Many financial advisers don’t think they have a conflict of interest, but they might be wrong.
Thanks to the royal commission, everybody is talking about vertical integration and in-house conflicts. We explain what this means and highlight four things you can do to manage conflicts effectively.
I’m a financial adviser. Am I conflicted?
Probably. Vertically integrated structures are pretty common in the wealth management industry. It’s not just the big banks that use them.
If you answered yes to either of these questions, congratulations! You’re conflicted.
So, is my business doomed?
No. Commissioner Hayne toyed with the idea of separating product and advice – known as ‘structural separation’ – but in the end he rejected the idea.
But don’t celebrate just yet.
While Hayne decided that it should be possible for advisers and licensees to manage in-house conflicts effectively, he was damning of the poor consumer outcomes caused by in-house conflicts in recent years.
We expect ASIC to scrutinise vertically integrated structures and in-house product recommendations this year. So advisers and licensees need to be able to demonstrate that they understand the conflict and can manage it effectively.
How do I do that?
You have to place your client’s interests above your own. In most cases, your client will have an existing product. So you should:
In-house product recommendations will generally be inappropriate if:
The exception to this is if there is a clear justification for your recommendation. For example, if your in-house product addresses a specific client need or objective that the existing product doesn’t.
If you can’t easily explain why you’re recommending your in-house product, don’t do it.
Is that all?
No. You have to record all of this on the client file and explain it in the statement of advice. Most advisers don’t do this adequately.
If your advice is not properly documented and explained, you are effectively guilty until proven innocent.
So, what should I do?
You can demonstrate that you are managing your in-house conflicts by doing these four things:
Simon Carrodus, senior associate, The Fold Legal
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