Non-aligned advice will soon dominate the space but the industry faces a fundamental challenge about how it will survive financially, according to ARCO Investment Management chairman Bruce Loveday.
Mr Loveday told ifa that non-aligned advice “will become the norm” in Australia but he can’t see it being legislated.
“Whether non-aligned advice is ever legislated is a big call because we seem to have a bit of a reluctance in the Australian political environment these days to regulate in the manner. But I certainly think it will become the norm,” he said.
However, he believes there is one critical issue that needs to be resolved by the advice industry: how it gets paid.
“Somewhere in the whole value chain the providers of advice have to receive some economic return for their time,” Mr Loveday said.
“When you had undisclosed commissions, trail commissions and upfront commission being the norm, that effectively underwrote the provision of advice. It was often quite decent advice.
“But the bottom line is somebody actually has to pay for the advice. As a consequence of FOFA and what is likely to come out of the Hayne inquiry, any commission being the primary source of remuneration for advisers won’t continue. It must be fee-for-service model.
“But the fee must be a reasonable one. The challenge for the advice community is communicating that good advice is necessary and worth paying for.”
Vertical integration to go
Mr Loveday is also chairman of Burnham Capital and was previously chairman of platform provider Praemium. His confidence in the success of non-aligned advice coincides with a belief that vertically integrated wealth management businesses will be dismantled.
“I think that, if not all, then a large amount of the old vertically integrated models will vanish without a trace,” he said.
“I am firmly of the view that it has gotten to such a state where clients, who are the most important part of the equation, cannot be satisfied whether they are getting genuinely independent, relevant advice or not.”
Mr Loveday believes that while vertical integration doesn’t necessarily mean that advice provided is sub-optimal, it is almost impossible for aligned advisers to prove that they are acting in their clients’ interest.
“It is very hard to satisfy yourself as a client when the same corporate entities control the fund manager that you’re investing in, the adviser providing the advice and quite often the administration platform that you’re using to keep everything together,” he said.
“There is obviously a P&L benefit for the corporate entity if they can service multiple demands of the client through the same corporate structure. It’s usually more profitable for them. But that’s really not the point. The point is we now have a public policy, as we have had since the '90s, that individuals will be responsible for their retirement incomes. So they’ve got to be able to rely on independent advice and advice that is in their interests and no one else’s.”
Three of the four major banks have already made significant changes to their ownership of wealth and insurance business. CBA became the latest to distance itself from its wealth management business Colonial First State, which will be bundled up with an assortment of other non-core assets, demerged from the CBA group and listed on the ASX as a separate entity.
While some see this as a reaction to the Hayne inquiry, Mr Loveday believes it has been on the cards for some time.
“I suspect that the disintegration of the vertical integration structure was going to happen anyway. I think some of the big decisions announced have been in train for a long time,” he said.
But the royal commission has certainly had an impact on the decisions of wealth companies across Australia.
“If there are any boards sitting around not quite sure about whether getting out of a vertical structure is a good idea, I think they have probably changed their minds now,” Mr Loveday said.
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