The revelations coming out of the Royal Commission into banking, superannuation and financial services recently have been remarkable. For AMP to admit to deceiving the regulator 20 times over one issue is an extraordinary admission and one AMP had clearly hoped would never see the light of day.
When AMP executive Anthony Regan said the words “we preferenced shareholders not clients” the Australian public could see first-hand what most of the financial advice industry has known for years. That the large institutions clearly put their own interests ahead of their clients.
My firm Capital Partners is a boutique licensee, and as such we live in fear of ASIC, to the point where we go to extreme lengths to be compliant and play by the rules. The Royal Commission evidence clearly shows that it is not a level playing field. Big players have been getting big advantages, until now.
There are two financial advice models operating in Australia. The first involves all the big players like AMP, CBA, NAB, Westpac, ANZ and IOOF. Their model is vertically integrated meaning they own the product and the advice channel. Clearly the preference in this model is to have their aligned advisers recommend the in-house products. The more in-house product used, the greater the profitability of the group.
The other model is the boutique licensee model where the there is no ownership link or conflicted remuneration arrangements between the financial planner and the company whose products they are recommending. In this model the financial planner is motivated primarily by the need to satisfy the client. This is the model where consumers are most likely to find advisers acting as fiduciaries.
A fiduciary is an adviser who acts in a client’s best interests, rather than recommending investments that are merely suitable for the client.
It would be reasonable to call this second approach the ‘independent advice model’ except that ASIC specifically prohibits the use of the term independent unless the licensee can prove that they don’t receive even one dollar of product-based remuneration. I will have more to say on this topic another day.
In the wake of the Royal Commission consumers are going to need a system they can have confidence in and this will mean change.
In simple terms we need to break the link between the product manufacturer and the adviser. To be taken seriously, advisers of the future will need to be fiduciaries, NOT product sales people, so the system of fully integrated product manufacture and selling, (i.e. the bank model), needs to be unwound.
If an adviser in the future wants to be called ‘financial planner’ or ‘financial adviser’, they must renounce their relationships with their big parents, and all the benefits that go with the system, and start truly acting in the best interests of their clients.
The challenge for Kenneth Haynes and the Royal Commission, for Government and for ASIC is to ensure they don’t tar all financial planners with the same dirty brush. There are many boutique financial planners in Australia who have been doing the right thing for years.
But for the big institutions that do want to keep the product selling chain intact, their ‘advisers’ must be licensed as product representatives, not financial planners. Simple as that. Then consumers will finally have a clear choice.
Capital Partners Private Wealth Advisers is the FPA Professional Practice of the Year, and is committed to helping people live richer, happier lives. If you feel you need a second opinion on your financial situation they are a great place to start!