Is grandfathering making you dangerously complacent?

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Rest on your laurels and waste 2013 instead of preparing for regulatory change, and you’ll be in for a rude awakening next year.

This is the stark warning from van Eyk Advice practice manager Tony Zulli, who has said that FoFA grandfathering provisions risk encouraging complacency in the advice industry.

“Receiving passive, commission-based revenue streams from large client bases is still the dominant business model in the advice industry, and with grandfathering it will be common for some years to come,” said Zulli.

“The risk is that it will make advice businesses complacent and they won’t use this window of opportunity to adapt their business models, or they will leave it too late.”

The deadline for compulsory compliance with the FoFA reforms may be little more than six months away, but trailing commissions in place before that date will be able to be grandfathered.

Zulli warned advisers, however, that too many practices had not yet fully costed the impact of the end of these grandfathered agreements.

“We suspect that few have done accurate costings of how the eventual end of all commissions on wealth products will affect their businesses,’’ he said.

This may also help to explain the anecdotal evidence that many businesses, even some of the major players, were well behind schedule in changing their work practices and processes to be ready for the new FoFA regime, he added.

“Businesses are still slow to properly address the major flaws in the traditional advice model, the dearth of proactive, structured engagement with clients and the poor business processes and practices that are the legacy of having relied on passive incomes for many years,” said Zulli.

He also believes that many advisers were also ill prepared for the growing competitive threat from groups such as industry superannuation funds, who would be ramping up their efforts next year to lure commission-paying clients to their fee-for-service models.

“Advisers may find an increasing number of their grandfathered clients, particularly the higher balance ones, being picked off by competitors,” he said.

There is a huge disconnect between what consumers say they are prepared to pay for holistic financial advice and the amount advisers say it can profitably be provided for, he added, and many advisers have yet to face this reality.

“Studies suggest the former is about $500 and the latter more like $2,500. Considering the costs to advisers associated with implementing FoFA, this gap is likely to widen,” he said.

The FoFA ‘best interests’ test is also likely to demand greater transparency within the financial advice model, which will put the spotlight on quality and value of advice, he said.

“FoFA’s best interest test will be a key driver of recommended investment strategies and will require a much higher level of analysis, supporting documentation and education material to be used in the advice model,” said Zulli.