Since 1 July 2013, advisers have an obligation to provide a ‘Fee Disclosure Statement’ and ‘Renewal Notice’ to their clients if they are receiving an ongoing adviser fee.
Four years on and some advisers still struggle with this requirement. I don’t blame them. It is hard for advisers and dealer groups to keep up with product providers changing the names on the revenue reports from commissions to fees and vice versa. The limitations on their reporting means they are not keeping up to with FOFA but advisers have to live with that.
In any professional practice, ongoing fees are common. It is simply a contract or agreement between the professional and the client for the provision of services, and the fees charged for those services. The FDS obligations are designed to capture the exact same thing.
Do you have a process to ensure you comply with the rules? Do you know where to start? The following details may be helpful:
Fee Disclosure Statements & Opt In requirements
What is contained in an FDS (s962H)?
The FDS includes:
- The amount of fees paid by the client;
- Information on services your client was entitled to receive; and
- Services actually provided to your client for the LAST 12 months.
Do you have to provide an FDS?
You are required to provide an FDS to all of your existing clients who have an ongoing fee arrangement with you. Even though the rules were only in place from 1/7/2013, the requirement applies to ALL clients who you have an ongoing fee arrangement with.
I charge an ongoing fee for 12 months only, do I have to provide an FDS?
You will NOT have to provide an FDS if you receive ongoing fees for 12 months only, or any period less than 12 months. The ongoing fees must NOT be received for a period over 12 months.
This is common in accounting practices where accountants have to provide a letter of engagement to the client every year and detail what fees are charged over the next 12 months. If you choose to re-engage a client every 12 months and you only receive fees within the 12 months, you do not have to provide an FDS.
You will have to disclose the fee in the SOA (if applicable) or send a letter of engagement (download one in Dover Resources) to the client. Best practice is to do both.
What is an ‘ongoing fee arrangement’?
An arrangement where the adviser provides personal advice to a retail client and the client enters into an arrangement with the adviser where under the terms of the arrangement, a fee is to be paid during a period of more than 12 months.
For example, if an adviser meets with a client, and provides the initial advice, the initial advice fee is not part of the ‘ongoing fee arrangement’. If the adviser then discusses his/her services in relation to ongoing advice which may include the following (the list is unlimited):
- Phone consultations
- Portfolio reporting
- One meeting
- Access to adviser support
- Insurance claims assistance
- Annual review of investment portfolio and strategy
- Questions about your portfolio
The fee charged on an ongoing basis to provide those services, are part of the ‘ongoing fee arrangement’ Some advisers charge an ‘adviser service fee’ or ‘advice fee’ through a platform/wrap/other investment vehicle. These fees are typically part of the ‘ongoing fee arrangement’ and must meet FOFA rules.
What is not included in an ‘ongoing fee arrangement’?
Initial advice fees are not part of an ‘ongoing fee arrangement’ as it only pays for provision of one off advice. This is even though the client pays the initial advice fee under a payment plan (section 962A of the Corporations Act). The total fees payable under the payment plan:
- Is fixed, and the amounts specified when the payment plan was entered into
- Is payable by instalments over a fixed period
- Relates to personal advice given before the payment plan is entered into
- Is not dependent on how much the client is invested/advised on (cannot be an asset based fee, i.e. X% of the portfolio or amounts advised on); and
- Clients cannot opt out
Other fees that do not apply under the ‘ongoing fee arrangement’ are:
- Insurance premiums
- Product fees (e.g account keeping fee, transaction fee etc)
- Commission type payments
When do you have to provide a FDS?
You have to provide a FDS to your client within 30 days from the anniversary (also known as ‘disclosure day’) of the ‘ongoing fee arrangement’. e.g. If the ‘ongoing fee arrangement’ started on 1st July 2014, the anniversary/disclosure day is 1st July 2015. You should then provide a FDS any time before 31st July 2015, which details the arrangement for the last 12 months.
Can I date and send the FDS to my clients before the anniversary/disclosure day?
Yes you can. But the FDS should clearly detail which 12 month period the arrangement relates to.
What is a ‘disclosure day’?
The anniversary of the ongoing fee arrangement.
How do I streamline or reset my ‘disclosure day’ to the same date every year?
If you are looking to reset the disclosure day some time after the initial FDS has been given to your existing clients, you may do so by making it clear in your resetting FDS that the resetting FDS covers a 12-month period that overlaps with the period covered by the previous FDS. For example, if the previous FDS covers the period from 1st July 2013 to 30th June 2014, and you decided to reset the disclosure date to 1st April 2014, you may issue a fresh FDS to your client but the period that will be covered in the resetting FDS will be from 1st April 2013 to 30th March 2014. Any overlapped periods will need to be specified in the resetting FDS. For new clients, you may also reset the disclosure day by providing the FDS before the actual disclosure day. Each FDS will still contain information about the ongoing fee arrangement over a 12 month period even though the duration of the arrangement might be less than 12 months at the time the statement is given. You will need to make it clear in the FDS that the ongoing fee arrangement only existed for a certain part of that 12-month period and that the fees provided and services received only relate to that part of the 12-month period.
What is a renewal notice (opt-in requirement)?
A renewal notice is a simple document that is sent to your client every 2 years after the start of the ongoing fee arrangement. The document should state that the client wishes to continue the ongoing fee arrangement, and to continue receiving ongoing advice/services as detailed on the FDS. The client should sign the renewal notice or consent by return email (or any form of written confirmation), as acceptance of the ongoing fee arrangement. Whilst the FDS is sent every year, the renewal notice is only sent every 2 years. For simplicity and best practice, we encourage advisers to send both documents every year as they are both sent at the time.
Do you have to send a renewal notice to all clients?
You have to send a renewal notice to clients who have entered into an ongoing fee arrangement with you after 1/7/2013. For existing clients pre 1/7/2013, you only need to send a renewal notice if the ongoing fee arrangement has changed after 1/7/2013. For example if the fee has increased, or if there are additional services to the arrangement, or if there are changes to the terms of the arrangement and so on. The examples here are only a guide so there are other factors that will change the nature of the arrangement. For best practice, we encourage advisers to send a renewal notice every year. It’s a good way to get in front of the client, and potentially bring in more work for the practice, and also a good way to maintain your relationship as the primary adviser to your clients.
What if my client does not respond to the renewal notice, can the ongoing fee arrangement continue?
After receiving the renewal notice, your client must consent to renew their ongoing fee arrangement with you within 60 days of the renewal notice. If your client does not respond/opt-in within the 60 day period, the ongoing fee arrangement will need to be terminated, i.e. you are no longer allowed to receive any ongoing fee from your client’s account.
Can I have my clients to “opt-out” as oppose to requiring them to “opt-in” as some of my clients are not very efficient with their responses especially there is a need to meet the timeframe?
No, you are not allowed to have your clients to “opt-out” as the legislation states that the client will need to “opt-in” to enable the arrangement to continue, not the other way round. This is to prevent advisers to continue receiving on-going fees without the client’s knowledge/consent.