EconomicsPersonal Finance

Conflicted advice…alive and well

By February 17, 2014 3 Comments

It beggars belief that the Abbott government is proposing to reintroduce commissions and sales bonuses into the financial advice landscape. While on the one hand the government talks tough about the manufacturing sector having to stand on its own two feet, with the other it is busy shoring-up the cosy oligopoly enjoyed by the “big-6” (the four banks, AMP and IOOF), by winding back the financial advice reforms put in place by the previous government.

The reforms were designed to eliminate “conflicted remuneration” from the sale of financial products. In a classic example of what economists call “rent-seeking“, lobbying by the big banks and institutional wealth managers is seeking to have the reforms overturned. Arthur Sinodinos previously worked at National Australia Bank during it’s campaign against these reforms1. No doubt his former employer is delighted he is now Assistant Treasurer and leading the charge to have these reforms overturned or heavily diluted.

Nonetheless, perhaps the most pernicious conflict of interest has been missed altogether. The playing field has evolved: the banks and institutional wealth managers have been busy buying up both advisory practices and fund managers. So while the direct payment of commission on a financial product may be eliminated, often the advisory firm and product issuer are now owned by (or aligned with) the same company.

Advisory Owners

It’s no wonder consumers are confused about whether financial planners are aligned or independent. The majority of customers using Financial Wisdom (CBA) or Godfrey Pembroke (NAB/MLC) perceived their financial planner as independent2. They’re not.

The financial services license holder is responsible for establishing what is called an “Approved Product List”, which restricts the products that its financial advisors can recommend. There’s no prizes for guessing whose products feature heavily in these lists. Indeed a recent Roy Morgan report2 showed each of the major planning groups continue to recommend in-house products. According to the report, AMP advisors are particularly confident that AMP products are best for their clients, with over 70% of people using an AMP/AXA-linked Financial Planner ending up with an AMP/AXA product.

And the icing on the cake? Through a “balanced scorecard exemption”, the adviser’s bonus can be tied to group-profitability, which depends directly on the amount of client funds invested in the parent company’s products. The conflict remains, but now it doesn’t even need to be disclosed.

[1] Investors left to the mercy of the wolves, Australian Financial Review 15 February 2014
[2] Superannuation and Wealth Management in Australia Report – December 2013, Roy Morgan Research

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