FoFA preview – how it has reshaped the wealth industry

The next edition of Trialogue will be released into a post-FoFA world. What’s going to look different?

FoFA is perhaps the most far-reaching industry reform since compulsory superannuation. It leaves the Stronger Super reforms in the shade; indeed one of the problems of Stronger Super was that FoFA basically stole its thunder (that’s how you end up with something like MySuper).

The full ramifications of FoFA will only emerge over coming years. But they have already been substantial; we see four particularly important areas:

– Unbundling of product pricing removes the price advantage of not-for-profits. The unbundling of commissions and product pricing has seen significant drops in go-forward retail product pricing. This has resulted in retail prices for super coming into line with, or falling lower than, the traditional price leaders. This has created an interesting situation where the pricing advantage of industry funds in particular has been largely eliminated, but retailers conversely now have a high margin backbook run-off problem.

– Changes to remuneration outlaw sales careers in financial product sales. OK that might be a slight exaggeration. But we can’t think of any other industry where sales staff can no longer be primarily remunerated on the basis of sales success. As a result we are seeing wholesale changes to assessment and reward structures. It’s not hard to argue that changes to sales incentives were needed. But does the sale of financial products need a special regime? If so, why not real estate and other close substitutes as well?

– End of conflicted remuneration reshapes business models. The early call by Count to sell to CBA was the canary in the coalmine. It signaled how hard it would be for businesses based on old remuneration models to transform for a post-FoFA world. FoFA is also reshaping institutions in a big way. For institutions there is a lot of history to review, with potentially conflicted arrangements going back 20 years or more. Often those involved in setting up such arrangements are long gone, and with them the institutional memory of their origins. Far from seeking to game FoFA, institutions are taking a conservative approach, and in the process re-setting the relationship between institution and planner (in favour of the institution of course).

– A reshaping of perceptions of what is acceptable behavior in the industry. The current series in the Fairfax media “Exposed – planners go rogue” makes ugly reading. The events are now ancient history for CBA, but may haunt current management (who by and large were not around at the time) for years to come. No doubt others are thinking “there but for the grace of God go I”. What was more-or-less common practice yesterday may be tomorrow’s front page story and class action.

These areas are far from exhaustive, but even on their own represent a fundamental re-ordering of the industry. FoFA is something of a sledgehammer which will cause some participants to leave the industry, and diminish the breadth of product offering available to many investors. Its impact may be softened in the event of a change of Federal Government in September, but even so it’s more likely to be the speed of change rather than the direction.

Over 70 years ago, a book was published titled “Where are the Customers’ Yachts?”. It asked (about Wall Street) why so many bankers and brokers had yachts, but few investors. Fast forward to Australia 2013 and it might be argued that relatively little has changed (indeed the book’s conclusion was that nothing would change in this repect).

FoFA may not result in a lot more yachts for Australian investors, and self-direction is no guarantee of that either. But it may make them a bit scarcer for those selling financial products. Overall that’s no bad thing.