Australia's financial services industry has to find a way to implement the federal government's reforms to enable productivity and growth without increasing complexity and cost, the head of a wealth manager has said.
ANZ advice and distribution general manager Paul Barrett said if the industry is not careful in its adoption of the Future of Financial Advice (FOFA) reforms, it could put itself at risk.
Barrett said while the industry has reconciled itself to the transition from a commissions model to a fee-for-service model, the issue of price remains a sticking point.
"What we haven't come to terms with is the relationship between price, cost per service and segmentation of our client base. I think there is a whole heap of work that is yet to be done there," he told delegates at yesterday's Financial Services Council 2011 conference on the Gold Coast.
"I think in the new world, the licensee will have to be far more discerning about the advisers that they serve and how they service them. The licensees themselves will have to take a different viewpoint on how they service their A and their B [clients]."
In Barrett's view, the practical changes of reform for licensees are difficult.
"If you take the rebates out of the [profit and loss statements] of licensees in Australia, most licensees would make losses if not all would make losses. And, of course, that is what is going to happen in a FOFA world," he said.
He said licensees have around five choices to cope with the reforms: they can get larger quickly by merging or acquiring, get smaller quickly and become a niche player, become a product manufacturer, get bought, and for institutional licensees, their option is to forget the profit motive entirely.
"There will be more vertical integration, there will potentially be more conflicts of interest to manage, and you might even have undercapitalised firms underwriting savings of many," he said.
Count Financial chief executive Andrew Gale said there are some positive aspects in the FOFA reforms, with best interest statutory obligation and scaleable advice two such examples, however, he said the reforms are also "riddled" with unintended consequences.
He said the reforms favour vertically integrated players and will encourage further vertical integration moves as well as prompt a greater number of boutique licensees to emerge.
"There is likely to be a proliferation in boutique licensees who will choose to aggregate licensee margin and adviser margin into one set of margins, which are disclosed to clients under the opt-in regime and to the extent platforms use naked or bare wraps. That model has some pluses, it also has some hazards," he said.
"As you have that proliferation, you're removing that dealer group oversight and quality assurance and risk management with that change."
In terms of specific reforms, Gale said opt-in would result in the increase in the cost of advice unless licensees and advisers embrace scaleable advice solutions.
Commenting on the topic of scaled advice, Barrett said if the industry is not careful, the best-interest test could stall development in this new advice sector.
"If we are not careful the best-interest test could actually put a bit of a hand-brake on the provision of scalable advice," he said.
"We need to make sure, through the policy discussions we have, we don't arrive at that destination because if we do, the explosion, or the potential explosion of limited advice, might not amount to much more than a noisy backfire."
