Grandfathering of conflicted remuneration to benefit independent financial planners

The government last week announced how pre-FoFA conflicted remuneration arrangements would be treated going forward. Simply, all existing arrangements will be grandfathered indefinitely.

There’s more. A 12 month transition period (to 30 June 2014) was also announced for financial planners. During this time new clients are still able to enter into pre-FoFA (conflicted) fee arrangements. These will also be grandfathered indefinitely.

Consider these numbers.

Australia’s population is around 23 million and approximately 20% of the population are under advice from a financial planner. That’s 4.6 million people under pre-FoFA conflicted remuneration arrangements currently.

It is estimated there are 18,000 financial planners in the country and 85% of these are tied to one of the ‘Big 5’ (ANZ, Commonwealth, NAB, Westpac, AXA/AMP) and are incentivised to peddle their own product (conflicted remuneration, then). Of the remaining 15% of planners, 14% or more are independently licensed but still accept commissions and/or charge asset based fees (also conflicted remuneration). The 1% (or less) of planners left over are properly independent and are therefore able to provide advice without conflicted remuneration.

Given these statistics, if 4.6 million people are under advice right now, only 46,000 are receiving independent (non-conflicted) advice. The other 4.554 million are not only receiving conflicted advice, they have also been ignored under the grandfathering arrangements. Interesting, given conflicted remuneration was one of the key catalysts for the creation of the FoFA reforms.

Overall, FoFA is a positive for the industry, advice standards will increase as a result, but the announced grandfathering rules mean that more or less everybody under advice currently will not benefit from the new conflicted remuneration arrangements. This situation is exacerbated further given financial planners have been given another 12 months to keep signing new business under previous arrangements.

What’s important to point out here is that the new FoFA rules (effective from 1 July 2014) do not stamp out conflicted remuneration, they simply lessen the amount of conflict. Essentially, a job half-done and we have the Big 5 to thank for it. As all are product manufacturers with large distribution networks (i.e. thousands of financial planners), they could never provide a non-conflicted remuneration solution for clients and given they represent about 85% of the industry, government tends to listen to them.

So, what we have is this; new guidelines that lessen conflict (but only for new financial planning clients from 1 July 2014), and around 1% of financial planners able to provide conflict-free advice.

Little wonder independent financial planners have waiting lists.