If you’d sat down at the start of last year and made predictions about what would happen in the financial planning industry over 2018, would you have guessed even a fraction of what went on?

I don’t think anyone would have predicted the impact of the Royal Commission, let alone the FASEA changes.

So with that in mind, only an idiot would try and make predictions about 2019.

I’m that idiot.

I’m of the belief that you don’t wait for change to be foisted upon you, but you take the initiative and get ahead of the curve. You can’t control the recommendations from the Royal Commission or the FASEA changes. But you can see where the industry is heading and start to make changes in your business now.

The financial advice businesses that succeed in the future will be proactive rather than reactive. They’ll initiate change rather than respond to change. And they’ll be extremely client-focused – this will be evidenced by a value proposition that speaks directly to their target market. And it goes without saying that they’ll be focused on advice rather than the product.

To position your financial planning business for success in 2019, here are the areas I suggest you focus on.

Community Expectations Are More Important Than Legislation

“Community Expectations” and “Community Standards” were a couple of the buzz-words of the Royal Commission. The underlying premise is simple – whilst it may be legal for something to occur, what does the community think about such a thing?

Community Expectations were talked about when it came to trail commissions. Whilst it’s legal for a financial planner to receive trail commission, is it okay for them to provide no tangible service in exchange for that service? Particularly in the context that if that trail commission was rebated back to the client, the client would have more money in their super fund when they retire.

It’s legal, but the community doesn’t like the idea. This also goes by the name of ‘the pub test’ – if you were talking about this at the front bar of the pub, what would the general consensus be?

In 2019, you need to think about how community expectations will impact your business. It’s no longer good enough to say that a certain practice is legal – we’re beyond that point now. Good financial planning businesses will examine their business from the viewpoint of their clients and will begin to adapt accordingly.

Which brings me to my next point – trail commissions.

Pressure On Investment Trail Commission

For many businesses, the percentage of investment trail commission they’re receiving relative to their overall income has been decreasing as they move to adviser service fees. But for most businesses, there’s still a percentage of income that’s recurring investment trail commission.

I understand the history of investment trail commission. And I know that it’s legal to still receive it thanks to the FOFA grandfathering provisions.

However, the Royal Commission has shone a light on this part of an adviser’s business and questions are being asked about why clients are paying this money for no service. And, going back to my first point about community standards, you can’t argue with the fact that if trail commission was rebated to the client they’d end up with a higher end balance.

I don’t know how investment trail commission will fare in 2019. I’m writing this article 24 hours before the Royal Commission findings are set to be released so I don’t have the benefit of reading that report. I’m also mindful that any recommendations contained in Commissioner Haynes’ report are just that – recommendations.  There will also be an election in the early part of this year so I can’t see any legislative change until later. But I’m sure there will be change.

I speak with a lot of financial advisers and in many cases, their trail commission situation is something like this – they provide service to the clients with trail commission when those clients need something done. Depending on the complexity of the service required, they may charge an additional fee. In other cases, they won’t charge extra because they’ll acknowledge that they’ve received $X of trail commission over the past few years and the client hasn’t had any contact with them over that period. Sometimes they won’t charge extra because there’s a pool of clients paying trail commission where they all subsidise each other.

In very few cases are those clients on a formal ongoing service program. Usually, this is because they became clients back in an era when the SoA’s referred to the importance of ongoing service and annual reviews but didn’t really provide any more information around how that would happen.

In 2019 if you can’t provide value for the trail commission you’re receiving, you’ll lose it.

You’ll either lose it through legislative change, through clients turning it off or product providers moving legacy products across to MySuper products.

If you’re lucky, that will be the extent of it. If you’re unlucky, you’ll receive client complaints as part of the switching off process. Clients will complain that they haven’t heard from you in a long time, that they weren’t aware of the amount of trail commission they were paying you and, you’ll start to get complaints that they were in an old, expensive product but you’ve never contacted them to talk about alternative products and strategies.

These complaints will cost you money and time.

So get on the front foot.

Get a revenue report of your business recurring investment trail commission for the past twelve months. Sort it in Excel from the client paying the highest amount of trail commission to the lowest.

