DDO underlines the need for quality personal advice
While it may not have been an intended outcome of ASIC’s new Product Design and Distribution Obligations, the far-reaching changes to the way responsible entities, superannuation trustees and fund managers consider product development and suitability for investors, could lead to increased demand for financial advice in future.
Right now, Product Issuers and Distributors, including advice firms, are largely focused on navigating the significant complexity of the administrative and reporting requirements associated with meeting the new obligations that came into effect on October 5. However, as their thinking extends beyond the short-term requirements, there could be some significant changes to their long-term product distribution models and as a result the way in which, for example, direct to consumer (D2C) channels access managed investment products and platforms.
DDO Obligations
Some of the key requirements for Product Issuers include:
- Making a Target Market Determination (TMD) for each retail product, including triggers that would suggest the TMD is no longer appropriate
- Establishing an ongoing governance program to review and monitor the TMD for each product and any “significant dealings.”
- Notifying ASIC of significant dealings that are inconsistent with the TMD and distribution of the product(s)
Some of the key requirements for Distributors include:
- Taking steps that are reasonably likely to result in distribution consistent with the TMD
- Ensuring products cannot be distributed to retail clients unless a TMD has been issued and is publicly available
- Notifying the product issuer of significant dealings as soon as practicable (within 10 business days) after becoming aware
- Notifying the product issuer of the nature and number of complaints and any other matters as set out in the TMD within 10 days of the reporting period and report the nature and number of complaints and acquisitions outside the target market quarterly
Although there are some exceptions, in the main, platforms have historically relied on financial advisers as their primary distribution channel, through the provision of a personal advice process, due to the breadth of investment choice and importance of aligning each consumer’s overall investment strategy with their goals. This trend is likely to continue under DDO with many platforms framing their TMDs with a personal advice requirement (from a financial adviser) as a major determinant of product suitability, in addition to the high-level target market and specific product configuration aspects.
Managed fund and ETF issuers who have also used platforms and financial advisers as a key source of distribution to consumers are also likely to continue this trend because of the ongoing monitoring and reporting obligations, as well as the complexity that DDO brings for other forms of product distribution (e.g. D2C).
Direct to consumer distribution has always been challenging for platforms and managed investment products globally for many reasons, including investor education requirements, consumer profiling and execution and reporting technology, as well as the high cost of customer acquisition. Successful businesses in this area have tended to be limited to a small number of providers with a simple managed investment product offering, deep marketing pockets and innovative technology to deliver the consumer interface and onboarding.
DDO is likely to further exacerbate these challenges due to the additional complexity of taking reasonable steps to ensure distribution of the product is consistent with the TMD as well as the ongoing monitoring, compliance and reporting obligations. Even at this very early stage, we are hearing examples of Product Issuers and Distributors review their commitment or approach to this form of distribution which may end up being refined to investments that do not require a TMD like non-managed listed securities, for example.
While there is still a lot to play out in relation to the long-term impacts of DDO and there are still many yet to be answered questions for the industry, it is conceivable that if direct distribution channels for managed investments reduce significantly, financial advisers and quality personal financial advice may be a long-term beneficiary of these changes.
To capitalise though, under DDO, advice firms will still need to work out the best way to attract and educate direct consumers who desire managed investments with the benefits of personal advice or develop a DDO compliant and streamlined method of providing general advice to satisfy their needs. While there is much more to play out, at least there may be some, long term, indirect opportunity from one of the many challenges the advice industry has faced in recent times.