Appearing just post-Easter on the 28th of April, the latest FoFA update addressed a smorgasbord of outstanding items; some expected, with one or two more left field than most. And when looked at as a whole, it is very clear that the future of financial planning rests very much with fee-for-service.
Meanwhile, we should take a quick look at the key aspects of the new elements of the reform and what impact it will have for financial planners:
|Prospective ban on commissions from insurance within superannuation|
|Opt-in renew every two years|
|Prospective ban on volume rebates and similar payments|
|Prospective ban on soft dollar benefits above $300|
|Introduction of a new form of limited advice called scaled advice|
1. Prospective ban on commissions from insurance within super from 1 July 2013 While some planners believe that this will spell the end of the industry, it’s interesting to note the following article that states that commissions within super represents “only 15% of total estimated life insurance commission revenue”.
The bigger question that planners should be wondering is whether this is just the first step towards extending the ban to include insurance outside of super. And, if all indications are right, and depending on how the industry copes in the meantime, there is a high probability that insurance outside of super will be next on the agenda in a few years’ time.
The other question to ask is whether this will result in some planners shifting clients from insurance within super to outside of super in order to rebuild their income stream. This could well be one of the unintended consequences of the ban which, ironically, might only help to speed up the timeframe upon which the Government then decides to extend the ban to insurance outside of super also to “balance out the playing field.”
2. Opt-in renew every two years While the opt-in provisions have always been a contentious matter, the latest update on the provisions leave the doomsayers do leave the naysayers and proclaimers of doom and destruction looking a bit silly for their disproportionate cries over what is, in the detail, quite a benign piece of reform.
In reading the detail, with a two year renew period, and a 30 day renewal period before the renewal date, in addition to a 30 day grace period, the Government’s requirement is actually quite straightforward.
Understandably, some commentators will still say that it’s not the right of the Government to legislate such things, but from a business perspective it begs the question, “Why wouldn’t you be reinforcing the engagement with the client on a regular basis regardless as a matter of good customer service?”
3. Prospective ban on volume rebates The ban on volume rebates, although not unexpected, will be the one that will, aside from the ban on commissions, be the biggest impact on financial planners. Based on experience, we know that, for the practices that do accept volume rebates, 15-20% of their total revenue comes from this source of income.
While 15-20% isn’t necessarily a business-breaker, it will undoubtedly hurt the top-line of those practices that have built themselves on the basis of volume rebates. For such practices, getting their fee-for-service model right becomes even more crucial in ensuring the on-going profitability of the business. 4. Prospective ban on soft dollar benefits above $300
While some planners will probably miss the holidays, cruises or trips paid for by fund managers or dealer groups, few would probably argue that they are an essential part of their businesses.
Of more immediate and pressing concern is whether this will apply to things such as marketing and other business-related activities that dealer groups and fund managers have been known to assist with from time to time. But ultimately, those are things that practices should already be starting to come to grips with themselves, as part of the journey towards becoming better and more professional businesses.
5. Introduction of a new form of limited advice called scaled advice The concept of scaled advice is actually not a new development. Indeed, it is something that my team and I have spoken about for a few years already. What is interesting is the Government also reaching this natural outcome, which I welcome as a pragmatic way forward for all practitioners of financial planning involved.
Of course, it is still early days and details are few and far in between, so it is best to reserve our judgment for now, but it is a positive sign nevertheless that the Government does wish to make financial advice something that is both accessible for more of the population, but also more flexible for planners to deliver.
So in conclusion, when we look at the recent FOFA updates as a whole, it’s quite clear that insurance outside of super remains the last bastion of commissions (or any other form of payment not directly from the client). And in all likelihood, it won’t take much for that last bastion to fall. Another financial crisis or financial scandal is all it takes.
Ultimately, it is clear that Fee-for-service is definitely on its way. It’s time for all financial planners to step-up, be proactive, and be ready for 1st July 2012.
Lap-Tin Tsun is the Managing Director of E&W Strategic Partners, a boutique consulting and training firm that specialises in assisting financial planning businesses in transitioning to fee-for-service. E&W Strategic Partners have a range of fee-for-service books and training workshops available. For more information, please visit the E&W Strategic Partners website.