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FoFA is not in anyone’s best interests now

In 2006 Westpoint, a mortgage trust offering returns of 12% per annum, went belly up leaving their investors with nothing. In 2008 Opes Prime collapsed, resulting in further losses, followed a few months later by the demise of Townsville-based Storm Financial which caused thousands of Australians to lose their life savings. Subsequent investigations revealed that Storm had been charging entry fees of up to 10%, and that Westpoint had been paying a 10% commission to advisers who recommended them.

Naturally, disasters of this scale made headlines, and gave vested interests the opportunity to bag the financial advice industry in general. The paradox is that the actions of these three companies were far removed from the operations of the average financial adviser.

Westpoint was a mortgage trust that got caught in the development business, Opes Prime was a margin lender with shonky documentation, and Storm had a one-size-fits-all model which resulted in many of their clients being over-geared.

The desire to ‘do something’

Be that as it may, the cries for somebody to ‘do something’ resulted in the Ripoll Inquiry, which was charged with the responsibility of recommending reforms to the financial system so these disasters could never happen again.

The final report was released in November 2009, and its recommendations were introduced to parliament by the Labor Government, with the title FoFA - Future of Financial Advice. Despite the best intentions of the members of the Ripoll Committee, who are good people, FoFA has been a disaster. It has created layer upon layer of red tape, yet has done little to protect the investor.

The cost of implementing FoFA, which will ultimately be borne by the consumer, was estimated in 2009 at $700 million, with annual costs of $375 million. Given the raft of paperwork since, it’s fair to say that FoFA has cost well over a billion dollars.

Following representations from the financial planning industry, and as part of their programme of eliminating red tape, the current Coalition Government attempted to wind back part of the FoFA ‘reforms’. The changes appeared to be on track until the last minute when Senators Lambie and Muir took us back to square one.

It is ironic that the complaints from the Timbercorp investor who had lost money were the catalyst for the change of heart, yet it has been reported that, in that specific case, the intermediary had been an accountant, not a financial adviser.

Ill-informed views

Given the adversarial nature of politics and the argy-bargy between industry funds and other players in financial services, we have been subjected to an unprecedented amount of ill-informed hysteria.

Opt-in is a classic example. The original FoFA rules contained an opt-in provision which required financial advisers to contact their clients at least once every two years for clients to confirm in writing that they wished to stay with their present arrangements, and were happy to continue to pay asset-based fees.

The requirement is pointless. Clients are already provided with details of fees in the original Statement of Advice, as well as in their annual fee disclosure statements AND in their regular product statements. Furthermore, they are not locked-in, as they could be with a telephone or pay TV contract. They are free to opt-out at any stage without penalty.

National Seniors have been running a scare campaign claiming that their members will be seriously disadvantaged if the government scraps the opt-in rules. National Seniors would be better off using their precious resources on an education campaign.

Are they trying to say their members are so naïve that they don’t talk to their financial planner at least once every two years, and they’re not capable of reading a simple statement of fees being charged?

Australia is sinking under a weight of unnecessary and onerous compliance. Almost weekly, I receive large documents from people such as my accountant, insurance agent, bank and stockbroker providing information which I don’t need, and will never read, because it’s now the law. There is still a feeling among bureaucrats that the only way to protect a consumer is to require bigger and bigger amounts of paperwork in the interests of ‘disclosure’. The practical effect is a load of unnecessary work on the good guys who have to churn it out, and even more confusion for the consumer who is handed reams of paperwork they are most unlikely to read.

The overreach of ‘best interests duty’

A major stumbling block is the requirement that the financial adviser must act in the ‘best interests’ of their clients. This would seem to be stating the obvious because one could reasonably expect that your lawyer, doctor, dentist and every other person you dealt with would have an obligation to act in your best interests. My legal friends tell me this is not the case. People who contract with you have a duty of care and if they fail on this duty of care, an action can be taken for negligence.

The introduction of the new term of ‘best interests’ opens up a new area of law. The regulations require that an adviser act in the best interests of clients, provide appropriate advice, warn the client if the advice is based on incomplete or inaccurate information, and prioritise the client’s interests.

