Vertical integration has been the source of myriad issues in financial services for decades, with the collapses of Dixon Advisory and United Global Capital (UGC) the most notable recent examples.
At its heart is the disconnect between what clients think they’re getting – advice – and what they are often actually receiving – product sales. While the effects of this structure were a prominent issue all throughout the financial services royal commission, commissioner Kenneth Hayne declared it didn’t need to be addressed.
“I am not persuaded that it is necessary to mandate structural separation between product and advice,” Hayne said in the royal commission’s final report.
Indeed, he concluded that “enforced separation of product and advice would be a very large step to take”.
“It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs, and the Productivity Commission concluded that ‘forced structural separation is not likely to prove an effective regulatory response to competition concerns in the financial system’,” Hayne said.
The fallout of vertically integrated product and advice firms collapsing is now set to have an even greater impact on financial advisers through the Compensation Scheme of Last Resort (CSLR).
According to the CSLR actuaries report, 92 per cent of expected claims paid for FY2025–26 relate to UGC and Dixon at $44.57 million and $12.25 million, respectively.
Meanwhile, the FAAA has modelled the FY26–27 levy as potentially hitting $123 million, largely on the back of Dixon complaints.
Speaking on The ifa Show last week, Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston said putting the onus for covering the cost of these failures on advisers, and by extension their clients, is “just ridiculous”.
“If the fund hadn’t failed, those people’s money would be there accumulating capital gains or interest or depending on what type of fund they’re in, and everything would have been alright,” Johnston said.
“But the fact is the fund failed and we think the product manufacturers should be held liable for the failure of their own funds. We think that vertical integration is a problem. This is what’s happened with Dixon’s and that’s what happened with the other one [UGC].
“We think the integration should be banned – grandfathered, of course, for those who are doing it now, but [banned] for anyone else.”
Arguing that it is a positive that the vertically integrated banks are now out of advice because “they weren’t very good at it”, Johnston said there needs to be a clear delineation between the services.
“It should be you are either an adviser or you’re a product manufacturer. And virtual integration is just that halfway point and confusion comes in,” he said.
“It’s conflicted for clients. It induces poor advice because people are leaned on to use their own internal products and those type of conflicts shouldn’t be there, in our view. So, that’s the quickest way to fix it.”
In a letter to AIOFP members, Johnston also raised the need for a ban of the structure, placing it as one of the three “critical structural issues” the advice profession must address ahead of the election, along with the disciplinary regime and government overreach.
“[Vertical integration] has been the most fundamentally conflicted and destructive advice influence for consumers over the past 30 years,” he said in the letter.
“It was responsible for duping consumers into trusting bank owned/independent looking advisers who placed their entire savings into expensive, poorly performing or failed funds … Vertical integration should be banned with current operators grandfathered but ASIC must keep a close surveillance eye on them.”
Broadly, Johnston argued sectors should be split between advice or managed investment scheme (MIS) product manufacturing.
“We do not consider managed accounts to be ’vertically integrated’ and super funds should be permitted to have internally trained ’product information officers’ to assist members with their own products and services,” he added.
Advice a financial services ‘punching bag’
While vertical integration is at the top of the AIOFP’s list, Johnston has also argued for a more centralised “universal code of conduct and disciplinary regime” and an end to government overreach.
“The advice community currently has a once in every three-year window of opportunity to end the 16-year phantasm of stupendous government overreach into our profession. No other profession has had to endure the level of government interference we have suffered since the collapse of Storm Financial in 2007,” he said.
“The Ripoll inquiry, FOFA then the Frydenberg/O’Dywer era of LIF, FASEA, compliance overload and grandfathered revenue ban followed by the CSLR which has the potential to be cataclysmic for consumers and our profession.”
The core problem, he added, is that Canberra has no “fear” of advisers politically, leading to the profession becoming the “punching bag of the financial services universe”.
