Read: Investment Month in Review - April 2018
Read: The shape of the Watery Curve
The first three months of the Royal Commission have exposed some of the weaknesses and failures within the financial services sector, key of which are the difficulties associated with maintaining and providing truly independent advice, given the constraints of:
- Corporate structures - vertical integration
- Conflict of interest - dealer group approved product lists
- Payment models - fees for service
Corporate structures - vertical integration
In many instances, the enquiry has shone a spotlight on the vexing structure that large players in the market operate under – “vertical integration”. This corporate structure is where organisations own every part of the wealth management chain from manufacture (owning fund managers and investment funds), to the platforms on which a fund must appear if it is to gain any inflows from retail investors, and through to the sales force (aka dealer groups and “advisors”) who actually sell the product. This structure is so littered with conflict, that poor outcomes are almost guaranteed.
Conflict of interest – dealer group approved product lists
Many licensed financial advisors are employed by a bank or large financial institution, via a series of dealer groups who then trade under various brand names, other than the bank or institution in question. Each dealer group has an Approved Product List (APL), and their “advisors” cannot include any product outside the APL in a client’s advice. While these APL’s offer a broad range of investment options, the statistics are damning in that the vast majority of product recommended is head office aligned.
Payment models – fees for service
Administrative platforms provided by the dealer group, on which clients’ portfolios are managed, form the backbone of the Advisor-Client relationship. Clients pay for the platform, which can cost from very little to sometimes over 2.5% depending on the bundling of services and “advice” they receive. However, the Royal Commission has demonstrated that in some isolated cases, clients have paid for advice that they never actually received in the first place.
From an industry point of view, the need for advice continues to grow given the rising financial complexity as an individual’s assets grow and capital commitments rise. In addition, much of the financial advice is being sought by increasingly sophisticated consumers who have a vested interest in ensuring their retirement nest eggs and hard earned investments are well and truly safeguarded.
We believe the best way to protect the client’s interests, and put them first, is to obtain true independent advice. The ageing population, rising Superannuation Levy, growing complexity (tax, pension status, estate planning), and numerous other investment needs outside Superannuation (philanthropic, education, house, etc.) are all important considerations that should be independent of an advisor meeting internal targets.