In an article by Powerwrap chief executive William Davidson written for ifa sister title InvestorDaily, Mr Davidson said vertical integration at the major banks would come under scrutiny in the ongoing royal commission.
“All eyes will be on how Justice Hayne will approach the issue of vertical integration in wealth advice and whether that has been in the best interest of bank clients,” he wrote.
“One conclusion could be that incentive structures are at the heart of the problem and have resulted in an overwhelming preference for in-house product.”
Mr Davidson pointed to ASIC’s approach to vertical integration and said Mr Hayne’s approach could be reflective of that.
ASIC’s Report 562: Financial Advice: Vertically integrated institutions and conflicts of interest found that advisers from five major financial institutions (AMP, ANZ, CBA, NAB and Westpac) had only fulfilled best interests duties one in four times (25 per cent of the customer files reviewed).
“The royal commission has virtually unconstrained power to investigate how actual product recommendations can be so heavily skewed to in-house bank-owned product,” Mr Davidson said.
“It is not going to be a pleasant Easter for the banks as they prepare to defend their past practices in wealth advice.”
Why is vertical integration so bad in Wealth Management? If a client walks into a CBA branch for a home loan, they can be expected to be sold a CBA home loan. The Royal Commission so far into the banking side of things has failed to bring this up as an issue, rather has focused on ‘inappropriate’ lending (particularly banks inadequately verifying affordability) and conflicted payments & poor sales tactics applied by mortgage brokers. Both of these issues should not be inherent in Wealth Management as the FoFA reforms brought in BID & banned conflicted REM… instead the focus comes back to Vertical integration and for some reason the same client who was legally sold a CBA home loan in a CBA branch must now be offered a AMP/BT/MLC/IOOF, etc Wealth Product.