In an attempt to get around the problems with the definition of best interests, there is provision for an adviser to put themselves into a ‘safe harbour’. To be protected by ‘safe harbour’ rules, the adviser must:

  1. Identify the objectives, financial situation and needs of the client
  2. Identify the subject matter of the advice sought
  3. Identify the objectives, financial situation and needs of the client that would reasonably be considered relevant
  4. Make reasonable enquiries if it is apparent that the information provided by the client is incomplete or inaccurate
  5. Assess whether they have the expertise to provide the advice sought. If not decline to give advice
  6. Conduct a reasonable investigation into the financial products that might achieve the client’s objective
  7. Base all judgements on the client’s relevant circumstances.

Now here’s the rub! As well as all the foregoing, there is a final 'catch-all' point, that the adviser is also required to take "any other step that ... would reasonably be regarded as being in the best interests of the client." (Corporations Act 2001, Section 961B (g)). Yes, we are back to square one.

To help in clarifying my own thinking, I spent an hour with a senior legal figure to discuss FoFA in depth. Raising an eyebrow he chuckled, “This is so vague I could drive a cart through it.”

He also opined out that it encouraged advisers to think in terms of tick-the-box - in other words, to focus on and spend time box-ticking in lieu of ethics.

FoFA was well-intentioned, but the grim reality is that it now costs a financial advisory firm at least $2500 to open a file and prepare a Statement of Advice for potential clients. This means that the lowest paid in the community, those who need advice the most, have been priced out of the market.

And while all this has been going on the property spruikers, the real villains in the ‘advice’ space, are left free to carry on their rapacious trade. Apparently, regulating the property market stays in the too hard basket.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His website is

December 06, 2014

What a laugh. The catalyst as I see it lies in who the decision makers are on this issue. If a decision is made on an issue on which the decision makers are ill informed, the intended outcomes will never be reached. Incompetent senators are barking up the wrong tree, at a massive cost to our clients.

I don't want to be political but that is unavoidable here. Great article Noel, so true.

Ps: The $1 Billion already spent could have been applied as a government special super contribution to eligible Aussie folks, and gone a long way to setting up for their retirement.

December 04, 2014

...actually, I think Ramani makes a lot more sense

Jamie Forster
December 01, 2014

As always Noel Whitaker makes a lot of sense.

Niranjan (Neil) Ramjee
December 01, 2014

A interesting read and makes goods sense, though we know that recent back-flip in the Senate had nothing to do with common sense and was in fact all about political posturing.

December 01, 2014

Thanks to the SMSF trustee for the helpful clarification.

In any relationship, a grasp of the needs of others, including aspirations and fears, is critical to long term sustainability and mutual benefit. Having a good handle on client relationships, understanding the changing profile as markets and risks morph, is part of this. If this is what 'control' implies, it is best to use an appropriate word.

But in any relationship, it is possible for the person with increased knowledge, skills and implicit trust (which may or may not exist) to over time, believe in own invincibility, and control the other party for inappropriate and nefarious ends. The greater the asymmetry between the parties, the higher the a priori probability. We need checks and balances and compensation if things go awry.

Watch Glenn Close in 'Fatal Attraction' closely. If love can thus deceive, wherefore not pelf?

Consider how bad priests, teachers, medicos, hospice staff have abused the vulnerable. Planners are not immune, either. Disengagement, illiteracy, complexity and tax almost guarantee that this would happen. Hence the need for vigilance and the competent and ethical planners to step in and enhance confidence. Adamant denials - Goebbelslike - would not cut it.

Planning needs reform because planning is the plank of our retirement future. Like wars and generals, too important to be left to planners.

December 01, 2014

"Clients Best Interests" I have a feeling this phrase is going to come back and bite many times. Imagine the following scenario, Investment in a firm that produces toxic chemicals and returns 8% or an Eco-Friendly version of said company that returns 6%. Client is a bit of a greenie and wants to invest in the Eco-Friendly company but ten years down the track decides that the lost revenue is your fault and wants remuneration. Did you do what the client wanted? Yes. Did you act in the best interests of the client? From a purely monetary basis, technically no.

Graham Hand
November 30, 2014

Sam, the Government and Opposition are discussing the FOFA areas they agree on, such as grandfathering commissions, but not expected to include 'catch all' and 'opt in'.

