The Future of Financial Advice legislation, which came into effect in July 2013, is undergoing more changes.
The Future of Financial Advice (FOFA) legislation is about as hot a topic in the financial planning world as anything at the moment.
So how did we get to this point and, more importantly, what does it mean for you? First, some background: FOFA refers to new regulatory reforms that initially stemmed from the fallout from the global financial crisis, with specific attention given to ‘dodgy’ financial practices.
To put it simply, the reforms were designed to encourage more people to get financial advice and help them take better care of their finances.
Specifically, they put into law the need for a planner to act in your best interests and banned commissions on investment products. These two areas were the source of much of the past financial collapses.
Like many changes, the first draft of the law went too far in a couple of areas, adding extra costs and uncertainties that did not work the way it was intended to, so the current government made more changes.
The debate is whether it has now swung the pendulum too far the other way as often happens in “chase-your-tail” government decision-making.
A few points on what this means for average punters looking to get their finances in order:
• A financial planner now has a specific legal requirement to act in your best interests. In fact, the law says that where there is a conflict, the planner specifically has to put your interests ahead of theirs.
• If you are getting personal advice, sitting down one to one with a financial planner, he or she cannot be paid investment commissions. However, one of the most contentious issues in the FOFA amendments is that commissions could find their way back into investments that are made as a result of “general advice”.
The crazy thing is that “general advice’ is actually no advice – it is simply general Information about an investment, provided with no reference to whether it actually suits you at all.
It’s the sort of information that you might get from a call centre when you inquire about buying some car insurance.
The government wants to bring this back so that companies can provide sales incentives for their staff to reward them for good performance. That’s fair enough if everyone understands what is going on.
The way the change is worded though, it could easily be exploited so that average punters could think they were getting personalised financial advice when in fact they were not, and end up buying an investment that is not right for them but puts extra dollars in the pocket of a salesperson.
• The proposed changes mean you can agree to limit the scope of the advice you get to keep costs down, if you want to.
For example, you might only want advice on your super, or a savings plan – just let your adviser know that.
Previously, your planner had a duty to understand your entire circumstances before they could limit their advice. It was kind of like having your doctor perform a full physical on you when all you wanted was some cold medicine.
• Your adviser has a duty to disclose all fees and benefits to you both before and after the FOFA changes. If you don't understand what you are paying for make sure you ask. It's your money so it is vital you understand how you are spending it and what you get in return.
Top five questions to ask your financial planner.
1. What do you do to plan for me as a person, rather than just plan for my money? That is, how do you ensure your recommendations will be congruent with my values and attitudes, instead of just being a cookie-cutter approach.
2. Who owns your company? Being wholly or partly owned by someone other than the planner is not necessarily a bad thing. But, you should be aware of this, and ask if it creates any bias in the products the planner may recommend.
3. Have you ever had a claim on your professional indemnity or been subject to an adverse ruling by a Complaints Dispute Resolution Service. An adviser may be a bad apple and ASIC (Australian Securities and Investments Commission) may eventually get around to banning them, but that is shutting the gate after the horse has bolted. Much more common is that advisers have complaints made against them through their insurers or the Financial Ombudsman Service, so it is good to know.
4. Ask if your adviser is a member of the Financial Planning Association. To be an FPA member you need to comply with its code of conduct, which is set higher than the FOFA requirements and includes an ethical element, essentially meaning accountability to their peers. The FPA has a conduct review commission, so members are accountable to each other.
5. On a more positive note, ask for three referrals from your adviser’s clients that are in similar stages of life or financial situations. Call these people and have a chat. The types of people they are and the comments they make will be a big help in deciding if the planner is right for you.