FoFa opt-in clause will preserve Australians' wealth
20 March 2012
Failure to retain the opt-in requirements of the federal government's current reforms for the financial advisory sector (the Future of Financial Advice bills, or FoFA) will see a high proportion of Australians paying for little or no advice on an ongoing basis and erode their wealth, a University of Sydney expert on financial regulation says.
"The opt-in preserves the right of consumers to enter into an ongoing advice relationship if they want to but protects a large group of Australians - including many super fund investors - who either unknowingly enter into, or forget they entered into, an ongoing advisory relationship," says Associate Professor Joanna Bird from the Sydney Law School.
Associate Professor Bird, who prepared written submissions on FoFA for consumer groups, says the remuneration models of many financial advisers are unusual, possibly even unique. She says they are paid on an ongoing, indefinite basis without any active step by the client to effect payment. "When combined with the average consumer's lack of interest and engagement in their own financial matters, we get the current situation where many Australians are paying for financial advice that they do not receive," she says.
"Those who see a financial adviser may soon forget - if they ever fully comprehended - they have agreed to pay their financial adviser a regular advisory fee out of their investment products and that this will happen every year until they actively stop it or sell their investment product."
FoFA reforms currently before Parliament feature a creative regulatory device, the opt-in, designed to deal with this problem. If the Parliament passes the opt-in, a client who has entered into an ongoing advisory relationship will receive a notice every two years explaining that, if they want to, they can renew their arrangement with their adviser. If they fail to tell their adviser in writing that they want to renew, the arrangement will come to an end.
"The financial advice industry has lobbied hard against the opt-in, arguing it is unnecessary and costly," says Associate Professor Bird, who previously worked for the Australian Securities and Investments Commission.
"The first argument flows from a misunderstanding of the other FoFA reforms. Unfortunately, there is nothing in the proposed ban on conflicted remuneration, where advisors receive commissions for products they sell, or the new best interests duty for advisers that will prevent advisers taking fees out of their clients' investment products on an ongoing basis. Periodic disclosure of fees will also not help the large number of disengaged clients.
"The requirement that advisers provide those clients, who they have put into an ongoing advice relationship, with a new document every two years will increase advisers' costs. But this has to be weighed against the cost to consumers of the current situation in which a significant number of Australians are paying for little or no advice services on an ongoing basis, and seeing their wealth eroded."
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