Sam Naidu
November 30, 2014

It can't be that difficult to remove catch-all and opt-in provisions. I though Gov't is talking with Labor to fix it.

Phillip Alexander
November 30, 2014

Well written article.

I have long articulated the SOA should be meaningful, concise and READ by the client it is provided to.

SMSF Trustee
November 30, 2014

Nobby, I'm sure you've used a common term from the industry in a way that a regulator's mind like Ramani's would interpret incorrectly. At least I hope you have.

When I've heard the concept of 'control the client' used, it's always simply been a term to describe the link in the chain that has the closest relationship with the client. A fund manager offers a retail product, but it's mostly advisers who are the channels by which the end investor will come into that product, rather than the fund manager having a direct relationship with the investor.

It doesn't usually intend to convey the idea of 'they do what I tell them unthinkingly' nor to suggest that the investor is 'under the planner's control'.

My planner advises me, but I make the decisions. He doesn't control me, though it might look that way to the supplier of the products I use.

Perhaps the terminology needs to be dropped if people like Ramani are going to hear a message that isn't intended.

November 30, 2014

Nobby by accident got to the core of the malaise that contaminates the advisory trade when he asks rhetorically 'Who controls the client?' and for those who are clueless, answers 'You!'

The various toxic practitioners who left their clients up the creek without a paddle wanted to, and for a time, believed, that they did too. The consequence is the stench that pervades the scene.

Does this represent the trade mindset? The client must control mere intermediaries. Is this the concern now?

Nobby Kleinman
November 30, 2014

The whole industry has allowed itself to be controlled by vested interests rather than stand up and tell them that you are self-employed and carry your own weight and responsibilities, unlike those who legislate and have no idea, or those at the big end of town who control ALL of you!
Who controls the client? Who provides the advice to the client? Who is responsible to the client? Who has done all the training and compulsory education for the client? YOU! And you allow imbeciles to control you! Shame on you all for being so shallow as to think some-one else had your best interests at heart, when really, it was their own. And now you and your clients will suffer because you allowed them to control you.
Your clients will suffer when they are no longer your clients. YOU have failed them and you have failed yourselves. You may not like it, and you don't have to, but think about it.
You have one of the most important roles in peoples lives, and you allowed others to dictate how you go to work, how you pay indemnity, how you put your assets on the line, all to help the client.
But you have no control over your own business. Shame on you. This started many years ago and when I saw what was happening, I got out of an industry I loved and enjoyed being a part of.
The best thing all of you could now do is sell up and walk away. Thats if you can get anything for your businesses which were decimated after the GFC along with you credibility. Not your fault the GFC or that the institutions with whom you placed your clients funds dropped massively in value.
But you were still seen as the person who should have been able to see this coming. Not that you could possibly, but from your clients perspective.
Hey - don;t get me wrong - I am on your side! I feel for you all. But you are going a black hole and it is going to get worse. There's more rubbish coming and again you will be the butt for the problem. Not the institution, but you people because now instead of commissions, you charge fees and for what? The same result. It will happen. You know it will. Not your fault. I had to learn that and you do probably already know it. But tell it to your client!
Tell them your money is in the same place as theirs - down the toilet!
Send a message to the media controlled public, and the institutions who don't care about you and the politicians who pander to lobbyists.
Tell them you have had enough and that you are taxpayers just like everyone else. You are highly taxed. You pay high fees to the institutions for the privilege of earning an income. You pay extremely big insurance fees.
Its time to tell them to get stuffed! Stand up for the professional person you are.

Melinda Houghton
November 30, 2014

I agree Greg, they should have put all fees and commission into FDS not just the more transparent adviser review fees. That would provide clients with some valuable information.

Greg Willey
November 30, 2014

The situation would not be this ridiculous if the rules were more consistent. Trail commissions that do not need to be included in the FDS, adviser fees charged as a percentage that appear similar to trail commission to most investors, opt in from a select date and not for all clients is not placing all advisers on a level playing field and hardly ensures all investors are better informed and protected. How are the investors who are on a trail commission arrangement better off from the changes? How many advisers who have their clients on trail commission will move the under performing, high MER managed investment in the client's best interest and lose the trail commission? I would really like to hear the senator from Tasmania say she is acting in the best interest of Australia rather than only Tasmania. Dream of a perfect world.

