Looking at the bigger picture

Accountants considering the future servicing of their SMSF clients need to look further than just licensing. David Lane examines another critical factor in the mix.

Declining fee growth and profit margins are the two biggest concerns currently facing accountants – issues that are now part of the regular conversations I have with accountants and supported by recent research.

These concerns, coupled with regulatory change, are causing plenty of sleepless nights for accountants.

In particular, accountants are grappling with what to do about SMSF advice in light of the pending removal of the accountants’ licensing exemption from July 2016 and the requirement that accountants operate within the APES 230 standard.

Interestingly, the successful accounting firms we talk to are not treating APES 230 and the removal of the accountants’ exemption as compliance decisions, but are using them as the impetus to revisit their business model and address the margin pressure they are experiencing.

During partner meetings across Australia, accountants are taking time to look at the bigger picture first by assessing the opportunities and threats to their existing business model and client relationships created by, among other things, regulatory change.

In addition, they are exploring how professional standards can be leveraged to support their overall business.

These conversations continue to remind me of the significant challenges facing accountants, but also of the resilience and client focus this community embodies.

So what does the practice of the future look like and what will it take to get there?

Business model for the future: strategic business advice

Accountants are facing a rapidly changing landscape, and although for some this is a very frightening concept, now is the time to act. Traditional accounting income sources are under threat and reliable client sources, such as tax lodgement clients, are likely to diminish.

For example, the encroachment on the traditional areas of accounting by readily available online accounting tools and new user-friendly accounting software will likely make it more difficult for accountants to charge substantial fees for bookkeeping services.

In addition, the ATO’s tax e-lodgment service is anticipated to reduce manual tax lodgments significantly.

Many firms we talk to have come to the conclusion that in order to retain clients and replace what is likely to be declining income from traditional work, such as personal tax returns and producing company accounts, they need to offer more strategic advice around improving business efficiencies to their traditional small business clients.

Online services and software providers may think they are offering this strategic service, which I like to call a ‘CFO in a box’, but they generally only provide efficient data management and bookkeeping services.

Switched-on accounting firms are incorporating services that provide the insight and business coaching components that no amount of online wizardry can replace.

Accountants’ licensing exemption and SMSF changes: threat or opportunity?

The removal of the accountants’ licensing exemption for SMSF advice may also be regarded by some as an external threat to the traditional accounting business model. However, in the many conversations we are having with accountants, we increasingly see firms looking for ways to turn this threat into an opportunity.

As recently as 2014, research has confirmed what we all know: clients hold their accountants in a position of high regard. Investment Trends research from 2014 indicates that of the 26 per cent of clients surveyed who left their accountant, the main reason for doing so was they did not believe their accountant could offer all the services they wanted.

That is a compelling statistic. No wonder many firms are not just looking at a limited licence to replace the exemption for SMSF advice. In fact, most of the firms we talk to are looking to add a wide range of financial planning advice to their suite of services.

It is my prediction that those who do will experience an improvement in client retention as well as an increase in fees from both accounting and financial planning, not to mention a rise in client referrals.

Business model: financial planning advice or focus on core accounting services

So what are the specific considerations for accountants debating the move to financial planning? We are seeing successful firms addressing the following fundamental decisions:

Decision 1: Do we want to expand into financial planning or focus on core accounting services?

Decision 2: If providing financial planning, will services be limited to SMSF advice (limited licence) or address wider client needs (full licence)?

Decision 3: Do we want to devote management time and billable hours to establishing and running our own licence or outsource to an established third party?

Decision 4:  How will we integrate our professional obligations under APES 230 into our approach to financial advice?

Successful accounting firms are finalising the decisions about their business model and approach to licensing now, well in advance of the looming deadline of July 2016 when the accountants’ licensing exemption will cease.

Interestingly, as more and more firms decide to embrace financial planning, we are increasingly being asked about the application of APES 230 to financial planning activities.

APES 230

Once firms decide they will offer financial advice, APES 230 comes into play. Many firms we speak to regard their professional memberships as a competitive advantage; some will actively promote their adherence to professional standards in marketing documents and on their company websites.

This commitment to professional standards is admirable, but what are the practical implications for the business?

APES 230 sets a higher standard than that required by law for accountants who offer financial planning advice and with that comes challenges.

