Does DBFO reduce the cost to serve?

Advisely expert and FAAA general manager policy, advocacy & standards, Phil Anderson recently jumped onto Advisely to answer all your burning questions on the Delivering Better Financial Outcomes (DBFO) package – the Government’s response to the Quality of Advice Review (QAR) recommendations.

Here are six of the most interesting conversations that came out of his AMA:

Q: In your opinion, what are the biggest wins for the advice profession in the DBFO Tranche 1 changes?

The big win, although this is limited to those advisers who are on ongoing fee arrangements (which excludes those who have switched to 12-month fixed-term agreements), is the removal of FDSs. I would suggest that those who are on 12-month fixed-term agreements have reason to go back to ongoing fee arrangements to leverage the benefit of 150 days after the anniversary for clients to renew. They would no longer be bound by a requirement to get clients to renew before they get to the 12-month point. Another important win was the ability to move anniversary dates. 

I also think that we now have the chance to rationalise the fee consent process via the development of a standard mandatory form. Ideally, this will soon become a digital process, where clients can approve an ongoing fee arrangement by clicking a button on an app on their phone.

The ability to provide FSG information on websites has merit; however, I expect that licensees will be reasonably careful when implementing this.

There was nothing much of great interest in the Conflicted Remuneration changes, and the client consent requirement for risk advisers is really just locking into law something that is already a business practice. This is a once-off consent that does not need to be provided to the life insurer.

Q: DBFO, I have to admit I have been on the sidelines of it and have seen a rollercoaster of emotion expressed from different commentators/participants ranging from excitement for the potential for real change both for advisers and customers in the early days to some pretty full statements of full disillusionment and disbelief with what has eventuated. All I see and hear in advice practices now is the pressure of rising costs to deliver and serve customers, leading many practices to reduce/limit the number of clients they look after – how do the changes made here reduce these costs and when will the impact be felt? In the next tranche, what changes will help reduce the cost-to-serve for those running advice practices? When are these likely to come into effect in 2026/2027?

Yes, this regulatory change process is slow and frustrating for those watching from the outside. I have been involved in regulatory change for over a decade and know that it takes time, and also appreciate that it is important to get it right the first time. It was nonetheless important to get the DBFO Tranche 1 changes passed, and this should give us confidence that the Tranche 2 reforms will be delivered. I like to remain optimistic about the future, and hopefully, that is how it plays out.

In terms of business improvement, I think that regulatory change is critically important. However, there is much more that can be done to deliver greater efficiency. The people I talk to describe the huge difference between practices that have good processes and those that don’t. So, I would like to say that regulatory change is not the only way to achieve real improvements. What practices need to target is serving more clients with the same fixed cost base and reducing the cost of providing financial advice.

There is an interesting debate underway about whether there is a maximum number of clients that any one adviser can service. Some refer to the Dunbar principle, which suggests a limit of 150. Others suggest that with the benefit of technology, advisers should be able to service a lot more. This will be an interesting debate to watch play out.

I think the removal of FDSs, the rationalisation of the BID, the removal of the safe harbour, and the rationalisation of advice documents can deliver material efficiency improvements. These changes will be material along with technology and process improvements.

In terms of timing, the ideal pathway would be for the legislation to be passed in early 2025, with a 6 to 12-month transition period. So we might be looking at commencement in late 2025 or early 2026. Please don’t hold me to this timeline.

Q: I know Misha Schubert's comments about ‘dodgy advisers’ were a couple of months ago now, but I'm curious as to what you think precipitated them – perhaps not hers specifically, but the general temperature before and during the passage of the first QAR bill and the comments we saw in the Senate. To me, a lot of these talking points seem to be rehashed from the pre-Royal Commission (or perhaps even pre-FOFA) era. Why do you think the QAR reforms have reignited this debate?

I think it is important to put on record the fact that Misha apologised for that comment. It was not appropriate and did not reflect how the vast majority of advisers operate. The DBFO Tranche 1 debate got a bit challenging, however I think we landed in the right space and I trust all sides will accept that.

Yes, there is a risk that we could go back to the bad old days of the FoFA and FoFA Amendment days. I hope that is not the case. The world is very different now and there is little doubt that the divides that existed in the past are simply much less relevant now. Our members work happily with all types of funds and we engage well with all types of funds as well. More work can be done by some funds to make them easier for financial advisers to work with, and we certainly hope that is a focus for them going forward. I think in this regard, the future is much brighter than it has been, and we should embrace the prospect of a world where advisers can happily work with whatever fund best suits the needs of their clients.

