To be totally clear the FPA has never and does not support Opt-In. We have worked for many years with many  stakeholders to get Opt-In removed along with other sensible concessions like a 12 month transition period, removal of additional disclosure requirements and sensible Best Interest amendments to allow for scaled advice.

We are continuing to work on those concessions and more on your behalf even as the legislation is being debated. We cannot guarantee the final outcome as that is in the hands of the Government and the Independents but we will continue to fight for what is in the best interest of members and the profession. That includes the removal of Opt-In.

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The Cost of ‘opt-in’ – confusion over what is and isn’t included in our calculations
Rice Warner’s estimate of $11 per client per annum for ‘opt-in’ is the ONGOING cost, and excludes ‘opt-in’ implementation costs.  It also excludes any costs associated with other parts of the FOFA reforms.  We have also made an important underlying assumption that advisers are already in regular contact with their clients, meeting at least once every year.  Importantly, the proposed grandfathering provisions will mean that ‘opt-in’ will only apply for new clients from 1st July 2012, so the first ‘opt-in’ will occur on 1st July 2014.  Thus, advisers who adapt their business models to include annual or biennial client reviews for all new clients will be able to incorporate ‘opt-in’ processes as part of their normal client management.

 In summary, the cost of ‘opt-in’ should not be confused with:

• the cost of contacting clients who are not serviced regularly
• the implementation and ongoing costs of other FOFA reforms.

 How was the cost calculated?
Costs were estimated for both dealer groups and product providers.  When calculating costs, consideration was firstly given to key functions that would be required under an ‘opt-out’ regime.  This was to show a complete picture of the relevant advice processes, including areas where items required under ‘opt-out’ can be leveraged to support an ‘opt-in’ approach.  This demonstrates why the costs of many additional business processes required to support ‘opt-in’ are relatively modest (they would be required for an ‘opt-out’ scenario anyway). 

                                                 One-off                                 Ongoing

Dealer Group                      $105,000                           $110,000

Product Provider             $1,400,000                           $450,000

For an industry wide cost, Rice Warner assumed there these costs will be incurred by 25 product providers and 100 dealer groups, resulting in the following total costs:

One-off            Ongoing (per annum)

$46m                     $22m

ASIC estimates that approximately 2,000,000 people receive advice every year.  Consequently, the cost per client is $11 per annum.

Number of Dealer Groups
Rice Warner has been criticised for restricting its calculations to only include the top 100 dealer groups.  It is generally accepted by industry stakeholders that there are about 17,000 advisers operating in the market.

An analysis published in Money Management on 29 July 2010 covering 100 dealer groups shows the following statistics:

Interestingly the smallest Dealer Group included in this analysis had just 12 Authorised Representatives.  There will clearly be some advisers who fall outside the top 100 dealer groups.  However, their number will be small relative to the accepted industry total of 17,000.  Overall, it is reasonable to conclude, from the published data, that no more than 2% to 3% of authorised representatives are with dealer groups with fewer than 30 authorised representatives.

Rice Warner also notes recent media discussion regarding “small advice businesses”.  The table above shows that the average number of advisers per office/practice is around 2 so there are clearly a large number of small advisory practices.  However, this should not be confused with the number of small dealer groups.  We can only conclude that those who talk about significant numbers of small dealer groups are, in fact talking about small advice practices – and most of these operate through larger dealer groups.

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Following lengthy discussions lead by the FPA, the Minister for Financial Services Bill Shorten last week indicated that the Federal Government would reverse a decision to ban commissions on insurance inside Superannuation on personal advice.

Whilst welcoming this review, the FPA also continues to call on the government to review its position on opt-in ahead of the release of draft legislation due out in coming weeks.

“Opt-in is an onerous proposal that won’t benefit Australians seeking financial advice,” FPA CEO Mark Rantall said.

“We have welcomed, and lead the way, in introducing a best interest duty and the banning of commissions on investments, which in effect make opt-in a redundant policy.

“No other profession is subject to such a policy and it will not lead to improved outcomes for consumers.”

Mr Rantall cites current market uncertainty as a prime example where opt-in would not benefit the consumer.  Noting that if a client failed to opt-in last week, for example, they would no longer be in a position to be notified or advised by their planner.

“It is the ongoing relationship between financial planners and their clients that enable planners to immediately act, provide advice and reassure clients to enable them to make rational decisions,” Mr Rantall said.

“The proposed opt-in requirement could put at risk planners ability to provide a critical response during crisis situations and market uncertainty such as all Australians are faced with now.”

“This week’s volatility is a perfect illustration of the dangers of opt-in.

This week, ASIC has also claimed that not having opt-in may mean that consumers could pay for advice they do not receive due to asset based fees.

“This is utter nonsense.” Mr Rantall said. “If the issue is either asset based fees or ongoing fees then let us have that debate. It has nothing to do with opt-in. You can still have an ongoing fee that is not asset based and provided it is not embedded in a product then the client has total control over whether or not they continue to pay that fee.

“While we accept the sentiment and strongly agree that it would never be conscionable to charge a consumer for a service they are not receiving, it is paternalistic to the extreme to use as an excuse that people don’t read their statements or paperwork as a reason to have opt-in.”

