The $4.6 billion financial advice industry faces a remuneration conundrum, according to Commissioner Kenneth Hayne, as to whether under present settings advisers can ever truly set aside self interest and “greed” to fulfil their duty to clients.
By law, financial advisers are required to act in the best interests of their clients and to provide services “efficiently, fairly and honestly”.
Yet a file review by the Australian Securities and Investments Commission earlier this year found that in 75 per cent of cases, advisers prioritised their own interests.
Commissioner Hayne says the results demonstrate how the choice between duty and self-interest is most often resolved in favour of the latter.
“And they are results that, on their face, deny a fundamental premise for the legislative scheme of the Future of Financial Advice [FOFA] reforms: that conflicts of interest can be ‘managed’ by saying to advisers, ‘prefer the client’s interests to your own.'”
ASIC examined the files of 10 advice licensees associated with the five largest entities: AMP, ANZ, CBA, NAB, and Westpac.
While FOFA banned conflicted remuneration, there are exceptions and these exceptions continue to give rise to the provision of inappropriate advice.
Moreover, FOFA did not seek to eliminate conflicts but regulate them. Commissioner Hayne invited feedback on whether this approach has been successful and remains appropriate.
“So long as advisers stand to benefit financially from clients acting on the advice that is given, the adviser’s interests conflict with the client’s interests,” he says in Friday’s interim report.
“So long as licensees stand to benefit financially from clients acting on the advice that is given, the licensee’s interests conflict with the client’s interests.
The royal commission heard how the grandfathering of pre-2013 commissions means conflicted remuneration is an ongoing problem.
In some cases, such pay structures have been replaced by “ongoing service fees”, which appear to be little better.
As the commission also heard, employment relationships within financial advice carry inherent conflicts.
Major banks and other financial services companies are vertically integrated: they are concurrently product manufacturers, platform operators and the employers and licensers of advisers.
“The adviser’s interest is to further his or her career and to maximise financial reward and the licensee’s interest is to maximise profit,” the interim report says.
“Where an adviser is employed by, or aligned with and acts on behalf of, a principal who manufactures or sells financial products, the adviser’s interests (and the principal’s) will be advanced by persuading a client to acquire one of the principal’s products.”
A major theme of the hearings has been the charging of fees for advice that is not provided or provided in full.
ASIC has been investigating the issue since 2015 and the estimated total future compensation owed to customers has topped $1 billion.
Commissioner Hayne concluded the “root cause of the fees for no service conduct was greed: greed by licensees; greed by advisers”.
AMP head of advice Jack Regan conceded the conduct in relation to fees for no service showed that the culture at AMP was not as robust as it should be.
He agreed it showed a culture in which conscious decisions were made to protect the profitability of AMP and put the interests of shareholders first at the expense both of the interests of clients and of complying with the law.
Another case study heard by the commission involved the Commonwealth Bank, which has been described as the “gold medallist” in the area.
CBA executive Marianne Perkovic, the executive general manager and director of Commonwealth Private Limited, confirmed customers of Commonwealth Financial Planning, Financial Wisdom, Count Financial and BW Financial Advice were charged fees for no service.
They fell into two categories. The first were those allocated to a financial planner in circumstances where the financial planner failed to provide ongoing services to the client, and the relevant entity had no systems in place to ensure the services were delivered.
The second category of clients who were charged fees for no service were orphaned clients. Orphaned clients were no longer allocated to a planner and there was, therefore, no possibility that advice would be provided to them.
Case studies involving AMP and CBA raised questions about platform operators within vertically integrated financial institutions.
Thanks to inertia by financial advisers licensed by AMP, clients remained on two AMP-owned platforms, WealthView and PortoflioCare, for which they were charged uncompetitive fees.
The commission also heard how CBA’s Colonial First State was unlikely to enforce legal obligations for platform operators to check that ongoing fees flowing to advisers were appropriately levied under “dealer terms of trade”.
“Those terms have not been enforced and are not practically enforceable given the vertically integrated environment in which Colonial First State operates,” counsel assisting the commission, Rowena Orr, concluded during her closing submission.