Accountants servicing SMSF clients currently find themselves at the crossroads due to the new licensing regime. Vicki Stylianou outlines their options and the implications of their choices.
The Future of Financial Advice (FOFA) reforms, which commenced on 1 July 2013, present many challenges to today’s accountants. Of course, with challenges come opportunities.
While there is a transitional honeymoon period up to 30 June 2016, accountants wanting to continue to provide the ability to assist clients in the set-up or closure of an SMSF should be planning now prior to the removal of the accountants’ exemption. Under the FOFA reforms, accountants who advise on SMSFs must hold the new limited Australian financial services licence (AFSL) in order to provide a broader range of financial advice after 1 July 2016.
For accountants who provide SMSF services, doing nothing is not an option after 1 July 2016.
Some accountants will choose to stay as they are and try and sustain their business based on what they currently provide. Some, particularly those who have primarily been providing clients with tax returns only, see opportunities. These include diversifying into areas of client demand, addressing the potential downturn in tax compliance work and building sustainable new revenue streams.
Then there are others who have traditionally provided SMSF and related product advice under the accountants’ exemption, who will look hard at what their options are. Some, if they do not already possess the necessary RG 146 qualification standard, will pursue this to not only sustain their current practice, but to grow it.
On the other hand, there will be some who will decide the time and effort is not worth it and will seek to exit from this type of advice work altogether, or decide to retire. Of course, that scenario presents very different and real challenges, particularly: “How do I retire and is there a succession plan to look after my long-standing clients?”
Regardless of the scenarios, what should matter is what the client and consumers are now seeking from a very competitive profession. This is the time for accountants to regain and establish themselves as the trusted adviser or as the centre of the trusted adviser circle.
FOFA – what’s all the fuss about?
Much has been written and debated about the FOFA reforms in the past three-and-a-half years since they were first announced. It is difficult to argue with the underlying policy objective of consumer protection. Since the examination by the Ripoll review into the collapses of Storm and other financial service providers, there has been a growing chorus to do more to protect unwary consumers. While FOFA may not prevent future collapses, the ban on conflicted remuneration structures may go some way to prevent the excesses of the past.
However, the accounting profession and key professional bodies, such as the Institute of Public Accountants (IPA), have embraced the reforms. The limited licence provides an opportunity for accountants to broaden the type of services they can offer to their clients. Given 70 per cent of people outsource their tax compliance work to a tax agent, the ability for accountants to cross-promote and extend their range of services represents a real opportunity.
Another factor accountants reliant on tax compliance work should not ignore is the shrinking pool of individual tax return work. Already this year, the volume of individual tax return work has declined by 10 per cent due to the higher tax-free threshold, which increased to $18,200 for 2012/13. There is further bad news, with the Australian Taxation Office (ATO) planning to remove the need for millions of individuals to have to lodge annual tax returns.
Both the government and the ATO have ambitions to reduce individual tax return compliance, which spells trouble ahead for practitioners who are over reliant on this sector for generating a high proportion of their fees.
So what does it mean for SMPs?
A recent poll of small to medium practices (SMP), where the IPA has a keen focus, revealed the fastest-growing sources of new revenue for Australian SMPs, with 36 per cent stating tax-related services (including advisory and consultancy) as an increasing area of revenue, 27 per cent per cent indicating advisory and consulting services, 27 per cent nominating accounting/compilation services and 10 per cent per cent naming audits.
SMPs have many challenges apart from responding to FOFA. A 2013 poll conducted by the International Federation of Accountants shows the small to medium enterprise/SMP market segment is immensely challenged by the regulatory burden. Other challenges include dealing with compliance and red tape, closely followed by ongoing economic uncertainty, market pressures, lower prices and rising costs.
A recent IPA partner survey of 500 accountants stated in relation to FOFA: 30 per cent were interested in getting an AFSL close to July 2013 (a short two-month history now shows very little traction); 25 per cent said they would tackle the issue in 2014; 50 per cent have made a licensing decision with the majority seeking to partner with a solutions provider; and 50 per cent stated they would start education solutions to meet the RG 146 qualifications.
More about opportunities – some further interesting trends
There are also some other interesting trends in the SMSF market that accountants need to consider to sustain, grow or diversify thinking. These were revealed in the “Vanguard/Investment Trends April 2013 Self Managed Super Fund Report”. The study found SMSFs using financial planners declined in the past six years despite the significant increase in the number of SMSFs. Further, SMSF specialisation has increased in the financial planning industry. The market tendency is to seek such specialists over generalists.
Forty-five per cent of SMSF investors currently using an accountant solely for tax advice said they would consider using them for financial investment advice if they offered it.
The time is now to diversify and grow your SMP business.
Decision-making
The IPA is encouraging its 25,000-plus members and students to consider their options wisely. At this stage, the main options are to decide whether to stay in the SMSF space or not. If not, then accountants may have to refer clients to other practitioners.
If the decision is made to stay in the SMSF/financial advice space, then the next major decision is to decide whether to apply to the Australian Securities and Investments Commission (ASIC) for a licence or to become an authorised representative of an AFSL holder. Either way, we suggest the intention should be to sustain, grow or diversify. This also presents new opportunities for young(er) practitioners who may not previously have thought about setting up their own practice. For graduates with RG 146 qualifications, this may become aspirational and an alternative to working for a large or mid-tier firm.
The decision whether to apply to ASIC for a licence or become an authorised representative will depend on a large number of factors. These may be grouped very broadly in terms of structure, risk and compliance, cost, resources, independence and convenience. Each practice will have to consider what is right for the accountant, the practice and the clients.
Some accountants may choose to become authorised representatives, which will mean having to find the right fit among the many choices, including choosing between the larger institutions and the smaller AFSL holders. One of the main considerations here is transferring the risk and the compliance to another entity, which will usually be better resourced.
It should be pointed out that authorised representatives will need to maintain compliance standards agreed and set by the licensee.
Limited licences are also a viable option for SMPs. It should be remembered all of the FOFA and Corporations Act requirements apply, including the disclosure obligations and associated documentation. They must also be a member of an external dispute resolution service. The application form is 65 pages and comes with three information kits and involves compiling myriad supporting documents.
What does the future hold?
The IPA believes the face of accounting has changed and will continue to change. However, we believe the one thing that won’t change is that accountants will remain as the trusted advisers to their clients.
ASIC will continue to monitor and encourage best interest behaviour and then seek to enforce the legislation while being on the hunt for FOFA window dressing, as they have already stated. Already, ASIC has announced its proposal for increased education requirements under RG 146 with two more modules. More demands are sure to follow.
What accounting professionals do to meet these increasing demands is primarily up to them – they will decide whether they sustain, grow or diversify.
There has been much debate in terms of the relationship between financial planners and accountants. The IPA believes their coexistence is inevitable and in the best interests of clients in terms of obtaining the most appropriate advice from a range of professionals.
Finally, we suggest accountants think about acting sooner rather than later. It can take up to 18 months to become RG 146 compliant (depending on the course) and it can take months to research the options in terms of AFSL holders or to compile information and comply with the limited licence requirements. ASIC is proposing the boosted RG 146 commence from 1 January 2015. Whatever decision is made, it will take time and time is running out.
