2019 has been a very challenging year for the financial advice sector. Any time of great change will ultimately have a deeper impact upon individuals as they seek to come to terms with the change and their understanding of what that might mean for them, their business and their family.
There is a big difference between the impact of small changes and the impact of large changes, particularly when they may put the future of a business at risk and where they may put the financial position of the owner in peril. What is not well understood by the bulk of the community is the impact of multiple significant changes at the same time, when some of these changes might put the future of a business at risk.
Employees might struggle to comprehend the impact of great uncertainty on small business owners, particularly where there is a lot of debt. As an employee, your job might be at risk from time to time, and losing it will have a big impact, however it does not necessarily mean that your entire wealth is at risk of being destroyed, as can be the case with small businesses.
This year we have worked through the challenge posed by the education and exam requirements of FASEA, the release of the Royal Commission final report, the closure of licensees, the intervention of regulators in the payment of fees by super funds and then the passing of legislation for the banning of grandfathered commissions. Financial advisers around the country are coming to terms with all these changes and dealing with the uncertainty and anxiety in different ways. Uncertainty can have a huge impact on people. Most of us would prefer to know exactly what it is that we need to deal with, rather than remain uncertain about what will change and what that might mean for the business. Living with high levels of uncertainty and high levels of anxiety for an extended period is not healthy. More needs to be done to sensibly reduce this uncertainty, or at least make it more manageable.
The FASEA Code of Ethics and heightened uncertainty
The FASEA Code of Ethics has become the new source of significant uncertainty. There are many different elements of the Code of Ethics that could have a serious impact on business models and business practices. Key amongst these would be:
- Uncertainty about the impact of Standard 3 on future business models and what this might mean for life insurance commissions and asset-based fees in the future. Asset based fees and commissions make up, on average, approximately 57% of practice income.
- Uncertainty as to whether an adviser who personally owns shares in a listed company, including a financial services company, can actually recommend shares in that company or recommend products that are issued by that company.
- Concern as to what the Code of Ethics might mean for referral arrangements. This is particularly important for some practices that are highly reliant upon referrals, such as specialist practices. Equally many advisers will have concerns about the implications of the guidance on long standing cross referral arrangements.
- Concerns about definitional issues such as the requirement in Standard 7 that all benefits must be fair and reasonable and represent value for money for the client.
- Uncertainty about the implications for the provision of scaled advice, particularly where an adviser has a lower income/wealth client base with reduced capacity to pay for advice.
- Advisers who have recently purchased a business will be concerned about the implications of obtaining client consent as soon as practicable, particularly given that they may be required to provide a Statement of Advice to all clients as part of this process.
- The points above are just some of the areas of concern and confusion with the FASEA Code of Ethics, however they each demonstrate why this uncertainty is of deep concern for many small businesses.
Detailed implications of the Code of Ethics on different business models
An adviser with a business that contains a smaller number of high wealth, high touch clients who are on fixed fee arrangements, may have less to be concerned about. They will need to focus upon the obligations in Standard 7, that all benefits received must be fair and reasonable and represent value for money for the client. The adviser will need to review each client to ensure that they are comfortable that this requirement is being complied with. Value for money will certainly be something that is extensively debated. What does fair mean? This is also something that is likely to be contentious? They may also need to consider the implications of Standard 2 and the requirement to provide "a fair share of your attention, skills and time to each client". They may also be very keen to receive clarification that Standard 3 does not prevent them from recommending shares or products provided by companies that they personally own shares in. Existing referral arrangements will need to be carefully reviewed.
On the other hand, an adviser may have recently purchased a business that contains a large number of clients, many of whom are either paying asset-based fees or life insurance commissions. At this time, it is uncertain as to whether the existing payment arrangements will be permitted in the future and whether the business will be required to get all existing clients to agree to either continue the current arrangements or put in place a different arrangement. Where these clients are paying lower amounts in fees, the business may also be concerned about whether they will be able to continue to provide economically viable services, given the increasing costs involved in compliance with the law and operating a financial advice business. The business will also need to carefully review their referral arrangements to ensure that they are compliant.
Seeing the world through the eyes of a financial adviser
While it is true that the extent of the impact depends very much on the current business model, the target market and the services that are being provided, there are many that will be hugely challenged by what might be expected of them as a result of the cumulative influence of all the current reforms.
All of these reform issues need to be addressed at the same time that the advisers are considering sitting the FASEA exam, commencing study towards a Graduate Diploma, moving grandfathered commission clients to fee for service arrangements, ensuring that they remain compliant with their licensees standards, continuing to profitably operate the business and also trying to spend time with their family.
And that is all before we start to think about the changes that will flow next year such as annual opt-in or the ASIC review of life insurance advice later on in 2021. This all takes a toll, and if Australia wants to retain a viable financial advice market where financial advice is both accessible and affordable, then there needs to be more consideration of the impact of this cumulative change and the consequences for everyday financial advisers and their clients.
The obvious reality is that the Code of Ethics requires some fundamental changes and commencement needs to be sensibly deferred until these issues can be resolved and businesses have time to prepare or reasonable exemptions and a transition period need to be provided.