Tread Lightly, Collaboratively Post Banking Royal Commission
Reverberations will continue to be felt across the mahogany boardrooms and expansive top-floor executive suites of Australia’s admonished
banking and financial services giants, as the royal commission claims more scalps while others jump the proverbial ship.
The revelations exposed by the royal commission have been nothing short of appalling. As members of the profession – and as people who are
proud to call themselves financial advisers – We find it jarring and disappointing that these are the circumstances in which the industry
Finding the ‘right time’ to comment has proven difficult.
A pervasive “make-money-at-all-costs’’ mentality and systemic culture of cover-up within certain institutions has cast a dark shadow over
the industry – and left a nation of now-sceptical investors wondering just who they can trust.
They say sunlight is the best disinfectant.
But in our rush to clean up the industry, it’s important we don’t simply create a set of different problems. Collaboration and consultation
is needed to ensure we don’t trade one conflict of interest for another.
By year’s end, with the sector purged of its sins amid the white-hot glare of political and media scrutiny, attention will soon turn to
commissioner Kenneth Hayne’s recommendations and what legislation the Government will introduce in response.
The recommendations will almost certainly centre around the banning of vertical integration and the removal of grandfathering of old
remuneration models. Trailing commissions are now illegal for new products but are protected in old products still held. Changes we support
as long as they don’t compromise a person’s access to advice in the process.
The corporate watchdog, Australian Securities and Investment Commission (itself under scrutiny for being slow to investigate persistent
concerns of misconduct in the industry), and Treasury have been highly critical of vertically integrated financial players, raising the
pressure to break up Australia’s largest banks by splitting their financial advice and wealth management arms.
Both ANZ and National Australia Bank are in the process of cutting their respective financial advice businesses and have already offloaded
their life insurance operations.
Commonwealth Bank is also in the process of considering offloading its Colonial funds management business and has sold its life insurance
business. However, Westpac chief executive Brian Hartzer has said while stories of poor advice were “confronting’’ his bank was committed to
keeping its BT Financial Group division.
It’s believed there will be recommendations centred around asset-based fees and the separation of advice into a profession in its own right,
the latter we would argue is the only way forward and only achievable with the removal of vertical integration.
Take the family doctor, for example.
When we visit the doctor, we expect they’ll recommend a treatment plan that is best for our wellbeing, ensuring we make the best recovery.
We don’t expect the doctor will only recommend certain manufacturers’ drugs, or medical organisations’ facilities. We expect our health
won’t be compromised by doctors being driven by their own remuneration.
Financial advice as a profession should be no different. The core measure should simply be whatever improves a client’s financial welfare.
Until real advice is distinguished from product-selling by legislation or self-regulation, how can anyone confidently accept undistinguished
While it’s eminently clear some legislative change is necessary – for example the recent recommendations by the Productivity Commission with
regard to super funds and their ‘not so’ innocuous fees – the government must tread lightly when it comes to the size and scale of new
reform it imposes on an industry that is arguably heavy in this area already. The on again off again… and on again Future of Financial
Advice (FOFA) of 2013/15 addressed many of the issues in question. For those in the industry who embraced the changes and adhere to the
compliance rules it dictates, we have already incurred significant and ongoing operational costs as a result.
The oxymoron here is that constant and increasing industry regulation adds to the price of advice but undermines its value at the same time.
In our view the real problem is business cultures blind to conflicts of interest on the basis that ‘everyone else is doing it’ – this is as
much an enforcement issue as anything.
Any knee-jerk reaction without due consultation with the industry and consideration for the (often complex and significant) flow-on effects
to customers will only serve to further increase the net cost of advice and, we fear, drive clients and good advisers away at a time when
they are needed most.
And that would be the worst possible result.