Since the announcement of the Future of Financial Advice (FoFA) reforms, there has been much debate as to how these reforms will impact on the provision of financial advice in Australia.
The majority of industry participants already provide professional and valuable services that do not require legislative reforms. However due to the collapse of Storm Financial and Opes Prime, the government identified the need for reforms to improve industry standards.The FoFA reforms aim to ‘underpin trust and confidence in the financial planning industry’ and prevent financial planners from making inappropriate recommendations to consumers.
In order for FoFA to underpin trust and confidence in financial planners, it needs to create a regulatory framework for the industry to advance towards a client centric and ethical professional Service.
Some industry bodies believe that the reforms are the next logical step for consumers accessing advice and developing the industry towards professional standards which make financial planners more ethical in their approach. A good example of this is The Financial Planning Association’s (FPA) Code of Ethics. The eight principles in the Code of Ethics serve as minimum benchmarks for professional behaviour. Accordingly, the principles act as a point of reference for all stakeholder including members, users of financial planning services, regulators and government. The FPA, Australia’s leading professional body for financial planning professionals, recognises and encourages other industry participants (e.g. non-members who provide financial planning services, licensees etc.) to adopt the principles as a reference to good ethical practice.
Others believe that it will reduce the number of financial planners as there is too much regulatory reform and move the industry towards a ‘barbell shape’ with a few large providers at one end of the spectrum and small boutique firms at the other.’ In the immediate term, stripped by FoFA of their ability to clip adviser commissions and negotiate volume deals with platforms and fund managers, the mid-tier independent ‘dealer group’ – in many ways an Australian anomaly – would cease to exist’. (Decimal, ‘Beyond FOFA – five fault lines shaping the ‘real’ future of financial advice’ 2011).
The FoFA reforms need to protect consumers from unscrupulous financial planners, whilst also allowing the industry to grow and prosper. Australian Securities and Investment Commission, ‘Compensation for retail investors: the social impact of monetary loss’ report, illuminates the fundamental reasons for distrust in financial planners from a client perspective after conducting interviews with consumers about their bad experiences in accessing financial advice. The key reasons for distrust in financial planners were:
Conflicts of Interest - Advice that benefits the financial planner instead of the client.
Disclosure - The financial planner not explaining the risks of a particular investment or product.
Communication - Not having regular contact with clients.
The FoFA reforms will need to enable the industry to remove these reasons for distrust and prevent financial planners from making inappropriate recommendations to consumers.
One of the key reforms in FoFA is the Best Interest Duty. The introduction of the Best Interest Duty, financial planners must ensure that their strategies and recommendations are in the best interest of the client. The need for a Best Interest duty has been highlighted by Australian Securities and Investment Commission, ‘Shadow shopping study of retirement...