Speaking in Sydney, ARCO chairman and financial services veteran Bruce Loveday said he will be looking for implications for the structure of the industry when commissioner Kenneth Hayne hands down his interim report on 30 September.
The interim report of the royal commission, as well as the final report (due by 1 February 2019), will be best read in the context of the ANZ, CBA and NAB’s decisions to divest their wealth management businesses, he said.
“You’ve seen what has been the mainstream model for the industry for probably 20 years – vertical integration – basically being absolutely smashed,” Mr Loveday said.
Vertical integration is “not coming back” irrespective of what the royal commission finds, he said – but Mr Hayne’s findings could well be the nail in the coffin.
“What you are going to potentially see is an industry that’s got a lot more independent participants in it: independent advisers, independent researchers, independent fund managers,” Mr Loveday said.
“And arguably a much better advice profile that ultimately flows through the whole system to the end consumer.”
The days of ‘womb to tomb’ financial services providers are over, he said.
“Independents who actually focus on genuinely added value is going to be the major thing that comes out of [the royal commission final report] from a long-term industry perspective,” Mr Loveday said.
The royal commission hearings into superannuation begin on Monday, 6 August and will run until Friday, 17 August.
You can follow all of the action on a live blog hosted by ifa sister website, InvestorDaily.
There will always be a need for someone to be able to walk into Toyota and buy a Toyota. So AMP will always need to have sales staff. What we don’t need are advisers that work for these institutions providing advice. What’s needed is some personal leadership and for advisers to make a decision as to whether they want to be in sales or advice and walk away from these relationships.
This new improved model sounds very familiar. Very much suited to the likes of the new and improved Big 4 accounting firms. They all now offer wealth management services. I reckon get ready for the new model and they have had this structure for a very long time. Lots of juniors being supervised by Partners. They have been mysteriously left out of this debate. My 2 cents. They are coming…
If Kenneth Hayne’s early comments are anything to go by, he will be recommending that the remuneration structure for advice changes to align to that of the legal profession, with time billing and costs for different services etc. Some of the biggest complaints I hear from clients are not about our fees, not about accountant fees, but about legal fees. Legal services, unlike advice are a necessity to individuals at some point in their lives and are very much a transactional, one off style engagement…….advice is not. If it ends up going down that path, many clients will simply choose to part company, especially if fees dramatically increase.
Plenty of lawyers charge a retainer based model, if that’s the recommendation there is still scope to avoid timesheets. I actually think a fixed fee for strategy and a % based fee for investment management (assuming you do that) is fair.
I agree. What is required here is to think from first principles rather than through the lens of the current regulatory constructs. Much of current regulation is largely based on product distribution and has lead to onerous compliance overheads as essentially it is about largely supporting putting square pegs (products and product owner interests) into round holes (client interests). One could argue that any system that has promotion of products may be putting product provider interests ahead of clients as often the product provider gets paid first. A new set of regulatory constructs could more simply focus on client best interests and with some simple tests and measures could more simply provide a framework for adviser and licensee compliance.
Well, after everything I’ve heard, the first thing I did was to make sure that my new financial advisor was fully independent (via the IFAAA). I’m happy to pay upfront advice fees from an independent professional. There is simply too much incentive to act badly in the integrated model. The integrated model is rather like linking auditors fees to reported client profitability. As others have said, “In any race,always back self-interest. At least you know it’s trying”. The temptations are simply too great in an integrated model. Retail customers (like me) will simply vote with their feet.
Love this comment.
Aleks, please make sure this comment (not mine, Glen’s!) makes it to print in the next IFA magazine.
[i]There is simply too much incentive to act badly in the integrated model.[/i] Swap incentive with pressure and you are getting closer to the mark for young advisers entering a shark filled pond. Retail customers
(unlike you) don’t always have the benefit of a second opinion which means as long as aligned advice exists, the prospect of poor advice will follow.
Glen, you are fortunate to have the excess cash to pay the full costs of insurance advice upfront, and to effectively forfeit that amount if your insurance application is declined. Most consumers are not as fortunate as you. The insurance commission system provides a great alternative option for funding these costs. It makes insurance far more accessible, even if it does cost a bit more in the longer term. Just like a home loan.
There are plenty of non IFAAA planners who are not owned or controlled by product companies. They allow their clients to pay for everything by flat fees if they wish. However they also allow clients to pay for insurance advice via the commission system if they wish. The differentiating characteristic of IFAAA planners is not their lack of alignment or use of flat fees, but their refusal to allow clients to fund insurance advice via the commission system even when the client prefers it and it is in the client’s interests.