“Somehow we get blamed for just about any industry ill but unless we start throwing a few punches back, it will continue and can only get worse,” Johnston said.
He added: “Allow me to be brutal about some aspects of our profession. Too many do not want to do any heavy lifting and rely on others to do it. The problem is the independent advice profession stands alone in the market, there is no other stakeholder to step in to fund or fix things – we must do it on our own.”
I think Peter has a point. The issue is not necessarily Vertical Integration itself, but the perception of ‘Advice’ and recommended products under this model. The ‘Best Interest’ duty would have to be tested under this model, given the limited range of product options. These models tend to have more of a ‘Self Interest’, on behalf of the ownership structure. If you thought our industry had learnt from the Bank’s pre RC. Think again, as the AZ NGA model roles out!
I’ve always appreciated the AIOFP’s work and am generally supportive of Peter Johnston’s advocacy, but on the idea of banning vertical integration entirely, I disagree. The real issue isn’t the vertical alignment of product and advice; it’s the misleading impression of independence that some firms have created. If a company is upfront about representing only in-house offerings, and clients know they’re not getting a full market comparison, the transparency helps everyone make an informed decision.
In cases like Dixon Advisory or United Global Capital, the collapse wasn’t simply because they had product and advice under one roof. It was that they failed to properly disclose their conflicts and limits. If the law properly enforced—and firms adhered to—the best interest obligations which includes conflict prioritisation, we might never have seen the situation blow up to the point where clients thought they were getting truly independent advice when they really weren’t.
Outright banning vertical integration would do more harm than good for everyday consumers. Plenty of people are comfortable buying their banking, insurance, or investment products from a single provider they already trust. If they’re aware the provider only recommends its own products, it doesn’t necessarily undermine the value of the guidance. Besides, forcing everyone into a fully independent advice channel often means higher costs, making financial advice less accessible.
It makes more sense to fine-tune current regulations so that calling yourself an “adviser” comes with strict conditions and hefty penalties for any misrepresentation. That way, product-tied representatives (who might provide a convenient, lower-cost option for many) are held to clear disclosure standards. Consumers can then pick if they’d rather go with a single brand representative or a fully independent adviser.
The law needs to allow for more choice, not less, and clients will vote with their feet and wallets.
Since prior to FOFA vertical integration was the primary source of all ills and remains so today. Haynes conclusion only proves he was clueless in his understanding of the problems and his analysis was biased in favour of the unions and big finance/product.
How about we just have the appropriate laws to strip the wrong doers such as Alan Dixon and David Evans of their personal assets to pay for their behaviours?
Dr’s owned and employed by Drug companies not to consult patients but rather to sell related company drugs.
Does this sound acceptable ?
Well it has too often been this way with Financial Adviser owned and employed by Investment or Life Insurance Product manufactures and thus these owned Advisers are forced to focus on selling Vertically owned products over and above providing real advice.
Ban Vertical Product Floggers.
huh huh huh
Now Industry Super are the biggest Vertically integrated Product Floggers in financial services this will never be stopped.
Even better, Industry Super get paid Hidden Commission for both flogging Super Products and Life Insurance.
To paraphrase Hayne… “I am not persuaded of the need to fix the most obvious cause of the biggest problem. I think it’s far more important to tie advisers up in more and more red tape, without actually improving anything for consumers.”
He had such a great opportunity to fix things, and he totally wasted it. What a fraud.
Keith – I refuse to listen to this – but I hope you laughed your head off when this came out of Peter’s mouth and pointed out that – even ignoring all the former AIOFP involved in exactly this kind of behaviour – they have a current director who has done exactly this just in the last 6 months!
The core problem, he added, is that Canberra has no “fear” of advisers politically, leading to the profession becoming the “punching bag of the financial services universe”.
Thats about right!
Johnston should be commended on his strong and righteous stand – completely agree with his identification of the underlying issues and proposal for resolve !! – If only authorities will listen and get past the noise of the instos .