According to Rob Lavery, the Technical Manager for wealthdigital, Australia’s leading online advice portal, the picture is a challenging one, particularly for those who provide predominantly SMSF advice under a limited license.

“The hope that advisers under limited AFSLs might avoid the full suite of training and education requirements is looking more and more unlikely,” said Lavery. “Unlike RG146, the standards enforced by FASEA, as they currently appear, do not scale up and down according to your speciality or licence class.”

“FASEA’s proposed guidance on new qualifications pathways for existing advisers split requirements into 3 categories. Advisers with no, or an unrelated, bachelor’s or postgraduate degree will need to do a full graduate diploma. Those with a related bachelor’s or postgraduate degree, such as accounting, will have a 3-subject bridging course to complete.

Those with an approved planning degree, or a related bachelor’s degree and post-graduate qualification, will have a single subject on FASEA’s code of ethics to complete.” “Many accountants who provide limited advice on SMSFs will find themselves required to do a 1 or 3 subject bridging course,” Lavery continued. “Those who have been in the industry the longest may need to complete the full graduate diploma.”

The second part of the new standards will be the requirement to adhere to FASEA’s new code of ethics.

“FASEA’s draft code of ethics included provisions not common in other industry standards,” said Lavery. “The requirement to uphold and promote the ethical standards of the profession may require advisers to actively report on colleagues and associates they believe to be acting contrary to the code.”

“Furthermore, all advisers, including those under limited AFSLs, will need to subscribe to a code monitoring body. Such a body will result in increased cost and regulatory requirements for those providing advice.”

Lastly, Lavery identified the rigours of the new exam. “FASEA’s consultation paper on the adviser exam noted that 80% of the adviser exam will be on non-strategic areas. For the most part, the exam will focus on Corporations Act rules, FASEA’s own code of ethics and the application of ethical thinking and behavioural finance.”

“All advisers, including those under limited AFSLs, will need to pass each section and achieve an overall mark of 65% or higher. The exam is proposed to be 3 to 4 hours, will be a mix of multiple choice and short-answer questions, and will require significant preparation for all candidates. Existing advisers will have until January 1, 2021 to pass the exam.”

“Those providing advice under limited AFSLs have to actively commit to maintaining that part of their business,” Lavery concluded. “They will be required to subscribe to a code monitoring body within 18 months, will need to have passed the adviser exam within 2 and a half years, and will need to meet the education standards by the start of 2024.”

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In the most part, it concentrates on default superannuation funds for new employees however its recommendations cast a shadow over superannuation advice.

wealthdigital’s Technical Manager, Rob Lavery, believes this impact on advice has been somewhat missed.

“Certain aspects of the draft report have received significant coverage,” Lavery said. “The Productivity Commission’s unfavourable view of advice given in relation to SMSFs has been commented upon, however there are more pressing issues that advisers need to consider.”

“At the core of the issues affecting advice is the recommended creation of a “best in show” list when allocating default super funds. When an employee with no existing super fund commences their first super-supported employment arrangement, they would be directed to an online form where they would be able to choose a super fund. Their chosen fund can be any complying super fund but, for those who don’t have a specific fund in mind, a list of 10 “best in show” funds will be provided from which they can choose. If no choice is made, the employee is put into one of the 10 “best in show” funds on a rotating basis.”

“Leaving aside the issues around how these “best in show” funds are chosen, it is a few short paragraphs buried on page 369 of the draft report that should concern advisers,” Lavery said. “The Productivity Commission note that ASIC has stated that this “best in show” list would be taken into account when guidance is provided to advisers, particularly around the best interests duty.”

“Furthermore, the same section of the report notes that ASIC would consider making it mandatory for advisers to consider the “best in show” list. This rule has been referred to as the “if not, why not” rule.”

Lavery sees some merit to this approach. “Having a clear-cut, 10-fund list that forms the core of every adviser’s superannuation Approved Product List (APL) would create consistency in the advice provided to clients. It would also, hopefully, provide advisers with a more clearly defined safe harbour than is now the case”

“That said, there are a number of drawbacks to this approach,” Lavery continued. “When it is known that using a fund from the “best in show” list cannot be viewed to be outside the client’s best interests, why risk an off-list recommendation? The risk of cookie cutter advice is significant.”