I would love to see if the ‘Independents’ who do cut corners (yes they are out there now) have large reserves of cash to compensate clients when they are caught or complained to? Just putting it out there.
Yes the day will come and sooner rather than later when ALL commissions will be banned, even on insurance products.
If Labour get in which looks quite likely, these changes will happen even sooner so advisers and participants need to be pro active now in changing their revenue sources.
But will all these changes including the tough education requirements rid the industry of all the bad apples, probably not.
You might be right… just not sure how many could survive.. the industry in short term would be obliterated (and so would be the jobs that hang off the back of a planner). There is no doubt about that.
So the obvious question then would be… Who ultimately benefits from that – consumer.. adviser.. or big product provider?
Too many people are looking at everything with rose coloured glasses.. really no clue about this industry… the sad part is how gullible people can be.. like a herd mentality really!!
I’m looking forward to the day that accountants can’t fling SMSF to ever person that walks in their door
NAB is divesting its wealth business. The new company (MLC) will/is vertically integrated – it has platform, advice and funds management. Vertical integration is not going away.
Completely wrong, the issues highlighted from Royal Commission is conflicted remuneration/incentives, not necessarily vertical integration. The independents of Maxwell Henderson failed and Dover failed too as they lacked the resources to have a proper client policy. There is a role for large organisations that have the resources to invest in the growth of financial advice and remediate clients if needed.
Neither Maxwell Henderson nor Dover were independent. They both had inhouse SMSF product that they profited from and pushed clients into. Same with Dixons. Same with most accountants.
I love the ‘Womb to Tomb’ line, actually, it’s made my day.
Especially considering CBA took it to the next level.
But in all seriousness though, wouldn’t it make sense to just ban vertical integration (ie. recommending own product over another) and force product manufacturers to create good products that an unaligned, unconflicted adviser would happily recommend to a client to serve their best interests?
In the case of AMP…sometimes beyond the tomb lol
I’m always intrigued to know what products the so-called ‘independents’ recommend. Is it the best for the client? How is this determined? How is their recommendation compared to other products? It’s a murky world out there in ‘independent land’. You cannot seriously tell me ‘independents’ don’t generally recommend their favorite little concoction to every client. Vertical integration does not mean bad advice or inappropriate products for client needs. Good strategy and advice is good and bad strategy and advice is bad. Goals based client outcomes are all that matter. I favor client outcomes and behavioural coaching everytime.
Yes I wonder how many “independents” recommend everyclient setup a smsf to manage a clients super.
And these independent operators will satisfy all the compliance and regulatory requirements imposed on so-called aligned.
The outcome of the RC will be poor policy from someone with no understanding of the industry.
The whole exercise is theatre.
‘The days of womb to tomb financial service providers are over ‘ Has anyone asked clients whether they agree with that ? Yet another idealist thinking that bespoke solutions for clients is the way to improve advice. Dream on.
So what does that mean for the Industry Funds & their advice channels which are predominantly are vertically integrated?
ASIC is pro-vertical integration if you read their submission.
We are forgetting the public with articles like this. They vote with their feet. If the public was desperate for independent advice they would be beating the doors down of the independents. If you look at recent surveys from RoyMorgan – that’s not the case.
Just because certain industry players want things a certain way – doesn’t make it so.
Removing choice from the public is prohibition & in most industries, alcohol, drugs, tobacco (excessive excise is a form of prohibition) prohibition creates other problems like bootleggers or unregulated players that satisfy the publics wants.
We can already see this in financial services, where people seek advice from a variety of unregulated sources, they end up getting burnt & as a result regulated advice gets further regulated resulting in it becoming even more out of reach for those that need it.
Don’t worry. People can get great advice from the noble accountant or the honourable solicitor.
Neither of whom is subject to any scrutiny.
Sounds like a pipe dream to me. Until there is a decent compensation scheme available, none of this will happen. Until the regulator reduces the compliance burden so advice becomes profitable, it won’t happen either. An adviser’s only revenue will be fee for service, no commission on insurance. No regular ongoing service fees from super either – that’s quite likely to be banned at some point or capped. It will all be invoiced and paid only when the job is done. FUM will be irrelevant. Advisers will need some capital behind them before starting their own practice and will need a steady source of new clients.
Running a fairly new advice business I know what it’s like to rely solely on new business and it’s not a space I always want to play in. My goal has always been to build an ongoing client book. If that is taken away I’d probably leave the industry and I’m as committed to this career as I can be!!
If they ban ongoing fees from superannuation, very few clients will be able to access advice. I can’t see that happening, it would result in poor outcomes for millions