Unless you’ve been living under a rock for the past year, it’s been hard to miss updates about the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Established on 14 December 2017, the Royal Commission unearthed unimaginable misconduct; heart-wrenching stories of banks continuing to charge deceased customers’ life insurance premiums, lending home loans to those who could not afford them, and aggressive insurance cold-call tactics.
The spotlight was also turned on the quality of financial advice provided by the nation’s 25,000 financial planners.
There is no denying the Australian financial industry’s reputation is in tatters. But the good news is, it’s not all bad.
We’ve broken down the events that led to the Royal Commission, what needs to be done going forward, and how you can still seek financial advice with confidence.
Uncovering a right Royal mess
In the early 2000s, Australian banks decided to enter the wealth management and financial advice business. The Commonwealth Bank led the pack, acquiring former mutual company Colonial First State. In the years following, a wave of takeovers followed as banks took over life insurance companies and wealth managers, as well as niche financial planning businesses.
Banks were no longer just manufacturing financial products like loans, superannuation and other investments, they were also employing networks of financial advisers, often under different names, who were meant to provide independent advice to clients about which products to buy.
This model of business was given the title ‘vertical integration’: where institutions engage in both the provision of financial advice and the manufacture of financial products.
Consumers felt safer having a relationship with a single, large, vertically-integrated institution, giving them easier access to financial services: vertical integration was heralded as the new way forward for Australia’s financial services industry.
However, in vertically integrated businesses, there is a natural conflict of interest between a financial advisor’s interest in selling in-house products, and the customer’s interest in receiving advice that is in their best interests.
The Royal Commission uncovered that the vertical integration model saw a disproportionate amount of customer funds invested in banks affiliated with financial planners. More than 2 million Australians pay a combined $4.6 billion per year for financial advice – with half that revenue going to bank-owned financial advice businesses.
The breadth and seriousness of the crimes means that banks and other institutions are now moving quickly to offload many of their wealth, superannuation and insurance businesses.
This has been coming for some time, thanks to reputational damage caused by the unethical attitudes and activities of many people in the financial services industry; not just financial planners.
Reform is required
At Advice SA, we believe that in an ideal financial services world, vertical integration wouldn’t, and shouldn’t exist.
So, how do we propose reforming this tarnished industry?
The Royal Commission’s findings lead us to believe that the abolition of vertical integration would ‘professionalise’ the industry, with hundreds of financial planners gaining their freedom, no longer bound by product targets, budgets and sales incentives.
But like anything in life, it’s not as easy as it sounds.
In a piece written for Professional Planner, Robert MC Brown AM argues that there’s a likelihood that most of those formerly vertically integrated planners would seek to replicate the conflicted remuneration arrangements that were in place under their institutional ownership and licensing arrangements.
The answer then is to create an independent profession, free from conflicts of interest.
Genuine and permanent reform in the financial planning industry lies in removing all forms of conflicted remuneration, product incentives and targets, irrespective of ownership.
A draft Code of Ethics issued by the Government’s Financial Adviser Standards and Ethics Authority has recently been released. The challenge for the industry is to take the code seriously, and recognise publicly that widespread poor behaviour is the result of a deeply embedded and corrupted culture of product selling.
Professional directors and managers of companies within the industry must accept direct responsibility for what has happened.
It’s not all bad
If you’d been thinking about seeking financial advice but are now having second thoughts, you’d be forgiven.
There’s no doubt that the Royal Commission unearthed grave misconduct: but it’s not all bad news.
With Advice SA, it may be refreshing to know that what you see is what you get.
Here at Advice SA, we’re paid by clients for providing trusted financial advice, not by commissions or selling products on behalf of an employer or financial institution tangled up in a vertical integration model.
If we can’t provide value to your financial situation, then we will not offer our services. We also offer complete transparency about the fees you pay.
Advice SA was founded by one of South Australia’s most experienced Defined Benefit superannuation specialist financial advisors, Mark Bastiaans. Our niche is providing financial advice in relation to employer and industry super funds, with a specific focus on defined benefit super schemes.
This means your money remains with a large institution, such as your existing superfund, but you will receive personal and consistent advice from Advice SA – something many large institutions are unable to provide.
After an intense, revealing nine months, the Royal Commission will deliver an interim report by the end of this month, and a final report by February 2019.
The financial services industry is looking ahead, and already cleaning up its act with trusting and transparent firms like Advice SA leading the charge.
Mark Bastiaans is an Authorised Representative #296627 of Guideway Financial Services Pty Ltd ABN 46 156 498 538 AFSL 420367.
The information provided above contains general advice that does not take into account your financial situation, specific needs or objectives and is not intended to be personal financial advice and should not be relied upon without written advice from Guideway Financial Services Pty Ltd.