“That the recommended “best in show” list is only reviewed every four years is also worrying. A lot can happen in a four-year period and it may not be in a client’s best interests to be invested in the 9th best fund from three and a half years prior.”

“It is less relevant to advice,” Lavery added, “but, the recommendeded model only defaults once, at the start of an individual’s career. The default fund follows them from employer to employer over their working life. As such, if they never switch funds they may find themselves in the 9th best fund from 40 years earlier.”

Lastly, Lavery has concerns about the impact such a list would have on the funds available to advisers and their clients. “By limiting the possible default funds to 10 for a four-year period, those funds not on the list will stagnate and, in all likelihood, lose membership and cost effectiveness. The growing, “best in show” funds may well start to consume the disadvantaged funds that missed the list.”

“In such an environment, what incentive is there for a new participant to enter the market? It would be an enormously loss-leading exercise for a new fund to attempt to survive off those individuals who voluntarily switch and those advisers brave enough to make off-list recommendations. Innovation in superannuation will suffer as a result.”

The window for making a submission to the Productivity Commission regarding the draft report is open until 13 July. “Advisers should ensure their voices are heard on this important assessment of the financial services industry,” Lavery added. “Any changes that reduce the incentive to provide tailored advice and issue innovative products need to be thoroughly examined.”

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All financial advisers will be required to abide by the code from January 1, 2020 and will need to choose a body to monitor their adherence to the code. This monitoring body will have the ability to apply sanctions to an advice provider for breaches of the code.

ASIC has released a consultation paper on how these monitoring bodies should be overseen. Monitoring bodies may face penalties if they fail to adequately monitor the new FASEA-authored code of ethics.

This increased regulatory impetus is why the new code of ethics should matter to every financial adviser. wealthdigital’s Technical Manager, Rob Lavery, believes it is important that advisers have their say on the final form of the new code.

“Not only will advisers need to adhere to the best interests duty, disclosure requirements and other black-and-white legal obligations,” Lavery said, “they will also have act in accordance with this less prescriptive code of ethics.”

“The draft code contains standards that are new to financial planning. The first is a requirement to act in accordance with the spirit of all laws and regulations.”

Lavery sees this as a broad requirement. “How is the spirit of a law determined? Is it revealed by the words of the politicians and review panels that may have recommended that law? Is it revealed by the explanatory memorandum that accompanied the bill? Is it identified by guidance from the regulatory body charged with enforcing that law?”

“This is not the first time that the spirit of the law has arisen as a concept when considering professional conduct,” Lavery continued. “Nonetheless, it is a far-reaching concept that advisers should question while they have the opportunity to do so.”

FASEA’s draft code of ethics also requires advisers to hold each other accountable for the protection of the public interest. Lavery sees this as a noble sentiment but one with challenging ethical implications.

In essence, if an adviser sees a colleague, or fellow industry participant, doing something questionable, they are required to report their suspicions to an appropriate authority.,” Lavery said. “If they fail to do so, they may fall foul of their code of ethics and be penalised.”

“Will this prevent unethical behaviour by requiring good people to say something?” Lavery questioned, “or will it engender mistrust between industry colleagues? It is another standard that should be discussed by those in the advice industry.”

The window for making a submission to FASEA on the draft code of ethics closes on June 1 and Lavery believes advisers should consider their response to the code. “This code will be more than the subject of compulsory study,” Lavery said, “it will be an enforceable set of standards that advisers will have to abide by. The time to help mould this important element of industry governance is now.”

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wealthdigital’s Technical Manager, Rob Lavery, has concerns about the industry’s familiarity with the rules, “it sounds like a straightforward opportunity, but there are plenty of places advisers can come unstuck.”

“There are some clients, who seem like prime candidates to benefit from the strategy, who may not qualify,” said Lavery. “Issues around how long the client has owned the property, how the sale is to be executed and the amount of the sale proceeds all need to be considered.”

“There are also clients who may be able to use the downsizer contribution when it doesn’t seem obvious. If the client does not own their home themselves, but their spouse does, they may be able to use the downsizer contribution if the home would have been considered their main residence under CGT law.”

