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MDRT around the world: Regulation reverberation

Elizabeth Diffin

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Government oversight adds challenges, opportunities for Australian advisors.

IF YOU HAD JUST ONE WORD to sum up the financial services industry in Australia, it wouldn’t be too hard to decide. The last few years in the land Down Under have been inarguably characterized by a single thing: regulation.

Regulation in Australia is not a new phenomenon. Indeed, the Wallis Report unleashed a flurry of new regulation when it was released back in 1997, and the intervening years have continued to see an increase in governmental oversight. But the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry changed things yet again — in ways that will have long-reaching impact.

For decades, Australian banks dominated the manufacture and distribution of financial products, according to Adam McCann, CFP, DFP, an 11-year MDRT member from Adelaide. But after the Royal Commission uncovered widespread wrongdoing among financial services entities, banks began to stop providing financial advice. This has led to a rise in independent financial advisors, many of whom hold their own financial services license rather than acting as a tied agent.

“There have been significant changes since I started in the industry, with increased professionalism and higher levels of education requirements to be licensed as an advisor,” McCann said.

Education has become an important focus, as new regulations stipulate that all advisors must take a mandatory qualification exam by January 2021 and achieve the educational equivalent of a university degree by January 2024. These requirements apply to all advisors, even those who have been in the profession for many years, like 11-year MDRT member Jenny Brown, CFP, FChFP, of Melbourne.

For those not prepared and ready to move with the changes, it will continue to have an impact on revenue. There will be an increase in costs at all levels.
— Mathew Thomas Fogarty

It’s widely believed the new educational requirements will have a significant impact on the number of financial advisors in the country, with experts estimating that as many as one-third of advisors will retire or leave the profession.

“We need to constantly keep up with training and education, and ensure our team is well equipped to meet any changes that occur,” Brown said.

Those changes include a shift from commissions to fees. According to McCann, the Australian government mandated a reduction in commissions from a maximum upfront amount of 120% of the first year’s premium to a maximum of 66% by January 2020. The Royal Commission also recommended insurance commissions be banned entirely, although that has not yet been decided.

“The change in how advisors are remunerated is very topical at the moment,” said Mathew Thomas Fogarty, CFP, Dip FP, a 17-year MDRT member from Moorabbin. “For those not prepared and ready to move with the changes, it will continue to have an impact on revenue. There will be an increase in costs at all levels.”

These cost increases, naturally, will impact clients, and Fogarty says it’s difficult to know how much of the advisor’s cost increases should be passed along.

“The initial challenge is the inability for clients to understand the value they receive for the fee,” he said.

In McCann’s practice, this discussion has been made even more difficult. They analyzed the cost of serving clients to make sure they were charging appropriate fees and ultimately had to increase some of those fees. And for the sake of the practice’s profitability, they had to sell the bottom 20% of the client base.

“Clients do not fully appreciate the time and expertise involved in meeting the strict compliance requirements and the level of information we are required to obtain,” he said.

Australian advisors must adhere to strict standards with their clients and prospects, all designed to ensure they are operating in the client’s best interest. Advisors must complete a comprehensive fact-find and risk profile, and provide terms of engagement before offering any financial advice. McCann estimates it takes at least 10 hours to complete, with more complex cases requiring 30 hours to complete a detailed fact-find and provide written advice.

“We have seen many changes to the industry, some good and some not so good,” Brown said. “For too long, there have been too many bad practices. The changes sadden me, but our business is going to be stronger. In five years’ time, we will be a lot more successful than we are today.”

Fogarty also said that, despite the frustration of such regulatory changes, they represent even greater possibilities for the financial services profession.

“The Royal Commission inquiry presents a wonderful opportunity for those willing to adapt to the changes,” he said. “You don’t want to be a Blockbuster video shop in a Netflix world.”

Fogarty believes that despite the changes, the purpose of being an advisor remains the same: helping clients. He particularly remembers a couple in their 50s who became clients when the husband was terminally ill. Fogarty was able to sort through their “financial mess” to create a clearer picture of their situation and obtain some helpful insurance payouts.

Ultimately, when the husband died, his widow was secure and even purchased a new home. The impact of Fogarty’s assistance is still felt — she mentions her gratitude at every client review meeting and has referred multiple family members to him as a result.

“Although there have been some challenges over the years, there are still clients who need quality advice. We can add a great deal of value to them and make their lives better,” Fogarty said. “While there will always be external factors, the fact that we can make a difference to people will never change.”


Adam McCann

Jenny Brown

Mathew Thomas Fogarty


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