In January 2018, the Australian Securities and Investments Commission (Asic) released a report into how the country’s largest banking and financial services institutions managed the conflict of interest of providing advice while creating products for retail clients.
The Royal Commission into superannuation, banking and financial services further highlighted the problems with the vertically integrated advice model in April when it spent two weeks focused on advisers acting in the best interests of clients.
Advice firms losing money
It often costs more to manufacture a piece of financial advice than consumers are prepared to pay, which means that, if viewed on a standalone basis, advice firms make a loss, says Oliver Hesketh, partner of NMG Consulting, which focuses on the investment, insurance and reinsurance sectors.
“As a result, there is a value transfer from product providers into the advice businesses, which generates a conflict of interest as the adviser has an interest in the sale of a particular product.”
While this scenario is far from ideal, it begs the question about what would happen to the advice firms if they were “no longer subsidised by product revenues?”.
Aussie advice in numbers
There are 25 million people in Australia and 21,000 active financial advisers with around 200 clients each, meaning that there are about 4.4 million Australians under active financial advice, Hesketh said.
Of those 4.4 million, about 20% as mass market, with investable assets of less than A$300,000 (£168,252, $222,981, €192,174).
“This is the part of the market that is often reliant on the vertically-integrated groups for the provision of financial advice and they generally pay a quite low fee.”
If the advice market could no longer be cross-subsidised by product revenues generated through the vertically-integrated model, “this is the segment that would seem to be the least likely to have the ability and appetite to pay more for advice”, Hesketh said.
If the vertically-integrated model can “no longer be tolerated or the cost of regulation renders it unfeasible”, the risk is that around 900,000 Australians would be left without any financial advice, he warned.
UK model solution?
“One option is to have a new advice regulatory framework for ‘tied advice’, as operates in the UK, where it is known as restricted advice,” Hesketh suggested.
“This involves a very clear understanding between the customer and the adviser that only in-house product will be offered.”
Hesketh believes that tied advice is just as much in the interests of industry funds as it is their for-profit peers.
“As it stands, industry funds currently offer either intra-fund advice and/or full holistic advice.”
Intra-fund advice is low cost and low risk, but also limited value to members in that it doesn’t even allow the adviser to consider the superannuation balance of a spouse. At the other end of the spectrum, holistic advice is costly and potentially over-services many members.
A tied advice model would allow industry funds to offer a valuable, lower-cost proposition to more members than they can realistically target currently, Hesketh argued.
He admits that it is difficult to believe the Australian regulator might entertain a tied advice regime right now.
However, “in our view at least, consumers would be well served by a third regulatory framework for financial advice that recognises the cost of maintaining true independence in advice may be more than the average Australian is prepared to pay”.
