The tortuous unravelling of how the big institutions have ripped off their clients by charging them fees for services they would not or could not provide simply highlighted – yet again – why we needed the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Take financial services giant AMP, for example. This venerable institution, boasting a 169-year history, has revealed a corporate culture that would have sat comfortably with Gordon Gekko, the morally bankrupt corporate raider from the 1987 movie Wall Street, whose immortal line, “greed is good”, has become emblematic of the financial services industry.
But as revealing as AMP’s testimony was, especially the deception of the Australian Securities Investments Commission (ASIC), I would contend it’s still not the core issue. Rather, it’s the mis-selling of financial products that is part and parcel of the integrated financial institution.
Remember when David Murray handed down the final recommendations from his Financial System Inquiry in December 2014, vertical integration certainly wasn’t top of mind. Understandably, Murray’s focus, in the wake of the global financial crisis, was on the stability of the banking system, and the report reflected this.
But in doing so, this inquiry, the third major probe into the financial system following the Campbell (1981) and Wallis (1997) reviews, missed a major opportunity to examine vertical integration in a detailed manner and to question whether its consumer benefits were far outweighed by the negative consequences of this industry structure.
However, this royal commission shows every sign of having vertical integration centre stage. Even before these current hearings into financial advice began, assisting counsel Rowena Orr affirmed it was very much on the agenda. To quote Orr: “Australians engage financial advisers to improve their financial position, to achieve their aspirations, and to plan for their future. Clients repose trust and confidence in their financial advisers. It is important that their trust and confidence is well placed.”
I remember a board member asking me a very simple question about an investment: “Would you put your grandmother into it?” Shouldn’t this be the question every financial adviser asks before making a recommendation? Many financial advisers on big salaries simply ignored their best interest duty.wa
For consumers who use the wealth arms of the big four banks and AMP, the evidence strongly suggests trust and confidence have been totally misplaced. The institutions, which were dragged kicking and screaming to this inquiry, and now having their dirty linen well and truly aired, must be wondering why they ever ventured into wealth management 20 years ago, especially as this investment has hardly shot the lights out, as a Macquarie Wealth Management research report makes abundantly clear.
“Wealth management represents only 4 to 10 per cent of the majors’ earnings. While relative contribution partly reflects sound banking income growth, on balance banks’ wealth management investments haven’t delivered desired returns,” the report says.
Maybe this low return will help explain the corner-cutting and questionable sales practices that inevitably will become evidence before the royal commission.
Today, the banks are voting with their feet: National Australia Bank has divested its 80 per cent in MLC Life; Commonwealth Bank of Australia (CBA) is divesting CommInsure Life to AIA Australia; ANZ is selling OnePath Life and OnePath Pensions; Westpac listed BT Investment Management in 2007 and subsequently reduced its holding to 31 per cent in 2015 and 10 per cent in 2017; and CBA has announced a strategic review of its asset management business, Colonial First State Global Asset Management, with an initial public offering firmly on the table.
The banks are clearly questioning the role of wealth management in their business models; I would go a step further and argue the vertical integration model needs to be scrapped – and hopefully the royal commission will provide another nail in its coffin.
To argue this is not to ignore the reforms that have occurred in wealth management. Significant advances have been made, including the Future of Financial Advice reforms, which were designed to improve the quality of financial advice; ASIC’s financial advisers register introduced in March 2015; the Corporations Amendment (Professional Standards of Financial Advisers), which aims to raise the professional, ethical and educational standards of advisers; and reforms to the payment of life insurance commissions in 2017. Although, as we are discovering, reforms only achieve the right outcomes if institutions embrace them. Clearly, they haven’t.
Still the elephant in the room remains vertical integration, as an ASIC report released in January made patently clear. One only needs to look at its key results to see the root of the problem. Of the five big institutions, their advice licensees’ product lists revealed 21 per cent were in-house products and 79 per cent were external products. But when the rubber hit the road and consumers made their investment decisions after getting advice, 68 per cent went to in-house products and 32 per cent to external products.
The report rightly says this doesn’t mean in-house products underperformed and it cites the advantages vertical integration delivers, including lower fees and the perceived safety of dealing with a large institution.
But those positives don’t, in my opinion, outweigh the inherent conflict of interest. Add to this the fact the report found 75 per cent of customer files reviewed showed the adviser had not demonstrated compliance with their best interest duty and related obligations, then you begin the appreciate the depth of the problem. “The advice licensees we review may not be appropriately managing the conflict of interest with a vertically integrated business model,” was how ASIC summed it up in an understated way.
Make no mistake, expect more big headlines as the financial advice hearings play out and the human cost of the integrated business model is fully exposed. In my opinion, the inherent conflicts have always outweighed the benefits and, hopefully, the findings of the royal commission will draw the same conclusion.