Melinda Houghton
November 30, 2014

Fergus, how will you feel when you can't contact a client who has gone away in the time frame required to opt-in, and then you have to cut them off from your advice. Then they call you from outback Queensland or Overseas needing help and you can't help them anymore because they are no longer your client?
And there are already 3 or 4 levels of fee disclosure - 1. Initial meeting with client (verbal notice), 2. Statement of Advice, 3. Statements they receive from super or investment (if applicable) and 3. Fee Disclosure Statement. Why on earth should we charge the clients more to do it again, and have to chase up a pointless signature when we have already got their agreement to charge a fee. No other country in the world does this,and do they really think we work for nothing anyway?
And as to your other point - Commissions are not required in Opt-In documents either (to protect ISN) so what difference does opt-in make to that? It is overkill.
And oh yeah, good luck getting your PI Insurance renewed (or renewed at a reasonable price) with the catch-all provision in the best interests intact.
And by the way, I work with "Real People" and I do really care about every extra stupid cost that doesn't help them in any way.

Fergus Hardington
November 30, 2014

"Opt-in is a classic example. The original FoFA rules contained an opt-in provision which required financial advisers to contact their clients at least once every two years for clients to confirm in writing that they wished to stay with their present arrangements, and were happy to continue to pay asset-based fees.

The requirement is pointless. Clients are already provided with details of fees in the original Statement of Advice, as well as in their annual fee disclosure statements AND in their regular product statements. Furthermore, they are not locked-in, as they could be with a telephone or pay TV contract. They are free to opt-out at any stage without penalty."

Firstly I have reviewed SOAs from other firms when the disclosures are made (this is NOT always the case) the explanation is often confusing so Noel should not rely on this as being sufficient...Noel also refers to Opt-in being unnecessary as FDS need to be provided in any case - except that FDS do not include commissions and some of the FDS we have read from other firms are less than clear in what is paid to the adviser and what was provided....

The reality RE: Noel's comments below is that the lowest paid were priced out of good advice (I don't mean product sales here) a long time ago before FOFA...and it is an issue to be dealt with....but I doubt the majority of advisers complaining about FOFA are really that worried about the small guy...but more so the implications on their business:

"FoFA was well-intentioned, but the grim reality is that it now costs a financial advisory firm at least $2500 to open a file and prepare a Statement of Advice for potential clients. This means that the lowest paid in the community, those who need advice the most, have been priced out of the market."

Christian Renel
November 30, 2014

I found the article worth the read if you would like better understanding on FOFA.

Fergus Hardington
November 30, 2014

FOFA is in the client's best interests so I am unsure why the concerns other Planners have with the reforms....what is wrong with a client knowing what they are paying and what for ? (FDS) or being made aware that they don't have to keep paying a fee each year if they don't see value (Opt-in)...or their adviser simply working in their (the client's) best interests.

November 30, 2014

Jason, I applaud you for providing SERVICE, and not just mountains of literature, whether in paper form or via email. (Complete with insurmountable jargon)
I can see you burning out while most advisors would treat their less-educated clients' financial hiccups as not significant.
Well done.

William Mills
November 29, 2014

Hi Noel I agree with you 100% and you are spot on with your article. I would like to write to every member of the Australian Parliament (both houses) and would you object to me including a PDF of your article in my email to them.?

Melinda Houghton
November 29, 2014

Now that is a fabulous article!

November 28, 2014

It is not often Noel affords others interested in finance an opportunity to contradict him, and never so fulsomely. It is a privilege to take advantage.

The three instances he cites were merely symptomatic of the malaise afflicting the financial advisory trade for long. They were big and hence captured attention. Countless small ones have slipped under the radar. From personal experience, I have suffered from being placed in overseas equities funds without a word about the pros and cons of currency risk exposure from an advisor affiliated to a large product provider. I am sure there are others falling under the radar.

The omission of Trio is notable. Here toxic advisers placed gullible people into a non-existent Deferred Purchase Agreement in British Virgin Islands (a shadow derivative portfolio which never existed) based on excessive fees. An adviser 'persuaded' many in APRA funds to move into SMSFs, depriving them of fraud compensation. Some were not aware they had moved. The punishment meted out was derisive: largely EUs where culprits agree not to be culprits in future and stay away from the industry for a period. If some advisors' super could be retrospectively invested in Trio, perhaps, it might teach the trade.

