The Future of Financial Advice

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					The Future of Financial Advice

       This is the first of a series of articles on the Future
       of Financial Advice (FoFA) Deloitte will publish in
       our Regulatory Review to support the industry as it
       grapples with the new challenges posed by FoFA and its
       emerging trends. In this article we provide an overview
       of FoFA, its timeframe, and discuss the implications for
       change and people management
       Overview                                                  The FoFA reforms aim to improve the trust and
       The FoFA reforms were introduced by the former Minister   confidence of Australian retail investors in the financial
       for Financial Services, Superannuation and Corporate      planning sector by targeting the quality of advice and
       Law, Chris Bowen in 2010 in response to the report by     enhancing retail investor protection. ASIC research has
       the Parliamentary Joint Committee on Corporations         shown that distrust and cost prevented many from
       and Financial Services (chaired by Bernie Ripoll MP)      seeking or accessing financial advice2.1The reforms seek
       into the issues associated with financial product and     to re-establish a relationship of trust between financial
       services provider collapses such as Storm Financial and   advisers and consumers by:
       Opes Prime, with particular reference to the role of      • Giving greater power to consumers
       financial advisers. The Minister for Financial Services   • Seeking better quality advice
       and Superannuation, Bill Shorten, is responsible for      • Introducing higher standards of professionalism for
       implementing the reforms.                                     financial advisers
                                                                 • Providing transparency around the cost of advice
                                                                 • Addressing conflicts of interest including conflicted
                                                                     remuneration structures.

                                                                 It also strengthens ASIC’s powers to take action,
                                                                 remove the accountants’ exemption, extend intra-fund
                                                                 advice and require clearer Financial Services Guides
                                                                 (FSGs). Currently the review and consultation processes
                                                                 continue around the definition of the ‘retail client’, to
                                                                 ensure it is correct, and explore the need for a statutory
                                                                 compensation scheme.

                                                                 2   One of the most recent reports showing these findings is the ASIC Report
                                                                     224: Access to financial advice in Australia December 2010

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                                                                                                    In practice

The key proposals are summarised in the diagram:

      Best interest                                          Removal of conflicted                Volume related
                                    Scalable advice
      fiduciary duty                                             remuneration                       payments

                                               .                               .

Diagram A: Summary of the key proposals

Timeframe                                                   The FoFA reforms have wide reaching implications.
The most recent Information Pack on FoFA was released       Independent research commissioned by the Financial
on 28 April 2011 with public exposure of the draft          Services Council indicated that recipients of financial
legislation expected in August 2011. Treasury anticipates   advice are likely to be up to $100,000 better off at
that legislation giving effect to these reforms will be     retirement than others; that individuals with a financial
introduced to Parliament before the end of 2011.            adviser are more than four times likely to have life
Legislation implementing the majority of the reforms,       insurance cover; and that the true value of financial advice
including the prospective ban on conflicted remuneration    lies in the ability to change individuals behaviours towards
structures, an adviser charging regime, and statutory       saving and financial discipline.
‘best interests’ duty, will commence from 1 July 2012.
The ban on upfront and trailing commissions and like        The effects of the reforms will also include restructures,
payments for risk insurance within superannuation,          mergers, acquisitions, opportunities and a possible exodus
will apply from 1 July 2013.                                of financial advisers. In recent weeks, there has been
                                                            a significant market response as organisations position
Challenges                                                  themselves for a future in a FoFA world. Nevertheless
As the FoFA reforms reshape the world of financial          there is still uncertainty over the reforms and when the
planning, organisations will be challenged to stay ahead    draft legislation is available in August, the key challenge
of the changes in order to come out on top in the new       will be to be adequately prepared. This can happen by
legislative environment. Actions will need to be taken to   thoroughly considering the impact of FoFA on strategic
make the most of the opportunities to differentiate from    and operational planning while the industry waits for the
competitors across various segments including customers,    absolutes to be agreed.
current and potential employees and advisers.

