Intro: 00:00 This episode was recorded live at United, the 2019 AFA conference in Adelaide. The Association of Financial Advisors is the association of choice for financial advice professionals, and empowers them to transform the lives of Australians through quality financial advice. For more information, check out afa.asn.au.
Hello, and welcome to the Goals Based Advice Podcast where I have conversations with pioneers of the new world of financial advice. I’m your host, Fraser Jack. I want to thank you so much for tuning in today, and of course, I’ll have to thank our supporting partners, Advice Intelligence, for powering this podcast, to the Association of Financial Advisors for hosting me here at this conference, the wonderful conference here in Adelaide in South Australia, the United Conference, I should say. And thank you to, oh, my podcasting team for editing these podcasts and getting them out straight away. I’m here joined on the last day, I’ve finally managed to track down fantastic Phil, who’s going to have a chat to us about his presentation on day one and all the developments that have happened over the time. Welcome, Phil.
Phil Anderson: 01:08 Thanks Fraser, great to be here.
Fraser Jack: 01:10 Now tell us, you got up on the first day and did a presentation. What was that all about?
Phil Anderson: 01:16 Well, I was positioned between Julie Bishop and Jane Hume, at least I was supposed to be positioned between them, but we needed to move Jane forward, so she went before me and we were really looking forward to an announcement from her that we’d done a lot of work on, hoping to get an extension on the deadline for the exam and the degree equivalence requirements. So that wasn’t really part of my presentation. I was just very much hoping that we would hear that from her. My presentation was really about the challenging contexts that advisors operate within. I set it out in a diagrammatical form to try and get everything on the one page, and it’s when you get everything on the one page that you know, this is an unprecedented period of change.
And obviously, at such a difficult time, this is having an impact on advisors across the country. The stress levels, the anxiety levels, and I was just try to flesh out some of the contributors to that and went on, later on in the presentation, to talk about some of the activity that’s been going on in the big institutional space, including things like the fee for no service project, the ASIC report 515, which is still having a ripple through effect in terms of the way those big institutional licensees operate, the way they audit the advice quality, the way they’ve tried to increase the standards. But the impact that it’s had in terms of the difficulty of giving advice, the extensive checklists, the going on pre-vet, going back to pre-vet, and really the the impact it’s had on productivity across the population.
It was really interesting to see that this is an initiative that ASIC has been working on, but only those directly exposed to it seem to be aware of it. And the question was put to the room, “Who’s aware of the 515 activity?” And there was a decent chunk of people who put their hand up and then, “Who’s got no idea about 515?” There’s a huge number of people. So this projected to the audience the fact that there’s all these fundamental activity happening that’s really impacting practices that the other half of the room had no awareness of.
The other things in the presentation were, I did go back and reflect upon the Royal Commission, I looked at the terms of reference and in particular, paragraph K of the terms of reference for the Royal Commission where they’re required to give consideration to the implication of any recommendations for changes to law, and specifically with respect to the access and cost of financial services. And I think this is a really big issue for our profession, that the cost of getting financial advice is going up rapidly as a result of all of these reforms. And it’s going to impact everyday Australians and their ability to get life-changing financial advice, which is something that we’re really worried about.
So we looked through some of the indicators of that. So you talked about the warnings that ASIC actually gave as to the risks of the reforms for the cost of advice, looked at the impact of all of the large licensees exiting financial advice, the messages coming out of some of the larger institutions around the cost of licensee services. So the fees are significantly increasing, we’re seeing that. Now, this is a flow on from the removal of volume bonuses. So it’s having a really big impact on the cost of licensee fees. And then also, what’s also coming out through some of these announcements is now a focus on the affluent end of the market rather than the mass market. So, it’s a really big area of concern. Will financial advice be affordable and will it be accessible for everyday Australians?
Fraser Jack: 05:31 Yeah, we sort of feel that in the short term it won’t be, it won’t be affordable. And as these prices go up and there’s only two people that pay for that this year, owner of the business or the consumer at the other end, the clients. And we’re looking at prices hitting up towards $100,000 a year to run a license or to run an adviser. At $1,000 a client for a hundred clients, before they get advice.
Phil Anderson: 05:58 Absolutely. I think the cost pressure is, on many fronts there’s the direct costs, there’s the education costs, there’s the new levies and there’ll be further levies introduced with respect to FASEA, and compensation schemes of last resort. And then, professional indemnity insurance, which the trend has been certainly upwards on that. And that is an area of concern as well. So when you’ve got all of those substantial costs, where you’ve got some of the revenue that the practices have relied upon in the past, it’s really making it much more difficult and making it more challenging to be able to service those clients who have less capacity to pay for fees.