While fulminating against the FoFA reforms as too far gone, the protagonists have not yet explained why the lobby group failed to act on their own before these disasters. Professions have such disciplinary processes, and the advisory trade even calls itself a profession.

Noel's criticism of 'opt in', if valid, will apply equally to the foundation of our super system: compulsion, preservation and stringent compliance and prudential supervision. If we assume that adults will always behave rationally and in their self-interest, there is no need to preempt current earnings into long term imprisonment. The irony is that financial advisors make a living out of such restrictions, and are excited if SG rates are hiked. 'Do as I say, not as I do'?

Inertia, disengagement and financial illiteracy (which Noel has spent a life-time addressing) are reasons enough for opt-in. Merely because someone placed you in a product years ago, there is no reason why he should earn a life annuity for doing precisely nothing later. The problem is not in discontinuing the bonanza, but in not clawing back past income.

Noel makes a reasonable point about the best interest duty. But I am sure the current focus is a direct consequence of the slipshod way practitioners blithely pursued their own best interests contrary to their customers' interest. Newton's third law, really. Had some not exemplified the worst interests of savers, the move towards best interests, to restore balance, might not have been triggered. Karma!

There is much wrong with property spruiking, but since when is wrong behaviour in one area justification for tolerating it in another? Are we racing to the bottom with others' money?

The argument that the cost of FoFA will fall on the consumer ultimately is unexceptionable. No one ever imagined that financial advisors will pick up the tab. But this logic could be invoked for many other risk management measures: traffic lights, hand hygiene and policing. We are not going to eliminate these, I hope.

What sticks in the throats of many consumers is this: when they have been mistreated (the UK boasts a flourishing mis-selling phenomenon, where advisers have been hands in glove with the big producers), its an insult to treat derivative cohorts such as planners as though they have an inherent right of existence superior to those of consumers. They simply don't.

Eric Ranson
November 28, 2014

Good summary!

While it is not a completely closed system, I think that you are right to say that the costs of regulation will largely come out of consumers pockets. {And possibly these costs are more likely to restrict the numbers of consumers left to share them}

So what are consumers gaining? More paperwork and more noise about what is being done? In return for less advice and lower returns.

If the regulations highlighted (disclosed) and diverted consumers from rapacious or unlikely schemes, the trade off might be justified. I don't see it doing that and am not sure that including property spruikers would stop them.

The problem lies in ignorance and morality so I am not unhappy about vague references to duty of care or best interests if there was penalties and intelligent enforcement behind it.

Ignorance and disinterest are perhaps the biggest problem. Maybe investors should expect some losses following a market crisis - particularly in geared situations? Should we restrict gearing to stop failures? I hope not!

But why are investors losing everything when we have a failure? Did an adviser fail their duty of care or was the investor unable to afford any advice?

November 27, 2014

I agree that ethics can never be legislated; however regulations and legislation can be an effective means to encourage and improve ethics where they are conspicuously absent or likely to be compromised.

Whilst I understand the argument that removing conflicts of interest and improving the ethics of financial advice provision can make financial advice unaffordable for some people, it is interesting to expand that thought experiment to the medical field.

Applying that principle to the medical profession we ought to allow lower income people, people that cannot afford non-conflicted medical advice, to see doctors and surgeons that are remunerated from pharmaceutical and medical appliance manufacturers based on the volume of pills and medical devices they sell and install.

Whilst some people may think that sounds like a wonderful idea I would bet they are not the ones that are going to be using the system. The provision of medical advice clearly ought to be removed as far as possible from monetary conflicts of interest, even if there is some loss of economic efficiency.

But coming back to investment, when investors get duded there is never just one cause and conflicted remunerations are one element of a larger landscape. Agribusinesses like Timbercorp, Great Southern Plantations and Forestry Enterprises provide a good case study.

In these three cases there were three preconditions which resulted in investors and shareholders losing their shirt:

1. A conflicted sales channel – the financial advisors (or accountants) received extremely generous commissions to sell these companies products. Any professionally qualified accountant worth their salt should not provide advice to a client recommending an unsound investment simply because it generated a good tax deduction.

