The upcoming third tranche of the Future of Financial Advice (FOFA) reforms will clarify and define what scaled advice will look like, but there is still a segment of advisers unwilling to develop their business models to accommodate the change.
“The scaled advice part is really saying that you need to make advice more affordable. So if advisers are going to stick with their current model, which is holistic advice, in the new environment it’s just not going to work,” Instreet managing director George Lucas said.
“Scaled advice is going to give a lot of power to advisers in what they can charge and it’s a re-engineering of their business from where they are today.”
Lucas said advisers who believed FOFA would make their jobs harder were sticking to the holistic advice model and only focusing on fragments of FOFA, such as opt-in.
“The new legislation is going to make it clear how scalable advice works and therefore they’ve got to start thinking outside of the holistic box and start looking at all the possibilities that FOFA’s opened up for them,” he said.
In light of the FOFA changes and also more well-informed clients in the market, financial advisers must have the capacity to manage client expectations, he said.
Instreet is attempting to assist advisers with this challenge through its Portfolio Check-Up, a risk management service for direct share and exchange-traded fund portfolios currently under trial.
Lucas said the service, due for release in February 2012, would allow advisers to quantify risk with their clients rather than use the “rules of thumb” approach of the past 10 years.
“What this does is quantify the risk so advisers can have a meaningful conversation with their client. So if there’s a chance you could lose this amount of money, the client can then make a better decision as to whether that portfolio suits them,” he said.
“We could see movement in the market more and more towards direct equity and so [advisers] need more information about direct equity portfolios.”
