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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Latest Updates

Taxation

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Taxation

Taking from the young, giving to the old

Despite soaring retiree wealth, public spending on older Australians continues to rise. The result: retirees now out-earn the young, exposing structural flaws in the tax system and challenges for fiscal sustainability.

Investment strategies

An obsessive focus on costs may be costing investors

As a relentless fee war grips Australia’s ETF market, investors may be missing the real battleground. Beyond basis points, index design itself - not cost - may be the most powerful driver of returns.

Taxation

Clearing up confusion on how franking credits work

It seems the mere mention of franking credits generates a lot of heat but not much light. Here's a guide to how franking credits work, and the impact they have on both companies and shareholders.

Investment strategies

Are the good times about to end?

As the bull market revs up, some investors worry about a possible correction. History shows the real question isn’t timing the top, but whether you have the time and liquidity to ride out inevitable downturns.

Superannuation

Australia slips in global pension ranking

The 2025 Mercer CFA Institute Global Pension Index shows Australia has dropped to its lowest ranking in the 17 years of the index. This explores why we're falling and what can be done about it.

Property

Where wine country meets real estate

High-profile wine regions don’t always see strong property growth - volume, exports, and infrastructure investment often matter more than reputation in driving regional property markets.

Sponsors

Alliances

© 2025 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.