                                                                                   Regulatory Review August 2011      3
                                   Page 2 of 4
    Change management and people                                    Equipping financial advisers with the right
    One of the most significant areas will be determining the       capabilities
    impact of change on businesses and in particular the staff      What are the characteristics of a ‘good’ financial adviser
    and advisers when strategic objectives such as the client       and will those characteristics carry over into a reformed
    value proposition, operational processes and technology         financial planning industry? Most organisations have been
    required in support of strategic objectives, and related        tackling adviser capability for years but some still tolerate
    implications on tax, financial, actuarial, compliance and       a degree of grey regarding the critical knowledge, skills,
    people factors, change. The reforms will have a significant     and behaviours needed at an individual and organisational
    people and change impact as structures and processes            level to stay competitive. The characteristics of a ‘good’
    have to shift to enable advisers to operate in the best         financial adviser may not necessarily translate in a post-
    interests of their clients, whilst remaining engaged and        FoFA reform environment, and organisations must identify
    motivated in a commission-free world.                           and develop these characteristics in order to equip their
                                                                    advisers with the right capabilities to stay competitive
    Have you considered:                                            and to ensure that they meet the new statutory best
    • How well your organisation is positioned for the next         interests’ duties.
       chapter in advice?
    • The implications of FoFA on your people?                      Engaging advisers
    • Who you cannot afford to lose?                                Once an organisation has identified the critical
    • How you will manage the behavioural changes?                  knowledge, skills and behaviours to stay competitive,
    • How you will motivate financial advisers via a reward         the reward structure should recognise and reward
       program that does not involve product commissions or         desired behaviours and motivate employees to perform.
       volume-based bonuses?                                        Organisations will need to assess whether they have the
                                                                    capability to measure these new behaviours that are
    As the playing field dramatically alters, the level of          beyond the financial, and are linked to performance in
    preparedness and the way organisations manage the               such a way that engages top talent. Being clear about the
    reforms will be critical factors in their ability to attract,   non-financial drivers of engagement for their workforce
    retain and support talent. And ultimately position              will be critical.
    themselves competitively for the future.
                                                                    Ultimately, a successful organisation in the wake of FoFA
    Changing the mindset – a salesforce to                          and other reforms, will be one that has supported its
    a profession                                                    advisers to own the changes and encouraged them to
    Those organisations that manage the reforms well                embrace their new roles and responsibilities. By equipping
    stand to attract and retain the best advisers. Those            their people with the right capabilities, motivating
    operating under a commission structure, where advisers          them towards high performance and rewarding their
    are motivated by incentives, will require behavioural           achievements, these ‘transformed’ organisations will be
    change. The financial planning culture will need to             positioned to capitalise on the new opportunities the
    become transparent where everyone is very clear about           reformed environment presents.
    acceptable and unacceptable behaviours. To achieve
    a transformational organisation, advisers will need
    to be clear about their new responsibilities and roles.
    Organisations will need to articulate a compelling
    promise so that their advisers’ roles remain engaging
    and meaningful.

                                             Page 3 of 4
                                                                                                   In practice

Being clear about the non financial drivers of
engagement will be critical

  In consideration of these concepts, are you:
  1. Clear on why your top talent joined your organisation?
  2. Compromising these arrangements as a result of implementing FOFA?
  3. Confident you have articulated a new value proposition that will attract and retain the best advisers, and
      motivate them to stay and perform in the long term?
  4. Planning to ensure you retain your top talent?
  5. Aware of how your advisers will react when these changes come into effect?
  6. Prepared to help the advisers through the transition?
  7. Communicating the FOFA changes effectively?
  8. Motivating and rewarding a distribution channel with a short term focus via a reward program that does
      not involve product commissions and requires a longer term approach?
  9. Clear about the key knowledge, skills and behaviours you need your advisers to demonstrate to achieve
      business goals and meet regulatory requirements?
  10. Confident you can achieve or sustain competitive advantage?

                                                                               Regulatory Review August 2011      5
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