The conflicts of interest in super, wealth management and financial advice
08 December 2014
Should banks own both wealth management and financial advice businesses? It is a bit of a moot point, because they are massive and they dominate both sectors. But as with many oligopolies, especially in the finance sector, the structural conflicts are very large. This is a point made in the AFR:
“What we are saying is that the product manufacturer needs to consider what information is made available, what advice is needed – further than FoFA – and the distributor has to take that on board,” he told a CEDA business lunch in Sydney Monday. “Once that system is in place vertical integration doesn’t matter. The same obligations are on everyone, whether they’re vertically integrated or not.”
And while he concedes there has been a lot of heat on this topic recently, he describes this as more to with the unofficial war under way between sectors of the super industry.
That response won’t satisfy the many critics of the current banking and super model. Although vertical integration has yet to deliver on its financial promise for banks, most of the majors still believe wealth management offers huge potential growth and are determined to expand their offerings.
About 80 per cent of financial advisers are now aligned to, or owned by, the four banks and AMP. The Commonwealth Bank in particular may have been deservedly embarrassed by the past behaviour of some of its financial advisers – and its inadequate response until forced into it. But there’s certainly no acceptance by the big banks that they shouldn’t also be big players in superannuation and financial advice and can increasingly move into the lower fees territory of the industry funds.
That is why, for example, the banks also pushed the government to allow some of the pay for general banking staff to be linked to the amount of wealth management products sold and business referred. Despite banks’ protestations, this is a commission payment and was recently overturned in the Senate. But pressure remains."
The simple fact is that the banks are too big. Murray knows that because he used to run the Commonwealth Bank. It means that it is very much a case of "buyer beware" for anyone getting financial advice and trying to amass wealth. They will find it hard to avoid the influence of the banks. More than 80 per cent of financial advisers use a bank platform or large insurer; they are effectively sales forces for these institutions.
SMSF investors are trying to take back control. But they should know that it is hard to avoid the influence, even in the markets that they are looking at.
Murray is hoping that the regulators will be more active. But don't hold your breath. ASIC's track record with financial advice scandals has been less than exemplary. They are having enough trouble keeping up with what is happening already, let alone expanding:
"It’s part of what he calls a paradigm shift from the findings of the Wallis inquiry 17 years ago. The Murray inquiry finally acknowledges relying on more disclosure and financial literacy will never be enough to balance the interests of consumers with those so keen to sell them more financial products and advice.
That’s also why he wants a much more active regulator in The Australian Securities and Investments Commission – funded by industry - that undertakes more intense industry surveillance and responds more strongly to misconduct. Murray acknowledges the risk that a regulator involving itself in product design has the potential to have a chilling effect on innovation but says he expects this power to be used “extremely sparingly”. It’s not about absolving consumers of responsibility or insulating them from market risk, he says, but reducing the risk of being sold poor quality or unsuitable advice. Murray’s analysis of how effective his proposals can become fits into the optimistic category, despite his appeal to the national interest.
But what is probably even more significant in the long term is his determination to shift the focus of superannuation from lump sums and account balances to a steady and sustainable retirement income."