Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 35

Painful transition to FOFA will pay off in the long term

The Future of Financial Advice (FOFA) reforms have overhauled the way financial advisors operate, to the long term benefit of financial advisors and the major banks. FOFA came into effect on 1 July 2013, and aims to reduce conflicts of interest within the financial planning and investment advice industry. The legislation has fundamentally changed the way financial advisors are remunerated for their services. Consequently, some advisors have come under significant pressure, while others have capitalised on opportunities to strengthen their business models and emphasise value propositions. Meanwhile, the major banks are following developments closely, ready to pick up the pieces – as they tend to do when a part of the financial sector is set to disintegrate.

The basics of FOFA

FOFA has introduced a ban on commission payments. Previously, financial advisors would receive a commission on the sale of retail financial products, such as investment schemes and insurance policies, to retail clients. This commission would be paid by the product provider. Thus, retail customers themselves did not have to pay directly for financial advice. Rather, the financial advisor would inform them on a product, sign the clients up and receive a commission from the upstream institution. Essentially, the advisors were part of the upstream cost structure and were incentivised to push through as many products as they could, regardless of a client’s financial situation. The ban on commission payments, along with the introduction of a fiduciary duty, has changed this. Subject to grandfathering on some existing payments, financial advisors now have to receive upfront payments for their services directly from clients, and it is now law that they act in the best interest of clients.

The fundamentals of financial planning and investment advisory operations have not changed. The success of these businesses is still underpinned by the quality of advice and the established relationships between clients and advisors, and between advisors and financial institutions. The FOFA reforms only apply to advisors working with retail clients — that is, clients that are not classified as wholesale or sophisticated investors. What has changed is the remuneration of retail advisors. The model will now largely move towards a salary-based package for advisors. The days of cap-free and trailing commissions are all but over.

Effect of fee-for-service

Financial advisors have had over a year to adjust their platforms. In early 2012, the Federal Government announced that the reforms would be compulsory from July 2013. Many firms implemented the fee-for-service model much earlier (notably NAB, which began implementation in 2008). The performance of advisors that introduced a fee-for-service model before FOFA became mandatory suggests that demand is unlikely to plummet due to the reforms. However, the demographics of the markets for financial advisors are expected to change, and the long-term effects of the legislation on the financial planning and investment advice industry remain unclear.

The reforms create an opportunity for savvy advisors with established reputations. The legislation improves the quality of financial advice because it removes the patent conflict of interest that existed previously. It also attracts clients previously put off by the feeling that a financial advisor was just another salesman. Overall, IBISWorld expects the industry to continue its healthy growth path over the five years through 2018-19.

The changing pay structure is spooking some advisors, who have turned to the big banks for security. The banks have started to consolidate their financial planning businesses by acquiring smaller boutique advisories that depended on the commission structure. The Big Four banks are still able to offer free financial advice as part of their overall value proposition, spreading the related costs across their traditional products. Furthermore, some advisors with strong ties to particular institutions, such as superannuation firms or insurance underwriters, have been able to find refuge with these establishments. The FOFA reforms offer the banks an opportunity to further diversify their businesses and reduce their dependence on mortgage lending.

Although it may be painful, FOFA demands higher professionalism, improves client confidence and presents opportunities for the banking sector and reputable advisors. The cleansing effects of the legislation are expected to outweigh the costs in the long term, especially as the wealth of the general public continues to grow.

 

Andrei Ivanov is Industry Analyst, IBISWorld, and Tim Stephen is Industry Research Manager, IBISWorld. IBISWorld is Australia’s best-known business information corporation. Related industry reports include K6419b Financial Planning and Investment Advice.

 

  •   10 October 2013
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

The state of play in the funds management industry

The dynamics of the Australian superannuation system

Managed funds reign over noisy neighbours, the SMSFs

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.