“By all means give clients the opportunity to opt-out every year, but forcing clients to have to opt-in is an added burden they shouldn’t have to bear,” Mr Rantall said

Mr Rantall noted a number of other consequences associated with opt-in:

• The actual investment and other risks associated managing one’s financial affairs, such as breaching superannuation contribution caps, changes to legislation and changes to client’s circumstances, for example, are then borne by the client alone.
• If client inertia results in a failure to opt-in, the client’s investments remain in place yet the planners’ ability to provide investment management services is stopped leaving the investments unmanaged and at risk.
• The client’s advice strategy cannot be monitored or reviewed by the planner and could become dated and fail to meet the client’s ongoing needs, which the client may not be aware of.
• Removes the ability for consumers to decide up front with their financial adviser as to whether or not they wish to have a service contract for a set time period or have an annual renewal service agreement, as is current practice.
• Fails to recognise that the financial planner-client is a long-term relationship built on trust, loyalty and openness. It is not a transaction like many other financial services.

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“A world in which unnecessary costs impede consumer access to advice is bad for consumers, bad for advisers and bad for the country,” said Association of Financial Advisers (AFA) CEO Richard Klipin. “The AFA’s Back to Basics research, released last year, revealed that only two in 10 Australians currently receive advice. Measures which make it more expensive to get advice means even fewer will be able to afford it.”

Mr Klipin said that without advice Australians are at even greater risk of being inadequately funded for retirement and inadequately insured.

“The cost to the Australian government of underinsurance alone is estimated to be $1.3 billion over the next 10 years according to the Lifewise/NATSEM Underinsurance Report released last year,” Mr Klipin said. “It’s time we looked for solutions to the big issues facing this country, rather than tie financial advisers and their clients up in endless red tape.

“Opt-in is poor public policy with no discernable benefit –  not for consumers, not for the advisory profession and not for the broader community,” said Mr Klipin. “It looks like a policy dreamed up by the scriptwriters of Yes Minister.”

Mr Klipin said the AFA would continue to oppose opt-in. “This so-called reform will hurt the very people it is designed to protect,” he said. “The AFA is committed to going into bat for the millions of clients our advisers serve.”

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“The opt-in proposal is bad public policy that will harm more Australians than it will benefit,” said FPA chief executive Mark Rantall.

“The best interests of Australians are served by receiving the known and measurable value of an ongoing duty of care from a professional financial planning practitioner bound by a fiduciary duty to their client.”

All FPA members are bound to a code of conduct and already operate under a world’s best regulatory regime. The FPA has embraced transparent guidelines regarding the banning of upfront and trailing commission payments and is aggressively pursuing a mandate for heightened professional standards.

The banning of commissions effectively renders opt-in a redundant policy solution looking for a problem.

“Our members continue to improve access for all Australians to quality, affordable financial advice. Opt-in will erode these benefits by introducing administrative complexity, confusion and increased compliance costs,” he said.

Proponents of the ‘opt-in’ argument are running a myopic campaign that risks endangering the robust financial futures for many Australians. The FPA is tired of the industry fund one track agenda, and with the removal of commission based payments can see no logical reason for continuing this time-consuming debate.

Recently, the FPA provided members with a comprehensive ‘FoFA Pack’ detailing the key issues raised by the Future of Financial Advice (FoFA) reforms. This pack outlines the FPA stance on opt-in and encourages financial planners to engage with their local MP to ensure that as many politicians as possible have a clear understanding of the issues facing the financial planning industry and Australians.

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The opt-in/opt-out debate is still top of the list for most financial advisers. Industry is quite divided on the issue.

The theory behind the opt-in service is that if clients feel that they want and are receiving value from a service provided they will opt-in to pay. Too often we have found people are apathetic towards their superannuation and other financial products. They do not realise the fees and charges and for too long have paid for services they have not had or known they were entitled to.

However, for advisers earning a good part of their income that way, this is a huge financial blow.

Many advisers believe that not only are their livelihoods affected by the new legislation but also their clients’ best interests.

Research recently undertaken by CoreData on behalf of the AFA has backed advisers in this argument, stating that during the financial crisis investors largely acted in two ways – exiting the market and storing their assets in cash and those who saw the market freefall as an opportunity to buy discounted assets.

The CoreData research on the high net worth investor segment clearly showed that those who remained in the market, and even used the crisis as a chance to buy new assets benefited significantly from the recovery while those who exited are in no ways better off than 12 months ago.

Extrapolated from this is that many advisers’ clients would have likely chosen not to opt-in, had the rule existed during the financial crisis, and as a result would have been worse off for their decision.

This is clearly another area of opportunity for advisers acting in their own best interests to make sure they are able to articulate the value of advice and their own offering to clients and potential clients.

If a client is sold on the need of an adviser’s service they are more likely to choose to stick with them in good times and bad. However, if a client does not feel they are receiving value for the service that they are receiving they will not choose to opt-in. It’s similar to an adviser’s own behaviour should they feel they were not receiving value for something they were paying for. They would choose not to opt-in.

What is your value proposition? Is it a good one? Are people going to choose you and what you offer? Spending the time developing that proposition now is going to see you reap the benefits later.

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