Haven't We Been Down This Road Already? Excellence in Regulatory Change

The Australian financial advice profession is no stranger to regulatory change, and the upcoming reforms off the back of the Quality of Advice Review (QAR) recommendations and the government's Delivering Better Financial Outcomes legislative program represent a significant opportunity for the profession to reflect, plan and reset for a brighter future. As practices gear up for these changes, we continue with our series on Defining Excellence in Australian Financial Planning. We will leverage both the Adviser Ratings Australian Financial Advice Landscape Report 2024 and Advice Practice Business Survey 2024 data to gain valuable insights into how top practices prepare and adapt to change.

The Long Road of Regulatory Reform

Historically, significant regulatory changes in the financial advice profession have taken considerable time to implement, as seen in the table below. For instance, the Financial Services Reform took seven years from recommendation to implementation, while the Future of Financial Advice (FOFA) reforms took four and a half years. The QAR, initiated in 2022, is expected to follow a similar timeline, mainly because we have yet to see legislation, and an election is expected sometime in the next six months.

In short, regulatory changes in financial advice take many years to legislate, transition through, and implement.

Key Changes on the Horizon

So it is worth considering which of the QAR recommendations were accepted by the government, which include several pivotal changes:

1. Modernised Best Interests Duty: Removing the "safe harbour" steps while retaining the core obligation to act in the client's best interests.
2. New Advice Records: Statements of Advice (SOAs) should be replaced with more flexible, principles-based advice records.
3. Expanded Superannuation Advice: Allowing superannuation trustees to provide members with a broader range of advice.
4. Streamlined Fee Arrangements: Simplifying fee consent and renewal processes (which have already been legislated).
5. A New Class of Advisers: Introducing a category for simple advice provision under licensee responsibility.

While some have been critical or concerned by some of the proposals, as a package, these changes are intended to improve the efficiency of advice delivery and allow more Australians to access financial advice provided in their best interest, which should be the primary focus of advice practice. The question is, should you wait for regulatory certainty to make some of these changes, or can you at least start planning now? And what are the excellent practices already doing?

Adapting to Change: Industry Insights

Practices adapt to regulatory change in a variety of manners. The Adviser Ratings Advice Practice Business Survey 2024 revealed how practices position themselves to navigate change:

1. Professional Standards, Compliance & Regulatory Liaison: 82% of licensed practices rely on their licensee to support them in incorporating regulatory change into their practice. Conversely, 45% of self-licensed practices proactively manage regulatory change projects or engage experts to assist them, while 13% outsource this to external service providers.
2. Business Planning: Regulatory change projects of the size of DBFO require a committed effort from practices to implement, given the opportunity to redesign both the advice process and disclosure documentation. The survey showed that while 73% of practices had a business plan in place, only 32% kept it up to date.
3. Managing Change: Despite the promise of a brighter future heralded by the Quality of Advice Review (QAR), the Australian Financial Advice Landscape Report 2024 reveals a concerning trend. 15% of advisers (~2300) are still considering exiting the profession over the next five years, even without the pressure of new educational requirements, including 16% of practice principles. This will impact as many as 225,000 clients and see a redistribution of an estimated $207B in assets they manage within the advice ecosystem.
   
   

Challenges and Opportunities

While regulatory changes present challenges, they also offer opportunities for practices to streamline their operations and enhance the quality of their advice. For example, the removal of prescriptive steps in Safe Harbour, which have over the last decade led to tick-a-box compliance, are being replaced by a principles-based approach to the Best Interests Duty, which can allow practices to develop a more tailored, client-centric advice process.

Changes to advice documentation and removing the requirement to provide 120-page SOAs can usher in an opportunity to deliver engaging, client-centric advice that helps clients better understand the recommended strategies, reducing client confusion and follow-up.

However, the transition period will require significant investment in training, technology, and potentially new staff roles, which we will explore further in the coming weeks.

Balancing Regulation and Sustainability

So, how do excellent advice practices implement regulatory change without overwhelming advisers and driving them out of the profession?

1. Streamlined Processes: 43% of practices plan to develop material process efficiencies in 2024 to improve advice delivery.
2. Compliance Enhancements: Additionally, 13% of practices plan to proactively implement material compliance enhancements despite needing more regulatory certainty.
3. Technology Enhancements: 23% of practices have plans to invest in new IT solutions in 2024 to improve advice delivery and practice management.
4. Building their Practice: 10% of practices want to make significant staff changes, and 15% plan on recruiting new advisers to prepare for growth opportunities in 2024.
5. Finding the Right Support: Finally, 15% of practices intend to change their licensee relationship, and 10% are looking for new service providers to better support their business objectives in 2024.
   
   

Conclusion

As the profession grapples with these challenges, it's clear that the success of regulatory reforms will depend not just on their content but on practices taking a proactive approach to their implementation. Practices that take a proactive approach to regulatory change are likely to thrive.

If you don't feel you are there, there is still time to start proactively preparing. Learning from excellent practices, options to proactively develop your regulatory change plans include:

1. Staying informed about regulatory updates and their implications
2. Investing in technology and systems that can flex with changing requirements
3. Fostering a culture of continuous learning and professional development
4. Collaborating with peers and industry bodies for support and insights
5. Regularly reviewing and updating internal policies and procedures

While the road ahead may be challenging, practices that embrace these changes as opportunities for improvement and innovation will likely emerge stronger. The financial advice landscape of tomorrow will be shaped by those who can most effectively blend regulatory compliance with innovative service delivery, ultimately benefiting both advisers and their clients, which can already be seen in leading advice practices today.

And if in doubt, start with a blank map, you might find a new road to your destination.

Article by:

Adviser Ratings

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