Conflicts of interest identified by Royal Commission not news to independent advisers

From

Adam Murchie

The recent news that ASIC has commenced legal action against AMP is not surprising. The fallout that has resulted from the Banking Royal Commission, along with ASIC’s announcement that its financial services reforms has enshrined conflicts of interest within vertically integrated advice and product providers, have not come as a surprise to many long term independent service providers in the investment sector.

Forza Capital, a property investment provider to independent financial advisers and family office clients, saw danger signs when the Financial Services Reform (FSR) Act was first introduced. The regulations and compliance, especially for retail service providers, were so significant and so all-encompassing that the only real outcome was the merger and consolidation of many smaller operators that could no longer efficiently provide services.

“In effect, this was when we saw the first real wave of vertical integration occurring,” said Adam Murchie, a founding director of Forza Capital.

“Many smaller firms either sold out or rolled into a larger licensee. Under these bigger dealer groups, they were then driven by Approved Product Lists, white labelled products developed by their licensee and attractive commissions driven by business (or advice) volume.

“In effect, the changes removed competition and made it harder for the independent product providers to get distribution.”

The FSR changes were so significant they ultimately led to a range of unintended consequences for investors; a reduction in available products, stifled competition and innovation, and a focus on fees/commissions as opposed to advice outcomes.

The GFC then resulted in another round of huge changes to the advice industry via the Future of Financial Advice (FOFA) regime. The FOFA changes, while welcomed and required, significantly changed the business model of the advice sector; it impacted the ways advice was provided, and thus resulted in further consolidation and vertical integration.

“The FOFA changes were necessary because the reality is, the commission on advice model did not work,” said Mr Murchie.

“We have seen the very real ramifications of conflicted commission models laid bare before the Royal Commission and the truth is ugly.

“When FOFA was introduced, it further enshrined vertical integration while the sector worked out how to deal with the complexity of the changes they were now governed by.”

As the FOFA regime became more established, and advisers digested what being part of a vertically integrated model entailed, many started to see the issues, primarily conflicts of interest, that vertical integration bought to the advice dynamic.

“Water started to find its level,” Mr Murchie said.

“We saw a distinct shift with many advisers obtaining their own AFSL, establishing their own truly independent business models and going to a full fee for service offering.

“This shift has been a massive benefit for independent product providers as we find these independent advisory groups actively scour the marketplace looking for the best of breed investment providers.”

Having struggled with the integrity of the commission-based model, Forza’s directors designed their business around a zero-commission model. As a result, Forza only deals with fee for service advisory groups; when the business first launched in 2010, there were few such advisory firms, so it was a somewhat pioneering approach. Over the last five years, Forza has seen a massive shift in the advice sector to fee for service pricing and a shift in the willingness of independent advisers to engage.

One of the key differences noticed was that these independent, self-licensed advisory groups do their own due diligence and are therefore invested in the process and better understand the offer. One such firm is Providence Wealth, an independent advisory group underpinned by a single principle – to provide advice aligned only to clients’ best interests. This principle has served Providence Wealth, and its clients, well for nearly 20 years.

“We believe there is an inherent conflict in the manufacture of product and financial/investment advisory, as has been clearly demonstrated during the Royal Commission” said Grant Patterson, Managing Director of Providence Wealth.

“Being truly independent means we have no constraints when it comes to investment selection and the managers we trust and partner with; this results in the freedom to find the best opportunities, which in turn drives a better potential outcome for our clients.

“Being unfettered by institutional ownership or product manufacturing, independent practices are able to provide advice that’s honest, professional and unbiased.”

“Independent advisory businesses such as Providence Wealth don’t hide behind an APL or research house,” said Mr Murchie.

“Their advice is as good as the due diligence they have done. It is their name attached to the recommendation and it has bought a greater discipline where there is no conflict by way of commissions.

“We see this as a great outcome for investors. It has made advisers more invested in the process and more receptive to innovative ideas and opportunities as a way to create value for their clients.

“For this reason, high-quality operators were not dragged through the mud before the Royal Commission.”

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