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Financial Advice matters

– The Future of Financial Advice (FoFA)

The level of attention that government has paid to the financial planning industry in the years following the exposure of unacceptable practices within the industry, clearly shows that financial advice matters. The most important matter that the regulations now in place address, is the fiduciary duty owed by the financial adviser to their clients. Whilst others might well join the chorus, we have always believed – and served our clients – on the understanding that Financial planners should always have been, and are now, duty-bound to act and advise in the best interests of their clients.

The FoFA regime of revised regulation of the financial services industry came into law as from 1 July 2012: the first major impact/s of that change took effect as from 1 July 2013. Following are the notes Continuum Financial Planners published on our understanding of how the regulatory changes were likely to impact the relationship between financial planners and their clients-

Fee Disclosure Statement (FDS)

Commencing from that date, all clients who have an agreed ongoing service package with their financial planner will be issued with an additional document beyond what has previously been required: that document is a Fee Disclosure Statement.

The requirements for a FDS to be compliant, are to report:

–         the actual remuneration derived by financial planners from their client during the twelve months to the anniversary date of the arrangement having been put in place;

–          what services have been agreed to be provided by the financial planner; and

–          whether or not those services have been delivered during the prior twelve month period.

For practical purposes the FDS will not change the value of the services you experience from your financial adviser – and it will entail additional costs to them to be able to generate the statement in a way that is compliant with the regulations; but it will provide an opportunity for clients of some financial planning firms to see for the first time, just what they are having done for them in return for the fees they pay to their financial planner.

As a long-standing ‘fee for service’ business, Continuum Financial Planners did not expect to have to increase fees for the provision of this additional documentation – and that indeed, is what happened.

Best-Interests: Advice appropriateness

Whilst financial planners have been required to demonstrate within their files (and to a less formal sense, within the Statement of Advice – SoA), that the advice has a reasonable basis on which it has been recommended, the new regime requires that the SoA must now show adequate financial data and background for the strategy recommended therein to be clearly seen as a natural outcome of bringing together the client’s financial goals and objectives and the financial products, through the recommended strategy. It must also demonstrate how the advice is ‘in the client’s best interests’. Because financial advice matters so much to many Australians, these obligations are welcome.

(Note: subsequent regulatory requirements require financial advisers/ planners to consider relevant family/ beneficiaries in considering the ‘best interests’ criteria.)

At Continuum Financial Planners we have been diligent to ensure that we are able to satisfy the ‘reasonable basis for advice’ test applied when the annual compliance audit is conducted; and believing we have always adopted a fiduciary responsibility to our clients, we have considered ‘best interests’ of clients as part of our modus operandi..

The step to providing the clear path of explanation as to appropriateness will be a minimal change; the demonstration as to ‘client’s best interest’ may call for some extra data to be acquired from clients for whom advice documents are required to be presented after 30 June 2013. Where this is necessary, we will contact clients at the relevant time – and where it can be avoided by getting advice documents prepared before 30 June, we will seek cooperation to complete these in the remaining few days of this month.

Conflicted Remuneration

What is ‘conflicted remuneration’? In very broad terms, conflicted remuneration is any form of remuneration that could be perceived to be in the interest of the recipient rather than in the ‘best interests’ of the client. It is income that arises from a ‘conflict of interest’.

There are a number of sources of income/ costs that flow in the financial services industry: most of these are reflective of the early stages of development of the industry and which can now be addressed because it has matured and is serviced in many new ways. Some well understood types of remuneration that fall into this category are commissions, volume bonuses and ‘shelf space’ fees. Not all of these sources of income flow directly to financial planners – but ultimately, they all cost consumers (investors – whether as members of superannuation funds, or directly).

Because of the structure of the credit and lending service parts of the industry; and of the life insurance industry, commissions cannot be avoided at present, but over the coming three to five years it is anticipated that remuneration for these services will be revised so as to eliminate ‘the percentage basis’ of payment.

As clients of Continuum Financial Planners you will be aware that we have always operated as a ‘fee for service’ firm: asset-based ongoing service fees are only accepted in the absence of clients accepting a flat-dollar basis which has been offered consistently (and constantly).  The receipt of any such remuneration is – where clients have agreed an ongoing service package with us – taken into account in determining the amount directly paid by the client. (The above-mentioned FDS will reflect these amounts by way of remuneration.)

Financial advice matters – to ContinuumFP and their clients

We welcome your comments or questions on this reform and how it is operating: please use the Comments box below to comment; or the Contact Us facility in our website to raise any questions on the matter.

If you would like to benefit from the dealing with one of the trusted and experienced financial advisers at Continuum Financial Planners Pty Ltd to experience how financial advice matters can benefit you, call our office – on 07-3421 3456; or use the above-linked Contact Us form to let us know: in either case, you can be assured of prompt and courteous attention to your enquiry.

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