Advisers are rightfully concerned that the opt-in clause proposed as part of the Future of Financial Advice (FOFA) reforms will negatively impact on operating costs, industry heads have said.
A survey commissioned by the Association of Financial Advisers (AFA) and National Australia Bank’s financial planning banking (NAB FPB) team revealed that out of 600 practice principals, 74 per cent expected the opt-in clause and new fee models to have some form of negative impact on the value of their businesses.
AFA chief executive Richard Klipin said the opt-in clause was one of the most concerning proposals to come out of FOFA and there were no other industries where government legislation instructed consumers and their service providers to operate in such a manner.
“It will create an administration nightmare for practices because the opt-in clause will require them to have annual conversations where there will be a sign-off process with both active and non-active clients, which will drive up not only the cost but the price of advice as well,” Klipin said.
“It is less of an issue for smaller practices but a significant one for those with larger client bases.”
He said there were also unintended consequences whereby advice firms could become focused on more profitable clients who wanted a higher touch service as they were less likely to opt-out, while underinsured, “under-saved” and under-advised clients were jeopardised.
NAB FPB national manager Shane Kirsch said that was because administration costs would increase for businesses that might or might not have the resources to get to all of their clients to sign off opt-in agreements.
“It is concerning to think that given the opportunity each year, less profitable clients may opt out if faced with negative markets or their own financial difficulties, which could be exactly the time they need advice the most,” Kirsch said.
FPA chief executive Mark Rantall said opt-in was overkill and would absolutely add to administration costs.
“Opt-in is unnecessary in a fiduciary environment, particularly one where commissions have been removed from investment and super products,” Rantall said.
“In a fee-based environment clients will already have the ability to opt-out regardless of mandatory opt-in agreements and while the proposal currently stands to only affect new clients, it is still raising a lot of concerns for principals.”
Business Health partner Terry Bell said with the average practice comprising about 1000 clients, opt-in could prompt the hiring of more advisers or the reduction of clients, but either way costs would be affected.
“The one positive is that opt-in would encourage firms to regularly reinforce what they’re doing for clients, but I think in the meantime the priority should be to get on the front foot and build activities that accommodate for opt-in into next year’s business plan so advisers are prepared,” he said.