Fraser Jack: 06:47 Now your role is predominantly around policy and working with the government as close as you can. Now, we’ve heard a lot of conversation around having one message with the other associations, and obviously that involves working fairly closely with them to make sure your messaging is correct and taking that to government. How have you seen that change, maybe, over the last 12 months, and how is that message resonating with the government?
Phil Anderson: 07:13 Well, I think there’s been a few key developments in the last 12 months. There’s the joint task force between the AFA and the FPA working on the life insurance reforms, and that’s about preparing ourselves for the 2021 ASIC review of life insurance and making sure that we can put a strong case forward for why commissions need to be retained for life insurance to ensure that consumers of life insurance have the ability to go and get financial advice on it and then they can choose how they pay for that. They should be able to choose whether they pay a fee or whether a commission is paid to their advisor. And also, emphasizing the fact that, ultimately, for many clients who have a reduced capacity to pay for those fees, access to commissions really works in their favor.
So yeah, the work that we’re doing with the FPA on life insurance is really important, but we’ve also seen the associations is working much more cooperatively together. So, things like the code monitoring body work that’s been going on for the last nearly a year. Joint meetings with ministers, we’ve seen that happen twice in the last 12 months. Yeah. So, they have given us the message that we need to speak with one message, not necessarily one voice, but one message is one that we have responded to, and it’s been great to have Dante De Gori here, the CEO of the FPA at our conference. And equally so, we were invited to attend their Congress in November last year.
Fraser Jack: 08:55 Yeah, fantastic. Now, the life insurance commissions one’s interesting to me. I’ve been an advisor in the past. We did a lot of life insurance claims and I used to explain to people that insurance is a pooled product. You put your money in and then if you don’t claim, somebody else did, and that’s the whole point of you putting your premiums in. You’re paying for somebody else that needs the money at the time. Likewise, with the commission, where you’d get paid a trail commission by everybody, and Bob and Jane and Sarah’s trail commission went towards Sam’s trauma claim or David’s income protection claim.
And so, that was always the conversation around the whole methodology of insurance, is this pooling of the resources, of everybody putting a little bit in, and to look after the person that needs it most. And it seems even strange to somebody in that scenario that then, if you take away commissions, then you ask the person to pay for the claim at the time they need the money the most.
Phil Anderson: 09:55 And that’s something that we have a very strong view on because, if you don’t get the support from the advisor, then the other alternative, and one that’s actively marketed, is going to lawyers. And they will charge substantially more. And we’ve seen some of the percentage of the payouts that may be negotiated in these exercise. So we don’t think that’s the right outcome for clients. Having access to an advisor who understands the circumstances, understands the policy, having them there behind them or beside them at the time of claim, and dealing with the other consequences, it’s not just a transaction. When someone incurs an experience event, it’s a trauma in their life and having access to someone to support them through that is really important.
So it’s something that we would not want to see, is it’s making it so difficult for advisors to provide that and needing to go and ask to get paid at the time that you’re trying to put a claim through is wrong. Cross subsidization seems to have been an issue of concern through the Royal Commission, but I think life insurance is a classic example where cross subsidization is understood and accepted. Whether it’s at the point of providing advice, because some clients won’t be able to go through and get cover, and they’re typically not charged the full cost of advice. That’s subsidized by other clients who do go all the way through and then it plays out at the other end with the renewal commissions, that there’s fundamental cross subsidization that happens between those who don’t need declaim and those who do need to claim.
Fraser Jack: 11:42 Yep. Couldn’t agree more. So that’s something that’s really working on for that ASIC review in a couple of years.
Phil Anderson: 11:49 Yeah, that’s right.
Fraser Jack: 11:50 So, it’s currently Friday afternoon here and there’s been quite a bit of hive activity over the last couple of hours. Do you want to talk to us a bit a little bit about that?
Phil Anderson: 11:58 Absolutely. So the really exciting thing is the announcement that we’ve got this afternoon from the minister that there will be an extension of 12 months for advisors to complete the exam and that there’ll be a 24 month extension for advisors to complete the degree equivalence requirement. Now, we have argued for this for a long period of time and certainly, we’ve most recently done it jointly with the FPA ,doing a lot of work to articulate that message and provide that single message from the associations about the importance of it. It was great to have the minister here earlier in the week, and whilst we were hoping the announcement would come on Wednesday, we are very pleased that we’ve got it on Friday.
