In the wake of the rollback of the Future of Financial Advice (FoFA) legislation in the Senate last week, comes research which indicates advice will be cheaper, not more expensive as Finance Minister Mathias Cormann has claimed. The research was conducted by Rice Warner actuaries and commissioned by Industry Super Australia (ISA) and is presented in a report on the impact of the regulatory changes on the development of the financial advice industry.
The FoFA reforms were first introduced by the then Labor Government in 2012 and became mandatory 1 July 2013. The incoming Abbott Government pledged to reverse many of these reforms and seemed to have been successful with the rollback of legislation receiving approval in the Senate from the Palmer United Party (PUP), thus achieving the numbers required to pass the bill. But last week the ‘coalition of commonsense’ crossbenchers joined together to revert to the original FoFA legislation, including requirements for financial planners to contact clients more regularly to check they still wish to receive advice and to act at all times in the best interests of their client.
Following this surprising Senate about-face, Senator Cormann declared that ‘costly red tape pushed up the cost of advice for people across Australia who are saving for their retirement’ and that his government remained committed to reversing the FoFA reforms.
The Rice Warner report, however, begs to differ, and comes to the conclusion that: “On average, the price of financial advice is expected to be lower after these regulatory changes with the reforms facilitating a shift towards less costly scaled advice and more transparent charging for complex advice.”
It also suggests that the removal of the need for clients to ‘opt-in’ to advice would have been ‘profoundly damaging’, costing consumers an extra $1.7 billion in fees for advice not received. In total, the report claims, “the increased provision of more affordable scaled advice will result in a significant reduction in the average cost of advice from an average of $2046 before the reforms to $1163 after the reforms by 2026/2027, in 2012 dollars.”
Read the Rice Warner Report
Nothing is really surprising in the report released by Rice Warner. What remains surprising is the ongoing government defence of poor planning regulations.
There is little need to enumerate the long list of company collapses and poor advice outcomes which have led in recent years to many Australians losing their retirement nest eggs. We know the companies and the banks which were involved in offering poor advice to invest money they could not afford in risky schemes, which would in return deliver high commissions to the snake oil salesmen who promoted them. It’s a shameful period in Australia’s investment history and brings no credit to the banks, the investment companies, nor to the corporate regulator, the Australian Securities Investment Commission (ASIC). So whilst the FoFA legislation passed by the Gillard government did not solve all problems associated with planners and banks, it did at least address some of the more obvious conflicts of interest inherent in our financial services system. That the incoming Abbott government planned to reverse these amendments made no sense to those who have experienced loss because of fraudulent financial dealings, nor those who have reported on them. And it seemed to be upon a Palmer United Party whim that this reversal made it through the Upper House in the first instance.
But that’s all changed, the FoFA legislation has been reinstated and planners really will now have to have their clients’ best interests at heart. And those who tell you that this will be expensive for the consumer have also been proven wrong, as Rice Warner’s report demonstrates – not only will advice be cheaper, it will be more affordable for a far wider segment of the population.
Now, what’s not to like about that?
What about you? Do you have a financial adviser? Are they delivering value for money?