In its draft report into competition in the Australian financial system released on Wednesday, the Productivity Commission (PC) said vertically integrated businesses could not avoid conflicts of interest, but that these were tempered by regulation.
“A vertically integrated financial advice business, where the business engages in both the delivery of financial advice services as well as providing (or manufacturing) the financial products, creates an inherent conflict of interest,” the PC said.
“The law allows such a conflict to exist but requires vertically integrated financial advice businesses to manage this conflict through a range of obligations (including a best interest duty to prioritise the interest of the client over those of the advisers or other related parties).”
The PC said, however, that it is not clear whether vertical integration restricts clients’ access to information, noting that while advisers recommend products from an APL, they are not restricted to the products listed on it.
“Furthermore, to manage the conflict of interest, a thorough approval process for selecting products would ensure greater objectivity of products on the APL,” the report said.
The PC said more information about the products listed on advisers’ APLs would “highlight whether advisers are able to provide advice on a reasonable range” of both in-house and external products, but that this information was not presently available to consumers.
Despite this, the report said it is unclear whether vertical integration restricts clients’ access to information in practice.
“Whether or not the vertical integration of financial advisers reduces the information available to consumers, in practice as observed by the behaviour of advisers, and results in poorer outcomes, is an open question,” it said.
“Forthcoming ASIC research, which is to be released around the same time as this draft report, will shed light on this issue. The results will be incorporated into the final report.”
The PC’s report also proposed changing credit licensing arrangements to allow advisers to offer some credit services, however representatives for the mortgage broking industry questioned the PC’s understanding of brokers’ role in the provision of such services.
The report comes roughly two weeks after the release of an ASIC report into vertical integration in the advice arms of the big four banks and AMP which found that almost 70 per cent of all client funds were invested in in-house products, however the FSC has questioned the methodology used by the regulator in its investigation.
I love how the FSC is questioning ASICs methodology in their report. How wonderful it would have been if the AFA or FPA had questioned ASICs methodology when it came to the seriously flawed report into poor insurance advice and supposed MASS churning and the resulting LIF outcomes!
What about some of these Union Super Funds were external advisers have a referral relationship but cant get paid if you step outside the boundaries of what they think is ‘appropriate’ advice ie; all money must be invested via Union Super & all insurance must be placed via the Union Super provider. No issues with that I’m sure……
Your article headline is misleading, as “creating conflicts” could be taken out of context. The PC report goes on to say, “Furthermore, to manage the conflict of interest, a thorough approval process for selecting products would ensure greater objectivity of products on the APL”. Exactly. It is what is right for the client and ensuring that your client knows you’re using in-house products that is more important.
My dealer group not only purchases research from external asset consultants, but also has an in-house research department that distills our APL even further to ensure quantitative and qualitative standards are achieved.
In addition, how is it that an “in house” administrative product, which allows access to a multitude of fund managers or individual listed investments, is a conflict of interest, if it affords the client enormous administrative benefits and flexibility in doing business. With one of our administrative products, I processed a withdrawal one morning and funds were in the client’s account that very morning. Try that with an industry fund.
If advisers were to avoid this supposed “conflict of interest”, we’d all be promoting the cheapest funds in the marketplace. How is that acting in the client’s best interest?
I always remember the tradie who presented me with an invoice that had a quote on the top of it, “The bitterness of poor quality will always outlast the sweetness of a cheap deal”.
ODwyer needs to make ALL vertically integrated advisers very clearly badge everything owned by their banks / Insurance co. or industry fund, plus very clearly disclose verbally and written at the front of SoA’s these vertically integrated structures.
Chance of ODwyer doing anything like this against her bank buddies = ZERO.
ODwyer, you are so conflicted in your role, you really need to go.
It is all very well for vertical integration to be “tempered” by regulation. But there as an enormous compliance cost associated with that regulation, which is ultimately borne by consumers. And exactly the same costly regulations also apply to non aligned advisers, where there is no vertical regulation.
Wouldn’t it be more efficient and less conflicted for everyone, if all financial advisers had to be non aligned, and the expensive regulatory burden was lessened? Let’s hope this obvious solution appears in their final report.
I agree. Industry funds such as Australian Super having their own advisers whom only can recommend Australian super is a floored vertically intergrated model.
Except, they use a panel of advisers (some bank owned like Elders) to provide advice to members. The small team of internally employed planners use a Licensee called Industry Fund Services, a business effectively owned by a number of funds including AustralianSuper. IFS have an APL that is more broad than AustralianSuper products- however- selection bias may still exist, if that’s your point?
My understanding is that if any of the panel advisers place clients into anything but the house product, the adviser stands to not get paid. So you’re free to recommend anything on the APL but you wont get paid from the member’s Union Super Fund account. So no pressure there….
flawed??