Then start making contact with those clients. Send a letter first inviting them to arrange a review, then if you don’t hear from them, follow it up with a phone call.

Make a goal to have a conversation with every one of those clients. Make them feel loved and offer something of value.

Some will meet with you for a review and you’ll probably be able to help them with a proper overview of their goals and objectives. You’ll recommend new strategies and products and be able to implement a new ongoing service agreement that’s paid by a fee, not a trail.

For some of these clients, you won’t be able to change anything. They may be in a grandfathered pension and moving will place them in a worse position. There’s nothing wrong with this, but at least they’re happy having had a review and understanding why they can’t move.

Some won’t want to meet with you but will appreciate the offer.

There’ll be a portion you won’t be able to make contact with at all. They’ll either not return your calls or be uncontactable – an obsolete address and no current phone number. Think of these clients through the lens of community expectations – turn the trail off if you can and consider removing yourself as the adviser.

Now that you’ve got those trail clients sorted, let’s move on to the next area of action – fees for no service.

Fees For No Service

ASIC has previously published a paper on fees for no service and it wasn’t pretty reading. And the Royal Commission only made this whole area look a lot worse.

The bottom line for 2019 is this – you must have proof that you’ve delivered on every promise in your ongoing service program. If you can’t prove that you’ve provided the services you said you would. you’ll be repaying the money to your clients.

If your licensee hasn’t come to this conclusion yet, they soon will. It’s that community expectations thing again.

Revisit your ongoing service packages and agreements. Are you offering things that are truly of value to the client or is there a lot of fluff in there? There may be value in updating your agreements and removing some of the extra things and focusing on delivering a core group of services.

You also need to start thinking about what happens if a client declines the offer of a review. This was talked about in the Royal Commission and questions were asked about why a full ongoing service fee should still be received by the adviser if they didn’t provide a full review to the client.

It’s no longer enough to say that the client was okay with this. They don’t know what they don’t know. The fact is that if that ongoing service fee was retained by the client in their super account, they’ll end up with a higher balance when they retire. Try explaining it to them in this way and see if they’re still okay with paying a full fee.

Even if your agreement says “offer of annual review” instead of “annual review” it’s no longer going to be enough to not provide something at review time.

If you feel I’m being harsh on this topic, read ASIC’s Fee For No Service Report or look over some of the Royal Commission transcripts.

Which brings me on to the next area of action – how you’re charging your fees.

Hello, Sole Purpose Test

I’ve been in this industry for over twenty years and I’ve very rarely seen much scrutiny around the sole purpose test when it comes to adviser service fees.

Yes, product providers each have some internal guidelines about how much the fee can be as a percentage of the client’s balance, but up to now, there hasn’t been much attention paid to this area.

In 2019 this will change.

Product providers and licensees will want greater evidence that:

1. An adviser service fee through super is only being used to cover the cost of reviewing the client’s super fund and nothing else, and
2. That service has been provided.

The fact is that charging an ASF via super is an easy option. From the client’s perspective, it doesn’t directly cost them anything (mental accounting – their super accounts are a few steps removed from their normal bank accounts) and they’re able to pay for the ongoing service that they need, but not from their cash flow.

From the community standards perspective, the suggestion is that this fee is being used to cover the cost of other elements to the client’s financial planning, therefore breaching the sole purpose test.

When there’s insurance involved (whether inside or outside super) it gets blurry. Does the insurance trail commission cover the bit of the review that’s about the client’s insurance? Is this clearly outlined in the ongoing service agreement, Fee Disclosure Statement and Opt-In? In many cases, these documents are silent about the insurance commission.

So what can you do about the sole purpose test?

As you’re reviewing clients, re-look at their ongoing service agreements and make a judgement about whether it meets the sole purpose test. The same for new clients when you’re setting up their initial ongoing service agreement. If in doubt, seek clarification from your licensee’s professional standards team.

You may end up in a situation where clients pay part of their fee from their non-super money but at least you’ll have a more defensible position if your licensee, product provider or ASIC come knocking on your door.

