Bruce Madden

Australians can thank Henry Ford for the experience of dealing with a financial adviser who operates under a brand owned by a bank, who recommends a product manufactured by that bank, who administers their portfolio on a software platform owned by the bank, and who in turn is remunerated for making that sale, and for using the platform… by the same bank.

For bankers this kind of vertical integration delivers business synergies, cost efficiencies and the ultimate ticket clipping selling opportunities that Henry Ford might have dared to dream about when he turned the first sod on his now infamous factory site outside Dearborg, Michigan around 90 years ago.

Henry had unlimited market upside to flog his Model T’s to 1920’s America.

But he would never have conceived of the rich growth afforded by a government -mandated market such as modern day Australia’s superannuation guarantee system.

And that is where the vertical integration analogy must stop. For beyond this point the future looks obscene. I argue that vertical integration in wealth management and financial services has a decidedly horizontal, flat-line future.

For, unlike Henry Ford, financial institutions don’t make badged hard commodities (and yes, I include the branded golf umbrellas in this comment).  They operate in the intangible market of promises and pieces of paper.

Put another way: financial institutions are custodians, by and large, of other people’s money. Contracts are forged between institution and financial service client not in the quality of the steel nor the amount of shiny chrome on the bumper. Financial service contracts are forged – or should be – in trust, ethics, fiduciary obligation and empathy with the customer.  Reputation. Brand. Customer affinity. Remember Henry, Emanuel and Mayer Lehman anyone? The original Lehman Brothers.

Yes, of course rationalist economics apply in order to sustain proper functioning commercial systems. And a robust Government and statutory regulation.

But at the end of the day, all of us in the financial services ecosystem are bound by the same truth: we exist at the sole pleasure of the humble customer.

Start treating people with a McKinsey-style zeal for widgetry and numerical order and presenting it as something that it is not (ie: sales dressed as financial advice) and the system starts to creak.  Badly. Add fraud, which is a potent symptom of the internalised volume/reward cycle and you have a recipe for complete disaster. It needs to be fixed. Client centric financial advice has no place in an integrated product world. It is that simple.

Vertical integration works great… for car manufacturers. Consumers go to a Ford dealership when they choose to buy a car. They expect to buy a product designed, manufactured, marketed and sold by Ford. They understand the simple contract of purchase price, taxes, trade-in valuations and drive away prices. Hell, they might even finance the purchase through an affiliated financing company and be happy to pay a disclosed commission to the sales guy. Why is this important?

Because today, July 15 David Murray, chairman of the Financial System Inquiry, will stand to deliver the FSI’s interim report to the National Press Club. I for one will be intently listening to his key messages to determine how the largest elephant in the room might be addressed.

The elephant is the systemically uncompetitive nature of vertical integration (actually, vertical monopoly) embedded within Australia’s largest banking, superannuation and wealth management institutions.

For in the light of recent revelations concerning ASIC and the Commonwealth Bank, and 61 calls by the Australian Senate – including for a Royal Commission – will it really fall to the FSI to flatten out the vertical mess?

These are interesting times.

Bruce Madden is a leading communications strategist and opinion leader with 20-plus years working inside the financial services marketplace. The views expressed are entirely his own.

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