2. Greedy and/or naïve investors - People, including you and I, sometimes believe what we want to believe. People will willingly let a convincing enough salesperson lie to them because they want to believe what they are being told, even if it all sounds too good to be true. Additionally some people are sufficiently inexperienced in finance that they simply can’t tell the bull dust from the gold dust.

3. Unaligned top management - There was never an underlying reason why forestry or agribusinesses could not be profitable business models. But these agribusinesses businesses were not run in line with sound business principles, they were run more like ponzi schemes albeit lawful ones. The investors in the underlying forestry products had 20 year plus timeframes in some cases, the executives did not.

If government policy makers are looking to ensure this trifecta does not recur, conflicted commissions are one of the easier areas to influence through appropriate policy making.

Is investor education a good idea as an alternative to mollycoddling investors with more legislation? Almost certainly yes; whilst bearing in mind that 63% of the adult Australian population is obese, which has no positive impact on either their quality of life or life expectancy. But who amongst us does not want to live longer?

Personally I enjoy eating a blueberry muffin for breakfast but I would never dream of eating a piece of cake. Why? Because everyone knows cake is bad for me (even my dentist, but I’ve not asked her about muffins…).

Whilst additional legislation and regulation does produce additional compliance costs, which are undesirable there is a big difference between financial advice and a pay TV contract. Firstly financial advice is somewhat more critical to most people than pay TV and secondly investment fees have been proven to be the most predictable destroyer of investment returns.

Additionally in the case of pay TV the consumer is definitely being provided with a service, whereas in the case of financial advice in many cases they are being charged for thin air. The purpose of the opt in was to force consumers to think about whether they are getting value for money and if they are then they will presumably continue to ‘opt-in’.

Lastly the proposed FoFA legislation was never quite a draconian as it sounded due to the grandfathering provisions. The overall effect of which was that the new regime only applied to banning trail commissions on new clients.

In conclusion even if the best interest test within the FoFA legislation is vague and difficult to enforce from a legal perspective and the legislation creates additional compliance costs, does that mean we would be better off without it? Not necessarily.

November 28, 2014

Les, you need to keep up, it's nearly 2015 and not 2007. Your lack of knowledge are like most where merely mentioning of the word amendments to FoFa sends media into a storm of pushing out alarmist headlines. Surely one can appreciate that legislation is never perfect and needs to evolve.

Firstly, Individuals can ring up product manufactures in the morning and ask advisory fees to be switched off and they are done by the afternoon. Welcome to 2014. Unlike my pay TV contract. About 99% of mainstream product manufacturers will rebate/refund any trailing commissions paid when asked. Secondly, The majority of submissions to the original inquiry all stated that opt-in was unnecessary and favored the consumer receiving an opt out letter. Only Union dominated Industry super funds pushed for opt- in and this was what naturally occurred with the Labor Government of the time.. Opt-in only favors industry super funds with their exemptions, large advisory firms attached to a product manufacturers and hurts advisers like myself not tied to any providers.

Finally in regards to financial advice providing "thin air" benefits my day has been as follows: I've helped a disability pensioner receive and extra $9,500 in Centrelink benefits, another individual I've used their existing First State Super fund to reduce their tax bill by $3,600 to increase their super savings by $6,000 a year over which over the next five years it's over $30K. I've created an extra $32,000 for another by lobbying their super fund to payout an anti detriment payment which their solicitor missed in claiming. Three appointments just today. However I guess i do provide "thin air" benefits in that yesterday i spent a couple of hours fixing up some Centrelink data input mistakes for an elderly widow. I spoke to another about the timing of downsizing their home, another with how much they could safely spend year after year and still have a retirement of dignity and not run out of money. This list goes. From first hand experience the only parties that are winning from Labor amendments are the big banks, AMP and industry super funds.

December 01, 2014

Well done Jason. The adviser bashing has to stop. It is completely out of control.

Warren Bird
November 27, 2014

Good summary, Noel.

I think I recall a judge saying a few years ago that real estate agents don't have to comply with the same standards because they are dealing in one off transactions rather than creating an on-going client relationship.



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