Fraser Jack: 12:49 Better late than never.
Phil Anderson: 12:50 Well, that’s right. Better late. And it’s really important that it comes now, and I say this from two perspectives. One is, the financial advice community really needed some positive news. The, challenges and the negativity and the setbacks that we have had in recent times, we needed to turn that around and we needed to get a sense of hope. And I know there’s a lot of other things that advisors will be really worried about, but I think this is one positive sign. It’s a light at the end of the tunnel. For many, it’s going to be really important and it’ll now allow advisors the time to do the preparation study before they sit the exam. It’ll reduce the stress.
And I think, right across the board, anything that reduces the stress and anxiety that advisors are going through right now, is a really important change. So we’re very much appreciative of this. There’s a lot of work still to be done and there’s no question that we still got things that we want to see. We still want to see FASEA recognize experience and the CPD that advisors have done in the past. But we’re really pleased with this announcement.
Fraser Jack: 14:05 Yeah. So just to clarify that announcement, the exam date that everyone must be past is now?
Phil Anderson: 14:09 So, it’s gone back from one January, 2021 to one January, 2022.
Fraser Jack: 14:16 Fantastic.
Phil Anderson: 14:17 The education requirement, to be degree equivalent, has gone from one January, 2024 to one January, 2026.
Fraser Jack: 14:27 Fantastic. Good news all around. I think that maybe we can take some credit for having the minister here and seeing advisors firsthand, and what they’re going through.
Phil Anderson: 14:38 Well, we would like to take credit for it, but I think it’s important we acknowledge that we’ve done this with the FPA and it’s not something that’s happened overnight. The work on this has been happening from before the election, and we have taken our opportunities when we met with the minister, and then through follow-up correspondence, just to emphasize the importance of doing something that demonstrates an acknowledgement of the difficulty that the advisor population faces.
Fraser Jack: 15:15 Yeah. Fantastic. And I know this was a critical issue. The other critical issue you’ve been working on is the code monitoring body. And some of the announcements around that, has there have been any move there or is it a still work in progress?
Phil Anderson: 15:27 Well, with code monitoring, Code Monitoring Australia, which is the body that the FPA has put together with cooperation with a range of other professional associations, including the AFA, their application, our application, was submitted on the 16th of August, and we’re now waiting for ASIC to review that and to approve it. Once that’s done, then we can go to the market place and provide certainty to advisors as to what they need to do to get registered by the deadline of 15 November. So this is really, really tight. There’s a huge amount of uncertainty because of, we’re still waiting for approval until you actually know that you’re an approved code monitoring body and people can actually register with you.
Fraser Jack: 16:15 So if a ASIC says, “No,” the industry is in a whole world of pain.
Phil Anderson: 16:21 Well, I don’t think it’s just the industry. I think that if there is no body, then the whole thing falls apart.
Fraser Jack: 16:30 Yep.
Phil Anderson: 16:30 And that’s not just a problem for advisors. That’s a problem for the government. That’s a problem for the regulator.
Fraser Jack: 16:36 Yeah. So these have been the critical issues that you’ve been working very hard on. What about, what else is coming down the road for you?
Phil Anderson: 16:42 Oh, well obviously there’s a lot of work on the Royal Commission, the debate around grandfathered commissions is ongoing. The legislation is in front of the parliament. We’ve seen product providers seek to move ahead of the government’s deadline. And this is a really big issue for a number of advisors who have had a greater exposure to grandfather commission clients, and maybe a greater exposure to debt. So, it’s having a real impact on business valuations and that’s one of the key contributors of anxiety and stress.
Fraser Jack: 17:20 And we saw ASIC release a report, what, last week was it? 627, or something? Have you had a chance to digest that, around financial advice?
Phil Anderson: 17:30 Well, that was earlier this week and I have to say I have got a copy of it, but I’ve had a pretty busy week.
Fraser Jack: 17:36 Fair enough, too. Fair enough. Well, thank you, Phil, for coming on the show and sharing the insights. It was worth the wait, to get the good news eventually. And I’m sure by the time this gets out early next week, the news will already be broken, but it’s nice to know that we did hear it first here. But yeah, thank you very much for coming on the show and sharing your insights.
Phil Anderson: 17:57 Thanks Fraser, it’s been a pleasure.
Fraser Jack: 18:00 If you haven’t already, I’d love you to subscribe to the podcast on your podcast platform of choice. And to continue the conversation, head over to our social media channels. We’ll catch you next time.
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