What to expect with FoFA

Are you seeking financial advice? NICRI’s Craig Hall explains how the new FoFA legislative changes will affect you.

Much debate and discussion has occurred regarding the Future of Financial Advice (FoFA) initiatives first introduced by the Labor Government in 2012. The original objectives, as stated on the FoFA website, “…are to improve the trust and confidence of Australian retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice.”

It seems that both the current and previous governments have had difficulty in striking a balance which satisfies advocates for both those seeking and those providing advice. In July this year, some aspects of the FoFA reforms were rescinded by the Abbott Government. The debate regarding whether the measures go too far, or not far enough, will continue well into the future as the FoFA outcomes are measured and technology and innovation bring change to the industry. Despite this, it is fair to say that we will still have a more robust, more transparent and less conflicted system than we did before.

So, how will this affect us as individuals? Here is what the FoFA changes mean for those seeking financial advice.

Banning of conflicted remuneration/commissions

Financial planners are no longer allowed to receive any payment considered to be conflicted remuneration – most commonly commissions – for recommending certain investment products. Their income is likely to come directly from their clients and will be determined by factors, such as the complexity of the situation, the time taken to research and formulate recommendations, the services included and the actions involved to maintain the portfolio on an ongoing basis. This measure is intended to remove the possibility and/or the perception that recommendations are made primarily for the benefit of the planner.

This ban does not apply to certain financial services products and existing arrangements which were in place prior to 1 July 2013 will remain.

Tip – Discuss the fee structure thoroughly with your financial planner and obtain a copy of the Financial Services Guide (FSG) at your initial meeting.

Fee Disclosure Statement (FDS)

When a financial plan is presented, an FDS should be presented along with the Statement of Advice (SoA). This FDS outlines the specific service and fee arrangement between you and your planner. These agreements may also be referred to as an Ongoing Service Agreement, Ongoing Fee Arrangement or a Client Service Agreement. Importantly, they can be terminated at any time.

Tip – Look carefully into the services which are available to you as part of these agreements and consider whether they actually benefit you. Be sure to utilise all that is being offered.

Click NEXT to read more about how will the FoFA legislative changes will affect you.

Best Interest Duty

While financial planners already had existing rules regarding the provision of appropriate advice, the ‘Best Interest Duty’ prescribes actions which are designed specifically to put your interests first when making recommendations.

Broadly speaking, when obtaining information and formulating the plan, the financial planner must identify and clarify the advice sought and assess whether they have the expertise to provide the advice. They must also identify your needs, objectives and any limitations or information which may affect the scope of the advice.

The planner must then assess the information and conduct reasonable research into the products which might achieve the stated objectives and meet your needs. Finally, all judgements must be based on your relevant circumstances.

These obligations are in addition to other requirements, such as:

  • the advice being appropriate
  • prioritizing your interest ahead of their own
  • providing warnings if there is any incomplete or incorrect information supplied by you and,
  • the requirement that the licensee ensures that their planner complies with these laws.

Tip – When the SoA is presented, ensure that your discussions with the planner focus on how the recommendations and any other services offered will best serve your interests.

Other measures

A number of other measures have been introduced which deal with various aspects of advice, including:

  • scaled advice  – clarification of ‘limited’ or ‘defined scoped’ advice with the aim to reduce the cost to those who seek ‘single issue’ or ‘non-holistic’ advice
  • use of the term ‘financial planner’ to enhance competency and professionalism of planners, certain conditions and requirements must be met by individuals who wish to be referred to as a financial planner
  • removal of the Australian Financial Services License (ASFL) exemption for accountants providing financial advice – to bring into line the licensing requirement for those who provide financial advice.

It is important to note this is not an exhaustive list of the measures and amendments which were introduced recently. At the time of writing the outcomes of the amendments and some of the original measures were yet to be fully finalised.

The National Information Centre on Retirement Investments (NICRI) Inc. is an Australian Government funded, independent consumer agency providing information to the general public on investment products.

For further information on superannuation, income streams and financial planning issues please contact NICRI toll free ph 1800 020 110, email [email protected] or visit www.nicri.org.au

Written by Debbie McTaggart