Q: It's good to see some changes that will help with Tranche 1, but I think most agree the real benefits for advisers will happen in Tranche 2. When do you think this will likely get passed and how are the discussions going with Stephen Jones? Are you concerned about a change of government having a big impact?

Yes, whilst getting rid of FDSs will be a big outcome for some advisers (those who have not moved to 12 month fixed term agreements), the bigger gains are likely to be through Tranche 2 of the DBFO. There wasn’t much in Tranche 1 for risk advisers, other than the new client consent requirement and confirmation of the retention of commissions (although at the current levels). We see the rationalisation of the Best Interests Duty, the removal of the safe harbour and the rationalisation of advice documents as the most important reforms.

There is still a long way to go in this process. I suspect that some work (consultation) still needs to be done before the draft legislation is released, and then there is still a period of time between that point and the tabling of the legislation in the Parliament. We remain in regular contact with Treasury and the Minister’s office.

In the Minister’s media release in response to the passing of DBFO Tranche 1 he said “The second tranche of reforms will further increase access and affordability of financial advice and will be developed over the second half of the year”. We obviously want it to happen as soon as possible, and with an election expected in the first half of 2025, we would like it to be fully resolved before the election. Unfortunately, there are no guarantees with this.

I am not particularly concerned by a change of Government, as the Opposition has said that they will fully implement the Michelle Levy QAR recommendations, so they will still drive change. The issue might be that there is a delay for them to transition into the driving seat. Thus, given that the election is still as much as nine months away and a change of Government is not likely to deliver a significantly different outcome, we will simply focus on driving for change and working with whoever is in Government.

Q: Isn't there an inherent conflict of interest with the idea of a 'qualified adviser'? If the government was truly interested in providing Australians with quality advice, it is easy enough to have a panel of 'non-aligned' advisers that super fund members can choose to go to. By having 'baby advisers' how is the mess going to be any different to what we had with banks? Also, I think the term qualified advisers is misleading. Almost giving these trainees the perception of being equal to a financial adviser or superior. Your thoughts?

Yes, there is definitely a conflict of interest in financial institutions appointing QAs and providing advice on their products. Conflicts of interest exist everywhere. In some cases, they are impossible to accept, whilst in other cases they can be managed. Let’s hope that the supervision and surveillance of QAs, when they commence, and on an ongoing basis, will be sufficient to ensure that the worst of what has happened in the past can be avoided. I certainly hope so as our members do not want to suffer reputational damage as a result of mistakes made by QAs.

My view has always been that QAs would provide the type of advice that fully qualified advisers would not provide, in that it was simple advice and the potential fees meant that they were simply not attractive clients. In this way, we would be talking about completely different consumer segments. QAs might be a means of these people getting simple advice that could make a meaningful difference to them, that they would otherwise not be able to get.

You might notice that I am not using the term ‘Qualified Adviser’, but instead referring to them as QAs. We objected strongly when this term was floated in December 2023, and we received a commitment from the Minister before Christmas that another term would be found. He repeated that commitment in a recent podcast that he did with Professional Planner.

Q: Have you seen much interest in the qualified adviser options for super funds and the like? Are these businesses busily preparing for this option in the background, ready to launch, or is this not a priority for them? In addition, will the option of qualified advisers be restricted to a particular cohort, or will it be an option available to all businesses?

We have been engaged in discussions with super funds and insurers about the ‘QA’ option. I think they are open to the idea, however, it is not yet clear how this might work, so I assume that they are just at the thinking stage at this point.

Some people have expressed concerns about the banks getting back into financial advice. The big banks have been quite guarded about responding to this, and no doubt the memory of the Royal Commission is still fresh in their minds. The world has changed substantially since then, and most of them no longer have a wealth arm where they have products to distribute. I think, for this reason, they are less likely to rush back into advice. However, it is difficult to predict what will happen in the long term.

Michelle Levy recommended that it would not be possible to charge for advice services provided by a QA. This would mean that it largely only made sense for product provider entities with product margins available to pay for them. We have argued that advice practices should be able to employ them and that their costs should be covered by fees that clients pay the practice. This outcome is important to ensure that the playing field is as level as possible.

Keep an eye out on the discussions section here for upcoming AMAs.