FOFA legislation was enacted on the 1st July 2013. In that piece of law were two items that would be quite controversial. In particular was the Opt-in legislation. Originally flagged for each year but ended up being a requirement for every two years. Opt-in alone has been confusing enough but add in the FDS, FOFA is on (July 2013), now off, oh wait its on again (Nov 2013) and you have a state of complete confusion. I have heard that a particular advice group until quite recently believed Opt-in was out.
So, how does the Opt-in provisions work?
Quite simply, if you have clients that you charge on a regular basis for advice and other services, and the most recent SoA was provided to them on or after the 1st July 2013, then you have clients that are required to Opt-in.
If you have clients that have not had an new SoA post July 2013, then you are not required to provide an Opt-in arrangement. However, you should remember that if you move advice groups you cannot complete an RoA for a client who’s SoA was provided under the previous advice group. Therefore, once you provide a client with a new SoA under the new advice group, and you enter into an ongoing fee for service arrangement, they will now be Opt-in clients.
If you have clients with products that pay an ongoing commission, you do not have to provide Opt-in arrangements to those clients nor an FDS.
FDS need only be provided to clients that are being charged an ongoing fee for service arrangements. This differs from the Opt-in rules as these MUST be provided to ALL clients regardless of when they began paying fee for service.
Interestingly, there is one exemption for advisers and advice group, and another onging fee arrangement that precludes the necessity of two year opt-ins.
The first is where the advice group is a member of an organisation that has an ASIC approved code of conduct and binds its AR to that code.
I believe that this will not provide advisers with the relief they require from the obligation. It is likely that any code approved by ASIC will have a client review as a necessary part of that code, and that it may be more onerous than the actual Opt-in obligation.
The second is an interesting alternative, and is one for contemplation.
The Legislation states that:
A fee arrangement is not an ongoing fee arrangement if each of the following is satisfied:
- the total of the fees payable under the terms of the arrangement is fixed at the time the arrangement is entered into;
- the total of the fees payable under the terms of the arrangement is specified in the arrangement;
- the fees payable under the terms of the arrangement are to be paid by instalments over a fixed period specified in the arrangement;
- the fees payable under the terms of the arrangement can reasonably be characterised as relating to personal advice given to the person before the arrangement is entered into;
- under the terms of the arrangement, there is no fee payment of which, or the amount of which, is dependent on the amount invested by the person, or the amount in relation to which personal advice is given;
- the person cannot opt out of payment of any of the fees payable under the terms of the arrangement. At the end of this period we will review both your portfolio and our fee arrangements.
What this means is that the client needs to commit to a say, 5 year arrangement, something like:
…For the advice provided in the SoA ($8,000) plus the above ongoing services described above being $2,000 over the term of 5 years to a total of $10,000. At the end of this period we will review both your portfolio and our fee arrangements.
NOTE: Only part of the service may contain an ongoing arrangement and it is agreed upfront. You cannot base the advice fee on funds under management as this would constitute an ongoing arrangement, and the fee cannot be increased over the period unless agreed by both parties under a new SoA. At least that is how AVALON would handle it. Under this arrangement you wold be able to make a separate charge for the preparation of the SoA.
Let me know if any of you have any concerns about FDS or Opt-in we have a couple of FDS and Opt-in wordings that you may use.
You should note that unlike all other laws pertaining to advice, in the case of your relationship as an AR with AVALON, you are the Fee Recipient as defined in the legislation and therefore it is up to you, the Fee Recipient, to ensure that FDS and Opt-in are carried out.
Also note that FDS and Opt-in are regular compliance confirmations advisers within AVALON are required to make on a quarterly basis.