Advisers: get ready for 2019

19 December 2018

From education standards to a federal election, you’ll be facing a lot in the new year, reports Zoe Fielding.

Advisers' new education standards begin to take effect from January 1, 2019, with a tertiary degree becoming mandatory by 2024.

Virtually every aspect of the business of financial advice was dissected and analysed over the course of 2018. From practitioner education, to the quality of advice, remuneration methods, and business structures, it was all under the microscope.

There should be some relief in 2019 from this examination and its ensuing uncertainty, created by the work of the Financial Adviser Standards and Ethics Authority (FASEA) and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

But the new year will bring fresh challenges for advisers in understanding and adapting to the changes that these and other reviews bring.

Financial advisers’ new education standards

For many advisers, FASEA’s education standards were the most pressing focus of 2018. And this will continue.

“These standards cause a large amount of anxiety and uncertainty among advisers,” says Association of Financial Advisers general manager policy and professionalism Phil Anderson.

“We sit here at the end of the year with a slightly better understanding of where it might land but we are still not clear on the final outcome.”

Established in April 2017, FASEA did the bulk of its work in defining upgraded education and ethics requirements for advisers in 2018. It is now in the final stages of consultation before the standards are formalised.

Some rules, such as those relating to continuing professional development and incoming adviser-education requirements, begin on January 1, 2019.

Others come into effect later but advisers need to prepare in the new year.

Practising advisers have until January 1, 2021 to pass a three-and-a-half hour open-book exam on legal obligations, advice construction, and applied ethical and professional reasoning.

By January 1, 2024 they must hold relevant tertiary qualifications and complete a bridging course on the FASEA code of ethics, which becomes mandatory on January 1, 2020.

Extra scrutiny for big institution advisers

The new year will bring further work for advisers related to large institutions (the big four banks, plus AMP) in making improvements to address concerns raised in the Australian Securities and Investments Commission’s Report 515 Financial advice: Review of how large institutions oversee their advisers.

The report uncovered numerous compliance issues, as well as inadequacies in advice processes, record keeping, recruitment practices, and internal auditing.

“The big picture was that [ASIC found advisers] have not explained the advice – the ‘why’ – and did not adequately demonstrate the quality of advice,” says ANZ Financial Planning manager, advice capability, Kate Morrissey.

In response, institutional advice businesses are updating systems, business structures and supervision frameworks to ensure they fulfil the regulator’s expectations.

“It’s about putting the customer at the centre of everything you do and demonstrating that you can deliver quality advice,” Morrissey says.

Between March and September 2019, independent auditors will review client files to check on progress. If deficiencies are found again there will be serious consequences.

Fallout from the royal commission

The banking royal commission dominated headlines in 2018 with its revelations of conflicts of interest, regulatory breaches, and wrongdoing in the financial-planning sector.

The damage to public trust in financial advice, let alone the wider financial services industry, will take time to repair. What could help is the commission’s recommendations on how to clean up the industry in its final report, due by February 1, 2019.

Those recommendations are likely to feature in political discussions given a federal election is expected before mid-year, possibly in May. Both major political parties say they will take the recommendations seriously. So advisers should brace for some further change.

Key areas of concern for the royal commission include:

  • financial product manufacturers owning advice businesses, and the effect of that vertical integration
  • instances where clients were changed fees without receiving services
  • advisers’ conflicts of interest over remuneration.

In particular, it questioned the continuation of grandfathered trailing commissions and commission on life risk products, which put adviser interests at odds with client interests.

The particular cost of grandfathered commissions were also highlighted by the Productivity Commission, which is due to release its final report on competition in Australia’s superannuation system by the end of December.

And the Parliamentary Joint Committee into the Life Insurance Industry, which reported in March 2018, recommendations included ASIC explore commissions on life risk products.

Following the royal commission, grandfathered commissions are almost certain to be eliminated in the near future. Several institutions have already stopped paying them. And commissions on risk insurance could follow.

The effect on adviser remuneration will be significant, says Anderson.

“It’s not just grandfathered commissions which has gained momentum and discussion. It goes further,” he says. “On three occasions [the royal commission] asked about commissions on life-insurance advice and whether advisers should be able to collect ongoing payments out of superannuation.”

There may be additional restrictions on ongoing fee arrangements for clients, Anderson warns, adding that advisers should be thinking about how they could provide work on a one-off fee basis.

Advisers’ 2019 checklist

As this exhausting year comes to a close, advisers must prepare for the changes ahead. Here’s a list of action items:

  • Review your qualifications and determine what further study you’ll need to undertake.
  • Plan how you’ll achieve the qualifications in the next five years, or an alternative move. If you plan to leave the industry, then get your exit strategy in order.
  • Keep clear client notes and maintain strong communication with clients.
  • Keep point-in-time copies of any audited client files.
  • Review and refine your client-service offer. Make sure you’re delivering value for money and providing what you agreed with the client.
  • Consider how your business will cope if and when grandfathered commissions are switched off.
  • Ensure you have sustainable processes in place to meet all regulatory obligations.
  • Stay tuned in to industry news: “You want to be part of the process, not a victim of the process,” Anderson says.
  • Stay positive: “There will be a good future at the end of the uncertainty. Nothing has changed in the value [advisers] provide to their clients,” says Anderson.
  • Focus on your own resilience and health. And finally, ask for help if you need it.