FPA chief executive Dante De Gori
FPA chief executive Dante De Gori

The ongoing service agreements that underpin most advice remuneration models are set to change dramatically after Commissioner Kenneth Hayne recommended that opt-in periods become annual, with more focus on the specific services to be provided, in his final report.

“The central changes I would make are to require that ongoing fee arrangements must be renewed annually and that the client be told what will be done,” he stated in the final report, delivered Monday.

Hayne gave fair warning in his interim report that he felt OSAs in their current form give “the advisers a financial advantage”, and that the fee-for-no-service scandals uncovered during the inquiry were facilitated by them.

Central to Hayne’s recommendation is the premise that the client and the adviser need to discuss and agree on the range of services given – and the cost for doing so – more often than the current two-year opt-in rules dictate. There is too much scope, he believes, for clients to lose track of what they’re paying.

“If there is no recognition of a pressing need for the services and the charge is deducted automatically against funds under investment, neither adviser nor client may think about whether the services promised have been or should be provided,” Hayne stated.  “One line in a periodic investment statement recording the payment will draw the matter to attention only if the client is attentive enough to look beyond the total given at the foot of the statement.”

In the absence of an event that prompts scrutiny of the agreement, Hayne said, two years is too long for clients to pay for something they may not be getting value from. His lack of faith in advisers to monitor this is clear.

“Absent extraordinary external events or radical change in the client’s personal position, it would be very easy to provide the service with little time and little effort,” Hayne stated. “And, as pointed out above, the less work that is done, the greater the financial advantage to the adviser.”

According to Claire Wivell-Plater, chair of The Fold Legal, there will no “no such thing as an open-ended OSA”.

“They’ll be annual service agreements now, not ongoing service agreements,” Wivell-Plater said.

Dante De Gori, chief executive of the Financial Planning Association, says many advisers are ahead of the curve on annual service agreements and Hayne’s suggested mandate will bring the industry together.

“Many, many professional financial planners are already operating on that annual model,” De Gori notes. “It’s no surprise; it just means that it’ll align the whole profession together under the standard process.”

About face on focus

The profile of OSAs is also set to change, with the Commissioner recommending that agreeements “must tell the client clearly what fees he or she will pay, and what services he or she will receive in exchange for those fees.”

The problem Hayne identifies is that fee disclosure statements don’t do a good job of telling the client what to expect, so ongoing service agreements need to do start doing so.

“The fee disclosure statement is plainly a backward-looking document, looking back at what services the client was entitled to receive, and what services were provided,” Hayne said.

Neither OSAs, nor the Corporations Act, specify “with any degree of specificity what services the client will be entitled to receive, and what services will be provided”.

Hayne said it’s too easy for advisers to define the services to be provided under OSAs as “such services as the adviser chooses to provide.”

“That is not satisfactory,” he stated.

“In my view, a financial adviser who enters into an ongoing fee arrangement with a retail client should be required to provide to the client – every time the ongoing fee arrangement is made or renewed – a statement of the services that the client will be entitled to receive under the arrangement during the coming year.”

Assuming the next federally elected government adopts Hayne’s recommendations, there should be a raft of changes to what a compliant SOA looks like. Disclosure may include not only a forward focus, but a clearer picture of the link between the service being provided and the cost of that service. Value is something Hayne wants front and centre in the adviser/client relationship.

“ASIC’s view is that the services promised under ongoing fee arrangements, even when provided, may not give the client a benefit commensurate with their cost,” Hayne stated. “I have no basis on which to doubt that view.”

“Where the ongoing fee is fixed as a percentage of the ‘funds under advice’ (rather than as a fixed dollar sum), the question of value for money is all the more evident.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.