Australia’s wealth industry is
eyeing up reforms to its fee charging, similar to sweeping changes
signalled in the UK’s Retail Distribution Review. Will Cain finds
financial advisers are facing big changes, although some family
offices and banks are less concerned.
The first verbal volleys are being fired in the debate about
proposed reforms to Australia’s wealth management industry.
Go deeper with GlobalData
The Treasury is currently holding
public consultations to establish the shape of its Future of
Financial Advice (FOFA) reform package, Australia’s equivalent of
the UK’s Retail Distribution Review.
Disagreements on the impact FOFA
will have on the industry are likely to make the consultations
feisty affairs. National Australia Bank’s claim it has already
moved to an advisory-based fee structure ahead of the reforms have
been dismissed as “absolute garbage” by industry consultant Jim
Stackpool.
“They [banks] only make money when
a product is placed, when they sell a loan, investment or leasing
product – but true advice doesn’t need products,” said Stackpool,
managing director of Sydney, Australia-based consultancy Strategic
Consulting and Training.
“People in these banks are getting
remunerated for selling more products. Their revenue line is loans
or the placement of investments.”
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalData
Fee structure shifts
The Australian private banking
industry is dominated by the leading domestic banks: ANZ,
Commonwealth Bank of Australia, National Australia Bank (NAB) and
Westpac/St George, which merged in 2008.
Stackpool cited NAB as an example
of a bank which claims to offer a “fee for service” model but
actually provides a “trail for product” structure. He claimed
advisers charge clients an ongoing annual fee even though they
provide little extra value after setting up the clients’ initial
portfolio. Stackpool said 90% of its advisers are remunerated in
this way, and that annual service fees of 100 basis points or more
should be reduced to reflect the actual cost of managing the
money.
National Australia Bank (NAB)
claims it shifted its fee structures from commission-driven to
advisory pricing in 2006 after Steve Tucker, the bank’s group
executive at MLC, its retail wealth division, took a lead on the
issue.
Will Hamilton, general manager of
NAB’s Wealth Services division, insisted it put the bank on the
right track ahead of the FOFA reforms to the wealth management
industry which will ban commissions.
“The impact on us will be minimal
because we have taken a leading stance on this from day one,” said
Hamilton.
“We called for commissions to be
banned and since 2008 NAB has been a fixed-fee business. We have
transferred over the clients that were not on this pricing scheme
previously, so going forward the impact on us is absolutely
minimal.”
FOFA reforms
The FOFA reforms have been prompted
by high profile miss-selling scandals in Australia, including the
collapse of Storm Financial and Opus Prime, which dented public
confidence in retail financial advice.
The proposed changes will outlaw
commission-based fee structures in the country from July 2012, and
establish a fiduciary responsibility for financial advisers.
Another area of the reform which could impact the wealth management
subsidiaries of the big four Australia banks is the requirement to
provide an annual contract renewal letter to clients. Those that
cannot demonstrate the value they are providing through charging
ongoing fees may see reduced client numbers or a contraction of
margins.
Ultra high net worth and family
office wealth management operations are unlikely to be impacted by
the changes, according to Graham Myer, managing director of the
Myer Family Office, headquartered in Melbourne, Australia.
“FOFA is shaking up the industry,
but it largely affects the financial planning and tax agent
community” he said.
“I’m not saying that FOFA doesn’t
affect us, but a lot of the proposals are talking about things we
are already doing.
“The financial planners and tax
agents are fighting each other. The financial planners want to be
able to give tax advice because certain advice provided for
superannuation is deemed to be tax advice. However, they don’t want
to become tax agents because it’s difficult and expensive to
do.
“The tax agents want to provide
certain financial advice but they don’t want to become financial
advisers. It’s an argument which doesn’t really affect us because
we’re licensed tax agents and licensed financial advisers.”
He said that the main proposals to
reduce commissions and provide a new contract each year for clients
to opt into were already a staple part of the business at Myer
Family Office.
“In many ways, it is what I would
call best practice in the high net worth industry,” he added. “But
for the industry itself and the general financial planning industry
it is quite challenging. We have a small number of very big
relationships with clients, while these firms have the opposite –
that’s what makes compliance for them in these areas more difficult
and expensive.”
FOFA reforms are expected to lead
to a reduction in the number of independent financial advisers,
particularly among mid-sized firms, as a result of increased
compliance costs, consolidation and exit from the industry of
businesses run by older advisers.
How to thrive
post-2012?
It is expected the major Australian
banks will continue to dominate the post-FOFA wealth management
landscape, through the likes of NAB’s MLC subsidiary, and AMP. This
will be driven by better use of technology, outsourcing and
improved efficiency.
Smaller firms will need to
demonstrate niche expertise and excellent client service if they
are to thrive post-2012.
Stackpool said mid-sized firms of
between 50 and 250 advisers will find themselves in a no-man’s land
of financial planning practices, and become amalgamated into the
bigger wealth manager players.
Training is one aspect of reform
which is addressed in the UK’s RDR but not specifically in
FOFA.
This was addressed in a previous
2004 legislation called the Financial Services Reform Bill. It
required all financial advisers to hold an Australian Financial
Service Licence and hold the RG146 qualification, equivalent to a
first year higher education qualification – the same as RDR
requirements.
