While the Future of Financial Advice (FoFA) reforms will on the face of it eliminate trailing commissions and volume bonuses, it will not eliminate the culture of product-focused sales. Yet ahead of its 2012 implementation, FoFA is already polarising financial advice into two major offers.
The first remains a narrow product-focused offer within the product manufacturer’s stable that is the domain of the big four banks, insurance companies and large vertically integrated financial institutions.
The second is a broader strategic-focused offer unrelated to quantum of investment and directly related to degree of financial complexity and/or depth of advice required. This second approach provides strategic financial advice on the broad spectrum of an individual’s individual financial complexity.
FoFA doesn’t have any impact on the financial product manufacturers who own the revenue stream, and will continue to sell their products. FoFA’s influence is felt in the smaller financial advice firms which have acted as retail outlets for a specific brand of financial product, and are now scrambling to consolidate, as FUM-based business models are only sustainable within the safe arms of a vertically-integrated institution.
Separate to this is the second major area of financial advice in the new FoFA era: strategic financial advice. Issues of tax planning, estate planning, asset management, succession planning and investment strategy contain much broader financial implications for an individual or family, and this is the realm of true strategic financial advice. Most importantly, the client can be confident that because these advisory firms are remunerated to resolve financial complexity rather than maximise FUM (or product), advice addresses all strategic considerations that might impact on successful financial outcomes.
In this area of the market are financial strategists who operate on a fee-for-service basis. The type of consumers attracted to this option will be those with higher incomes who currently have investment properties or a portfolio of investments and will directly benefit from understanding all the financial and tax-effective mechanisms that they are in a position to take advantage of.
While FoFA may not have achieved its full objective of eliminating the conflict of interest that is inherent when a financial planner represents the financial products of a single manufacturer, it at least makes this relationship more transparent.
Critically, the challenge for the industry is to ensure that consumers who need strategic financial advice understand the difference between these two offers, as advice on which investment product to choose will never qualify as a financial strategy.
