Of all the organisations that provided submissions to the Financial System Inquiry, Elite Wealth Solutions is neither the most powerful nor the most noteworthy. And yet, among all the documents penned by professional lobbyists and the spin doctors of major institutions, the two-page letter written by AMP-linked financial planner and practice principal Rhys Wood was perhaps the most explosive.
While the conflicts created by vertical integration are well-known in financial planning circles – whispered about over beers at conferences and in the pages of this publication – never before has an adviser currently licensed by the institutions spoken out so loudly or articulately.
Writing to his local MP, assistant defence minister Stuart Robert, Mr Wood raised concerns often voiced off-record to ifa by institutionally aligned advisers – the conviction that choosing a licensee is not a fair choice, and that the “cumbersome and expensive process” of self-licensing effectively forces most into a commercial relationship they never really desired when embarking on their small business journey.
At length the practice principal described what he sees as the lip-service approach to flexibility and transparency at institutionally-owned licensees, arguing that most insto dealer groups “develop APLs which virtually exclude all other products from providers who compete with their parent company”.
Of the 50-plus comments on the associated news article, most came out in support of Mr Wood, congratulating him for making such a public plea in the consumer’s best interests. Others rejected the notion that institutional licensing is the only choice, urging Mr Wood to vote with his feet rather than voice loud complaints.
One responder, describing himself as a NAB-aligned financial planner, stood out. In an intelligent critique of Mr Wood’s submission, reader ‘Dave’ asked whether the whole debate over vertical integration places undue significance on product recommendation. “Is there really much difference between the various wrap accounts on offer, or the platforms on offer?” Dave asked. “Slight differences in fees, investment menus etc. doesn’t really matter that much; the value we provide to clients is in the advice we give them, initially and ongoing”.
Dave’s point is a cogent one. Giving advice restricted to one provider may not harm a client. Indeed, with the levels of competition in the industry, a single product manufacturer may provide a range of financial products sufficient to an entire client base reaching their financial goals.
However, the vertical integration debate is not necessarily about the end result to clients, it is about the impression they have when they walk in the door. It is about developing a culture of disclosure and transparency across the entire profession and paying respect to the consumer’s ‘right to know’.
Rhys Wood was not the only one to take aim at vertical integration in an FSI submission. Other criticisms came from slightly unexpected quarters. A joint submission by the Bendigo and Adelaide Bank, Bank of Queensland, Suncorp and industry fund-aligned ME Bank also voiced concerns. “With the major banks now dominating retail banking markets, their reach into other financial services has increased and is likely to increase further,” the joint submission warned.
Even the SMSF Professionals’ Association (SPAA) – a body not known for rocking the boat – came out strongly against product conflicts in the financial advice industry, going so far as to call for the introduction of a new licensing regime for independent advisers, akin to the Registered Independent Advisor regime in the United States. A separate licensing tier for independents would encourage greater numbers to shun institutional backing, SPAA suggested.
The Rudd-Gillard government inconspicuously ignored the issue of vertical integration when drafting the FOFA legislation, somehow deciding that ‘fee disclosure’ was a more pressing concern than disclosure of conflicts of interest emanating from licence ownership. In fact, the whole FOFA process has been a distraction from this most significant of trust issues for the financial services industry.
Given that David Murray once headed up the largest vertical integrator in the land, it is an issue he will be familiar with.
Given the submissions he is now tasked with reading, it is an issue he cannot ignore.
Advice for what its worth, if percentage based fees were banned then there would be no point in churning FUM would there. A fee would be charged to give advice in the client’s best interest and a massive amount of product would stay put because at the end of the day, most of the product out there is ok.
Paul, good point. This is one of the conundrums of the vertical integration debate. We want small groups to proliferate and drive competition, but in order to survive many are launching their own products, making them basicklailly vertcially integrated. In my view it is the major instos that are the problem though, not small groups and IFAs making innovations
[quote name=”Advice for what its worth”]
Only last week I saw an SOA that promoted a change to the new advisers owned solution ,.[/quote]
If the adviser owns, or has a financial interest in, the platform then they are not independent (surely)? Just another case of vertical integration?
Well done Aleks a very well written piece, unfortunately this issue of product flog/vertical integration, well known to everyone except the regulator will continue to go on unresolved.
They had an opportunity with FOFA and blew it .Not much of a reform was it, cost millions, beat up the advisers and back to business at the sausage factories, churning out products that must appear on the licensees apl.Even the adviser with their own AFSL and their own product solution is not immune to promoting the product before the consideration of acting in the clients best interest .
Only last week I saw an SOA that promoted a change to the new advisers owned solution ,when all the client needed to consider was simply switching asset class within their current platform .
This advice was conflicted and clearly not in the clients best interest, but the name of the game is
Whos got the most FUM.
Stewart, I’ve been told I won’t get the bare pricing with my own AFSL. That’s from the horses mouth.
Gerry bare pricing is now available on most platforms and clients pay (much) less than they would under a badged offer or with inbuilt vb.
If you get your own AFSL and use bare pricing then the loser is your old licensee as they no longer get their margin/vb and the winner is your client that no longer pays the higher platform fee. It makes no difference to you unless your licensee was sharing that margin/vb with you.
Badged or white label platforms should be banned and volume over-rides driven out of the industry. Every adviser should be able to use the same bare pricing on any product or platform.
If I want my own AFSL I get retail platform pricing because I don’t have the scale of FUM…so therefore I am somewhat forced under the umbrella of an institution. Damned if I do, damned if I don’t.
Good to see some informed debate. I am seeing more and more one practice licensees who now meet the independent definition or come close. If you excluded insurance commissions then many would already be there or would drop their legacy trail commissions to be there. It could be that no change is required and the answer is already there for those practices that want it.
And self licensing is not an expensive/difficult/time consuming/risky option if you are a one practice licensee. I would argue self licensing over a dealer group on every one of those points but I am NOT independent/unbiased/impartial.
Yes Shorten as Minister did ignore vertical integration as an issue probably because he did not fancy starting another fight with the big end of town. Another reason is that the argument could also impact on the relationship between unions and the ISN.
Underpinning the politically inspired policy development of FOFA is that ASIC have a business model which loves large licencees. Easy to scare !! Westpac in 1999 was closed by an EU for a month-expensive, and a lesson learned. AMP jumped real quick on the churning of super investments from ISN funds to its super products when it drafted its EU.
ASIC deliberately, in my view, makes the process of getting your own AFSL slow and expensive. ASIC would have been in Shortens ear about not encouraging a lot of new and SMALL licencees, without more staff.
FWIW, we should separate product manufacture from product sales & distribution. Can I see it happening soon – not on your nelly.
If ever the phrase “elephant in the room” was apt, it was now. The entire industry, as well as the financial press, have known that every possible method of “encouraging” support of in-house product has been employed for many years.
So, while there is no “news” in Rhys Wood’s letter, he is to be applauded for drawing such attention to it.
Perhaps the suggestion of a distinction in the licensing provisions between true IFAs and institutionally-aligned advisory groups has merit.