in adviser practices and then by advice licensees/dealer groups and also by product manufacturers and distributors.

The recommendations will accelerate the forces of change already reshaping the industry that collectively amount to a revolution.

Implications for adviser practices

  • The combination of removing grandfathered commissions, the potential reduction (to zero) of life insurance commission limits, restrictions on advice fees that can be paid out of superannuation accounts and enhanced annual opt-in requirements for all ongoing fees, could reduce the value of advisers’ practices, removing much of the goodwill that exists in the back book and accelerating the move towards the front book fee for service model.

  • These factors, coupled with new professional standards and training obligations are likely to accelerate the departure of advisers from the profession, particularly where buyer of last resort or “BOLR” arrangements are in place.

  • Advisers who have already transitioned to a fee for service model and more efficient advice delivery methods will be less impacted and will enjoy a competitive advantage. There will be opportunities for innovation in the delivery of advice through fintech and other more efficient advice delivery models.

Implications for product manufacturers and distribution

  • These changes will continue to drive up the cost of personal advice and could further reduce the number of consumers willing to pay high up-front costs for advice.  For product manufacturers, in-flows through personal advice channels may weaken over time, which should drive further innovation in distribution models.

Implications for advice licensees/dealer groups

  • The increased compliance burden and its cost is likely to drive further consolidation.       

  • All AFSL holders will be required to investigate misconduct of a financial adviser and inform and remediate clients where misconduct is identified.   This requirement and the possible removal of the “safe harbour” provision will require licensees to enhance their monitoring measures for representatives.  A much sharper focus on investigation, compensation and breach reporting will be expected.

What you should do next

  • Product manufacturers should consider the implications for their distribution models and ensure they are not over-exposed to personal advice channels.  They should also review all grandfathered commission arrangements and consider whether they should be terminated (where possible) or whether commissions can and should be redirected to customers.

  • Dealer groups and advisers who receive payments from superannuation accounts and/or grandfathered commissions should consider the impact on their business of the removal of these revenue sources.  They should also consider how the cost of advice can be reduced through efficiencies and how they can deliver greater value to their clients on a fee for service model.

  • All participants should review and, where appropriate, enhance policies on conflicts of interest and develop protocols for disclosures where there is a lack of independence, impartiality or bias.

Authored by: Jim Boynton, Stephen Jaggers and Jedd Watmore-Tanner.

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