Evidence provided to the royal commission on financial advice sends two very clear messages to the marketplace for all stakeholders including consumers
Clearly the vertically integrated model structure should have been banned under FOFA’s conflicts of interest and organisations that are too focussed on shareholder value with a poor management culture are a significant threat to the members or policyholders of the in house investment funds.
Many believe AMP should never have listed,and that it would have better served its policy holders by concentrating on providing them direct value with lower margins and stronger management teams. When an organisation heavily features in the 10 worst Superannuation’s funds in history there is a clear message to both Advisers and Consumers to stay away from such a culture.
Their ‘buyer of last resort’ [BOLR] mechanism is a profoundly conflicted threat to consumers and should be banned by ASIC.
AMP is well known for only appointing from within when filling senior management positions, this potentially toxic environment only perpetuates poor culture. They need a major clean out of the Board and Management team to survive.
But AMP is not the only one. The past week has shown that vertical integration is well and truly dead in the eyes of the government, courts and consumers.
The AIOFP started preparing for this new world a long time ago.
In the late 1990s Members did request the AIOFP Board assist them with establishing White and Private Label structures which was popular across the industry at the time.
But with the implementation of FOFA and the dramatic reduction in management fees over the past 5 years, this activity was terminated by the AIOFP Board due to the potential for conflicts with client objectives – something AMP and others should also have done.
Finally, a clear message to consumers has been to seek advice from Advisers who are not aligned to Institutions.
An equally clear message to both Politicians and ASIC is that their policy around s923A is not in the best interests of consumers, they need to be able to easily differentiate who they are actually dealing with when selecting an Adviser.
Peter Johnson is executive director of the Association of Independently Owned Financial Professionals.
The royal commission financial advice hearings continue live: https://www.ifa.com.au/strategy/25404-royal-commission-financial-advice-hearings-live-blog
Sam Henderson doesn’t work for AMP or the big banks……. Conflicts are not isolated to the banks and AMP.
I’m guessing there is a lot to speculate about, while I have never been a fan of the current dealer group model (Manufacturers should never be in bed with distribution). vertical integration has some positive points. that said my biggest concern was that Banks were allowed to own 100% of life companies and fund managers. this kind of ownership automatically opens it up for conflict. I said many years ago that banks should be limited to a maximum of 30% equity in any life office and 40% in aggregate. Banks are not culturally aligned to the life industry, and arguable also the funds management business either.
My greatest concern right now is that the baby will get thrown out with the bath water, I fear a knee jerk reaction by Government and regulator will not be a good move.
However when have we seen measured and thoughtful regulation in our world in recent times?
Consumers also need to know there is no such thing as independent firms as well as journalist when making these bias comments to polarise the industry players. There is always some dependencies on partnerships and firms and there is nothing wrong with aligned groups because they are still capable of delivering quality advice and in the best interest of their clients. Whilst banks are a target at the moment, there is a lot of issues to be uncovered with the so-called independent licensees and it comes down the extent they prioritise profits, sponsorship arrangements, business efficiencies over fair judgement when choosing products and delivering their services.
What makes you say that? Dont get ‘non-aligned’ and ‘independent’ twisted.
There are less than 100 truly independent advisers in the country, many work for the same firms.
While you are at it, how about the FPA being banned from flogging courses and setting education requirements.
The FPA doesn’t set education requirements. And what’s wrong with any organisation providing optional courses that raise the standard of professionalism in financial planning? And why should planners who optionally chose to do those courses be subsequently penalised for backing the wrong political horse?
FASEA are the ones who should be banned from setting education requirements that favour the commercial interests of FASEA Board members, while failing to recognise high standard courses provided by others, such as the FPA’s CFP Program. (That’s CFP Program, not the CFP Designation which is quite different).
Cant wait to hear what all the union funds have been up to. If its anything like what the union bosses have been doing in recent years with misappropriating member funds it will be explosive. These bastards have been attacking advisers for years. Now its their turn to stew.
Well said Peter. I’ve only two things to say to the AMP product sales people who disagree with your thoughts…”Royal Commission”. Vertical Integration in financial planning has been an epic fail. The banks are selling, Suncorp is out, we’ve got a RC, we’ve got over regulation and red tape, we’ve got ordinary Australians being turned away due to the cost of advice. Time to go back to the drawing board.
Yes… the silence on this issue is deafening
This is, after all, only an opinion. The author needs to do a little more research to get his facts right..
Everyone else who isn’t morally corrupt/chasing $$ in the industry feels the same way as the article.
Ironic though Reality, that the author of the opinion piece, Peter Johnston, once vouched for Jack Flader (Trio fame) after he fled Australia with millions of peoples super. I’m suprised he keeps writing articles in this industry.
Ironically, Trio was primarily being used by AIOFP member firms (nice upfront/ongoing commissions!). There was no vertical integration there, but a debacle left behind by Trio and several AIOFP member firms. Wonder how many Dover firms are members of the AIOFP (Dover about to appear in front of the RC this week).
No doubt vertical integration will decrease, primarily because the banks want rid of financial services/financial planning (insurance has already been spun out by many. Just not sure how companies without (or who have a small) banking arm will do it at this stage.