Insurance In Super

The ability to pay for insurance premiums via an annual rollover from a client’s super fund has helped many clients pay for appropriate levels of insurance cover.

However, as highlighted by ASIC and the Royal Commission, it has also led to situations where client’s super balances are being eroded by the insurance premiums. And there’s also the possibility of over-insuring people for the benefit of the adviser via a higher commission for higher amounts of cover.

This is an area that ASIC is looking into at the moment and I wouldn’t be surprised to see the Royal Commission weigh in on this.

In the past, ASIC has talked about the need to show clients the effect of funding insurance via their super funds on their eventual retirement balance. Many licensees have also set internal guidelines around insurance affordability and retirement balances.

I believe this is something that superannuation trustees will start to look at in more detail – especially in light of their new-found understanding of their responsibilities as trustees.

In many cases, insurance via super is a suitable strategy, but I believe licensees will start to examine more closely the best interest duty implications of this strategy. By letting the client pay for insurance from their super fund which leads to an erosion of their retirement capital, is this in the client’s best interest? It’s no longer enough to look at a piece of advice in isolation and say that it’s okay because you’re meeting their insurance need. You need to consider all their needs and objectives to satisfy the best interest duty.

This may lead to a change in some licensee’s audit process where they will start looking at the quality of the financial strategies and advice being provided, rather than just focusing on whether the advice is provided in a compliant manner.

And this ties nicely into the next area to look at in 2019…Best Interest Duty.

Best Interest Duty – doing the right thing

I’ve lost track of the number of advisers who tell me that they haven’t had to make many changes to their advice process to cover their best interest obligations because “it’s not much different to the reasonable basis test we used to do.”

Except that it’s not.

Best interest duty introduced a number of safe harbour steps that an adviser needs to demonstrate they’ve followed as part of their advice process. ASIC has taken action against a number of financial planning licensees both big and small where they’ve found that best interest duty hasn’t been met. As ASIC increases its scrutiny in this area, there will be more action taken.

And the Royal Commission highlighted numerous cases where best interest duty was not evident in examples of client advice.

It is a mistake to think this is solely related to large licensees with related product conflicts of interest. It’s not.

Best interest duty has become a catch-all area when analysing advice and covers all the points I’ve made in this article.

Charging fees (trail or ASF) and not providing service? That’s a best interest problem.

Charging excessive fees via super and breaching the sole purpose test? This also has best interest obligations, particularly around the erosion of their super balance.

Recommending a client takes out insurance via super so they can have that high level of cover that they need without adequately explaining the impact on their retirement income? Definitely a best interest problem.

As I mentioned at the start of this article, it’s no longer about what is legal, it’s about what’s best for the client. Community expectations. And it should always have been about this.

My suggestion is that as you deliver advice this year – both for new and existing clients – you complete a best interest checklist and clearly set out how you have met every safe harbour step. Then, play devil’s advocate and ask yourself (or someone else) “what is wrong with this advice?” Look for ways you can improve on the advice and always be open to the idea you may get it wrong sometimes.

And importantly, make sure your file shows clear compliance with the safe harbour steps. One day it may be looked at by an external auditor – your licensee or ASIC – and all they will look at is what is in that file. You won’t be able to give them extra information. If it’s not in the file, it didn’t happen.

Make sure your advice process and files are world class.

Opportunities Abound

The financial planning industry in Australia is changing and over the next couple of years, we will see massive change.

And change creates opportunities for smart business people.

The business that will thrive will be different.

They’ll listen to their clients and design a service that meets their needs.

They’ll examine how they charge for advice and make changes based on what their client’s find valuable, and how their clients want to access advice.

They’ll use technology to make their business more efficient.

They’ll provide world-class financial advice to their selected target market.

They’ll be able to demonstrate the value in their advice.

These are my thoughts about where the opportunities abound for financial planning businesses in Australia in 2019.

There will be change, some of it won’t be pretty, but you can either chose to react to it at the last minute or be proactive and create your own destiny.

I know which option I would choose.

I’m interested in your thoughts. Please leave a comment below and join the discussion.