While Lavery cites eligibility as a concern, he also sees other factors advisers may not have considered. “Clients may find that their downsizer contribution has unexpected consequences. Centrelink meanstesting may be impacted by the change in the client’s assets. This is particularly important where the client is holding funds to purchase a new home.”

“Changes that took effect on 1 July, 2017 will also influence the benefit a client can gain from making a downsizer contribution. The client’s transfer account balance will need to be considered. If their balance is approaching their transfer balance cap, they will be restricted in how much of their downsizer contribution can be used to start an income stream.”

“The client’s total superannuation balance also has flow on affects. Clients with higher total superannuation balances may lose access to a number of benefits and opportunities in the super system. Those with SMSFs will need to be particularly careful.”

Lavery also warns that not all the rules that will govern the downsizer contribution are yet clear. “The changes to the regulations that will allow older clients to contribute to super, without such requirements as meeting a work test, are yet to be made. There may yet be more devil in the detail.”

Lavery concluded, “ultimately, advisers will be best served to familiarise themselves with the rules around the downsizer contribution well before the start of the new financial year.”

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Wayne Wilson, CEO of knowIT Group, said the appointments enhance the technical and legislative knowledge, analysis and support that the business offers financial advisers through its Desk Caddie online tool.

“One of our primary focuses since taking over Desk Caddie has been making sure we have access to the right expertise and experience to maintain its knowledge base at the highest possible level.

“Ensuring we have comprehensive, up-to-date and accessible information available to Desk Caddie users at all times is key to its ongoing success.

“Desk Caddie already provides practical support to more than 4000 advisers, to help develop financial planning strategies for clients, and these appointments will further add to the services we provide,” Mr Wilson said.

Rob Lavery joins KnowIT as technical manager. He has fifteen years industry experience and was most recently with ANZ Wealth as content and design analyst. He has also worked at Pinnacle Financial Services, TAFE NSW and ING/OnePath in a range of education, technical services, and government relations roles. Mr Lavery holds a graduate diploma of financial planning and is currently studying for his master in financial planning.

In addition to Mr Lavery’s appointment, knowIT has also recruited three subject matter experts who will be responsible for developing technical content and subject updates for financial advisers through Desk Caddie.

They are: Kieren Dell (investments); Stuart Milne (investments); and Tim Miller (SMSFs).

Kieren Dell has over 31 years of experience in superannuation and financial services, having worked in a variety of corporate roles as well as an independent consultant to the industry.

He is a partner in Praxis Partners, a small consulting firm in financial services, founded in 2000. His previous roles was as general manager, financial planning and investments for Perpetual Private Clients, and he has also worked at Barclays Global Investors, Westpac Financial Services, Retireinvest, MLC and BT.

He was involved in the establishment of the Australian Retirement Income Streams Association in the 1990s, becoming its Chairman and first CEO prior to its eventual merger with IFSA (now the FSC). He was also executive director of the Senior Australians Equity Release Association of Lenders (SEQUAL). Mr Dell holds a Bachelor of Arts degree from Sydney University and a Bachelor of Laws degree from the University of Technology Sydney.

Stuart Milne has over 30 years’ experience in the wealth management and superannuation industry. He co-founded Praxis Partners in 2000 and prior to this spent fourteen years in various corporate roles spanning product management, operations, product development, strategy and technology at organisations including Zurich Financial Services, Colonial First State, and Aviva Australia.

He has been involved in product design and development across the funds management industry including master funds and wrap accounts, unit trusts/managed investment schemes as well as all types of retirement income stream and superannuation products.

Tim Miller started his financial services career at the Australian Taxation Office in 1990 and moved to its superannuation unit in 1994, providing superannuation assistance to employers, employees and tax professionals.

He has also worked at Cavendish Superannuation leading the retirement income and technical compliance teams, and was head of education at AMP SMSF, before becoming an independent SMSF trainer, presenter and mentor. Mr Miller is a member of the Self Managed Superannuation Fund Association and holds its Specialist Adviser (SSA) designation as well as a diploma of superannuation.

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