No, what’s dead in the eyes of the public is trusting financial institutions to do the right thing.
The public vaguely understands the idea of a conflict of interest and they have this sense that our institutions are riddled with conflicts. They have no idea about ‘vertical integration’.
Let’s be clear about one thing. The issue is not vertical integration, it is unmanaged and/or undeclared ‘conflicts of interest’. Scratch the surface of those who would seek to entangle the two issues and you’ll find an ulterior motive; a vested interest or some turf to protect or incumbency to shore up.
“Vertical integration” is properly understood right throughout all industries. It is the combination in one firm of two or more stages of production normally operated by separate firms.
A farmer who opens a butcher shop is vertically integrated. An iron ore miner with a steel-making factory is vertically integrated. Your local farmer’s market is a vertical integration; the milk cooperative too.
Amazon’s acquisition of Whole Foods is a vertical integration. The point should be obvious – vertical integration is good for consumers because it is key to innovation.
Texas Instruments foray into vertical integration drove down the prices (and vastly improved the quality and availability) of calculators and digital watches. (Of course Bowmore and Commodore – the leaders at the time – campaigned against the move, but that’s competition for you).
Vertical integration allows a company to distribute an innovation amongst its own user/customer-base. Think about this. If you come up with a better way to construct an investment portfolio (as my firm has), who is going to risk trying out the innovative method on their own customers? Certainly not your competitors. And probably not your key business partners either. If your innovation doesn’t work, the failure will be quarantined to your business. If it does work, the industry will move towards your model, and others will be free to improve upon it again.
Removing vertical integration from financial services would be an extraordinary move given it is prevalent in all industries. It has repeatedly been shown to benefit consumers above all else because it (i) lowers transactions costs, (ii) contributes to ensuring supply, (iii) improves coordination, (iv) drives and builds technological capability, (v) facilitates deep specialisation (hence broadens consumer choice appealing to broader needs etc).
If vertical integration was banned, it would ensure large institutions can use their scale to limit the penetration of new entrants. There would be less specialisation, less technology and a homogenisation of the industry. Arguably, this is already happening. A ban would only be to the benefit of incumbents. This perhaps explains its appeal amongst many so-called ‘independent’ financial advisers. Show me an IFA who campaigns for a ban and I’ll show you an IFA with no genuine value proposition around their core functions – investing, and planning – and thus who requires additional barriers to entry, homogenisation and no change to the status quo in order to survive and appear relevant.
At last! Someone who understands “vertical integration”. Well said Scott Barlow. Just another poor assessment of what it’s all about by someone who should know better.
In each of your examples of vert intergration the firm didnt change its name. They didn’t hide behind names like ri advice, bridges, charter, hillross. Vertical intergration in finnancial planning has lead to a lack of innovation, (look at planning software) over regulation and poor consumer outcomes.
Scott, until you have actually advised clients, I don’t think you understand the concept of best interests duty. We IFAs have been left to repeatedly bear the brunt of bad behaviour and clean up the messes created by the large end of town for decades. We use latest technology to cut costs and do not require additional barriers to entry, just ask for a level playing field by separating product and advice, which has never existed in this industry from the beginning and is sorely needed. Go back to your sports arena as I would not pay 1c for your “pioneering outcomes-based planning and investment” advice.
I agree with the conclusion but not the reasoning. Let’s be clear, there is no such thing as conflict free advice. AIOFP members, IFAAA members, accountants, lawyers and doctors all have conflicts. The real issue is how conflicts are managed.
The big problem with vertical integration is that the extreme sales culture of the banks just makes it too hard to manage those conflicts. There are too many middle managers with sales based performance metrics, who put lots of pressure on advisers to compromise their professionalism.
This same problem is now also happening in corporatised medicine. In recent years lots of small medical practices have sold their client bases into big medical conglomerates, and now find themselves working for sales driven bosses who pressure them to cut short appointments, request unnecessary pathology and scans from other divisions of the company, and refer to company aligned specialists. In short, they are being pressured to compromise their professionalism. If you speak to any doctors caught on this treadmill you will find many are tortured souls. Not unlike a lot of bank planners.
Maybe everyone joins Don’s licensee – Synchron. 4 Page Risk Insurance only SOA, most ASIC bullet proof licensee in the country. No old life agents joins them because they only recruit less than 50% of applicants, their due diligence is state of art and again ASIC bullet proof. Don send those terrific emails to Millennium3 planners to join your licensee. Rumour is your trying to get rid of SOAs and get back to CAR (Customer Advice Records). I’m sure ASIC will listen and act accordingly. All planners should join this non intregated licensee which is totally ASIC bullet proof.
In honesty, Royal Commission should focus on terminating Executive managers who either refuse to act or leave it too long to act when problems occur. The systems, processes and controls are in place, it is lack of leadership that have caused those issues. Severe fines should apply to AMP and banks including termination of executive managers whom are at ‘fault’ in all instances.
I welcome Peter’s thoughts on Vertical integration. Just interested to see whether Industry Fund Financial Planners promoting their own products will also fall under the same presumptions as the banks regarding Vertical Integration. Watch this space.
Touché, when will the curtain come down on Industry Funds?? Aren’t they an example of vertical integration in it’s purest form?