APES 230 is a professional and ethical standard for accountants who provide financial planning services. It applies to members of Chartered Accountants Australia and New Zealand and CPA Australia, but sets a standard many other accountants will no doubt use as the benchmark for financial planning activities. The APES 230 requirements fall into two main areas: the advice process and fee arrangements.

The spirit of the APES 230 standard takes the concepts of professionalism and ‘independence of thinking’ expected of accountants in a range of other areas and applies these principles to financial advice.

In doing so, it looks at such things as obtaining informed consent from clients, applying safeguards where possible conflicts of interest may arise and removing or managing the perceived conflict created by percentage-based remuneration for financial advisers, including asset-based fees, production or volume bonuses and other commissions.

In some respects, APES 230 sets higher obligations than those already required under the Future of Financial Advice legislation. For example, the APES 230 advice requirements apply to credit and lending activities, and the disclosure requirements extend to annual disclosure of insurance and lending commissions.

The devil, as they say, is in the detail. The challenge for firms is to customise their systems and processes to support these additional requirements. Realistically, this is a big investment of time and effort; most licensees won’t have software, documents or payment systems that meet all these requirements, meaning the firm will need to find a way to comply manually.

We know this firsthand, because Count took the decision to make the investment of time and effort to support APES 230 in our systems and processes. For us, it meant not only overhauling advice documents, but customising our fee system so advisers can send fee disclosure statements for insurance and lending, and correctly disclose asset-based fees.

Self-licensing firms should be addressing all of these areas in order to incorporate the APES 230 standard into their processes, particularly in regards to client engagement, documentation of financial advice, fee charging models and ongoing fee disclosure.

APES 230 and the advice process

The APES 230 advice process requirements should be integrated into standard advice documents, including the financial needs analysis document, risk profiling tools, financial services guides and statement of advice documents, among others.

This includes outlining that the advice has been prepared in accordance with the APES 230 requirements and obtaining evidence that ‘informed consent’ has been obtained from the client for asset-based fees or commissions to be charged.

In approaching the range of advice documents offered at Count, we have specifically mapped the requirements of the APES 230 standard to our advice documents so that members who need to comply can meet the advice process requirements largely through using complying documentation.

Naturally the responsibility for conducting client conversations (including assessing the client’s needs, ensuring the client is in a position to give informed consent and considering safeguards to protect against any conflicts of interest) rests with the accountant/adviser.

Those who are self-licensing will need to consider how to build supervision and monitoring processes to ensure advisers are complying with these requirements.

In determining which Australian financial services licensee to partner with, accountants should check they will assist in the supervision and monitoring process.

APES 230 and fee arrangements

Fee arrangements are a key part of the professional services model and APES 230 contains specific requirements about how fee arrangements are to be agreed, disclosed and renewed.

Firms will need to consider how they track the dates that annual fee disclosure statements for commission products, such as insurance and loans, need to be issued. In addition, they will need to have a tracking and management process for specifically obtaining biennial consent to ongoing fee arrangements where asset-based fees are charged as part of the opt-In process.

The good news is that because many of the APES 230 fee arrangement requirements are now also part of financial planning legislation, established licensees will be automating processes to support them, making it easier to comply. For firms considering self-licensing, this will be a real challenge.
In choosing a licensee to partner with, accountants need to assess whether the licensee supports professional standards in areas where APES 230 sets a higher bar than required by law.

For example, Count has taken the view that we want to support accountants to issue fee disclosure statements to insurance and lending clients as required under APES 230, so we are automating these processes as well.

What are successful accountants doing?

Reflecting back on firms that have successfully managed the transition to financial planning, they are the ones that made a deliberate strategic decision to expand their services, and then made a ‘whole-of-firm’ commitment to a new business model.

The current convergence of fee pressure on traditional accounting activities, regulatory change and increased professional standards makes this approach even more important.

In the conversations we are having, we see successful accounting firms considering the bigger picture implications of a changing commercial and regulatory environment, and acting now to define their business models. This will be the key differentiator between accounting firms after July 2016.

Their decisions about replacing the accountants’ licensing exemption are part of a much wider review of their revenue sources and offering, and their commitment to professionalism means they are thinking now about how to integrate the APES 230 standard into their financial advice process.

They are taking time away from working in the business to spend time working on the business – my experience indicates this will be time well spent.

A big year ahead

With the end of the accountants’ licensing exemption approaching, it is important to think strategically about the business model and how to incorporate APES 230 into processes. It’s an exciting year for accountants.

The opportunity is there, but the question is, who will embrace it?

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