Financial advice sector won’t avoid scandals with Band-Aid solutions

26 Jan 2026

JOYCE MOULLAKIS

The structure and inner workings of the nation’s advice market lend themselves to yet another blow-up, leaving many investors at risk.

And that means it’s only a matter of time before the industry again comes unstuck. Dodgy selling and marketing practices by intermediaries and conflicted pay models are thriving.

That, coupled with the fact that a greater proportion of investors is now classified as sophisticated, leaves more people exposed to potential bad behaviour and poor product design.

The structure of the industry has also allowed many advice firms and advisers to continue to earn additional or new fees for putting customers into particular products or funds, which, rightly or wrongly, raises questions about whether the advice being provided is in the customer’s best interests.

I assessed a handful of financial services guides across the advice sector, prepared for sophisticated investors, and found prolific fee sharing and referral arrangements and payments flowing to and from external or related parties, often for putting customers into specific products or managed funds.

There are even fees and commissions flowing to some firms and advisers for directing end customers into specific cash management or deposit accounts, and margin loan products.

“The only revenue advice businesses should generate is a fee from the client receiving the advice. Full stop.” — Paul Heath, CEO, Koda Capital

Although firms must disclose these arrangements, they muddy the water when an adviser has to justify their decision to put a customer into a particular product, managed account or fund.

At the retail end of the market, the demise of two questionable investment schemes last year, the Shield Master Trust and First Guardian put more than $1 billion in retirement savings at risk.

After those disasters, policy-makers, regulators and the industry must come together to more closely evaluate and overhaul the workings of the advice market for both retail and sophisticated investors.

This is particularly the case in light of heated debate regarding how victims of financial misconduct should be compensated and who foots the bill. The Compensation Scheme of Last Resort, introduced by the Morrison government, faces a ballooning volume of claims and Assistant Treasurer Daniel Mulino is already taking steps to fortify it and plug the hole.

That includes getting industry and retail super funds to pay a special levy to cover a shortfall in funding for the Compensation Scheme of Last Resort over the 2026 financial year, while a more contentious proposal may see self-managed super funds roped into the funding.

But broadening the range of participants that tip into the scheme only represents a stopgap measure that doesn’t go to the heart of the issues.

Investors can’t wash their hands of liability either – there needs to be an element of caveat emptor, albeit that can’t protect against adviser misconduct or investment products that flout the law.

Paul Heath, chief executive of private wealth firm Koda Capital, tells this column that what’s missing from the debate is a strategy to reduce misconduct risk, and more specifically, the industry’s tolerance of conflicts of interest.

“Much of the commentary has fixated on the primary mechanism for misconduct redress – the Compensation Scheme of Last Resort – and the challenge of funding it sustainably,” he says. “While important, the CSLR is ultimately a Band-Aid solution applied after the damage is done.

“Since the 1990s, conflicts have sat at the heart of nearly every major scandal. The inherent risk they create has been repeatedly flagged by inquiries: Wallis (1996), Ripoll (2009), Murray (2014), and Hayne (2018). Hayne went further, declaring the long-standing assumption that conflicts can be ‘managed’ as fundamentally flawed.”

Heath believes issues will continue to emerge in the advice industry until it accepts and adapts structurally to conflict-free advice.

“The only revenue advice businesses should generate is a fee from the client receiving the advice. Full stop,” he says.

Paul Ashworth, managing partner of wealth management firm Cameron Harrison, says part of the issue for sophisticated investors is that their advisers are not subject to a statutory best-interest duty.

“This creates a clear asymmetry: the adviser receives commissions or fees for recommending or referring an investment yet bears no formal downside if that recommendation proves unsuitable or fails,” he says.

“By contrast, retail advisers must meet qualification and accreditation standards, pass exams, and comply with a best-interest obligation. Wholesale advisers are subject to none of these requirements, despite typically advising on materially larger investment sums.

“The investor, meanwhile, is left with a product or referral that may generate strong returns – but also carries the full risk if it does not, with little practical recourse against the adviser. This imbalance materially increases the risk of poor outcomes and, over time, raises the likelihood of further industry scandals.”

But other industry participants don’t believe conflicts, in and of themselves, represent something that should be avoided.

In a recent LinkedIn post, Andrew Varlamos, co-founder of managed accounts investment platform OpenInvest, argues conflicts are not “inherently bad”.

“It’s impossible to decide if the conflict of interest has ‘unduly’ influenced a decision,” he says.

Varlamos suggests that advice firms and dealer groups could be prevented from branding their model portfolio or managed account divisions in a different name, meaning advice to the customer or prospective customer is “clear and transparent on its surface” rather than in the fine print.

A proliferation of separately managed accounts is seeing significant amounts of money funnelled by financial advisers into the products, spurring the corporate regulator to undertake surveillance of the industry. The Australian Securities and Investments Commission will assess compliance with general licensee and advice conduct obligations, governance frameworks and the management of conflicts of interest.

Australia’s managed account sector had swelled to $256.2 billion at June 30, more than three times the almost $80 billion balance in mid-2020, according to figures compiled by the Institute of Managed Account Professionals.

The providers of managed accounts, including separately managed ones, include research firms, investment consultants and financial advisory and dealer groups, some of which promote them through their own advice channels.

For example, advice firm Viridian wholly owns Infinity Capital Solutions and its related entities, benefiting financially when customers invest in separately managed funds or accounts through that entity.

If Varlamos’ aforementioned suggestion were to be implemented, Infinity would need to be branded Viridian, making it clear to the customer they were being directed to products under the same parent entity.

It’s an example of the vertical integration that was lambasted by Kenneth Hayne during the financial services royal commission in 2018, and his final report the following year.

Listed-group Prime Financial has been open with investors about the opportunity it sees from being able to cross-sell to customers, across advice and capital and asset management. Last year, the company acquired investment research, portfolio, platform and funds management firm Lincoln Indicators to boost its distribution capability.

Connections are not always clear-cut

Sometimes the connections are not as clear-cut. Take for instance, professional services network AZ NGA, which houses accounting, financial advice and mortgage broking firms.

The firm counts private equity house Oaktree as a controlling shareholder, but Italian asset management firm Azimut Group holds a minority stake. Financial advisers are reportedly being told by head office they’d like the advice firms to consider using Azimut’s wholly owned AZ Sestante, an investment consultant and managed account provider.

An AZ spokeswoman says the group’s firms have “autonomy in how they design and deliver their advice proposition, however, they must do so within the regulatory and governance framework of their Australian Financial Services Licensee”.

“Of the assets in managed accounts across AZ NGA, only a small percentage (less than 5 per cent) is advised by AZ Sestante.”

The Hayne royal commission showed that vertical integration, fee sharing and referral arrangements where money changes hands can cause a spate of issues for advisers and the parent entities.

Outside financial advice, the big banks were also in the firing line for some of their loan introducer programs which paid commissions to those who referred mortgage customers to them.

National Australia Bank went on to scrap its loan introducer program in response to compliance and reputational issues it caused at the time.

Under the Corporations Act, conflicted pay arrangements are typically banned for those providing retail customers with financial advice. (There are some exceptions, including income protection and life insurance).

Few rules and obligations for sophisticated investors

But when a customer moves into the sophisticated investor category, there are few rules and obligations, bar disclosing pay arrangements and not engaging in misleading or deceptive conduct.

To be deemed a sophisticated investor you generally have either gross income of at least $250,000 for each of the past two fiscal years or net assets of at least $2.5 million. The net assets figure can include the family home and superannuation.

The thresholds were implemented more than two decades ago and are not indexed, meaning that a much larger cohort of the population fits into that category.

The Labor government has thus far ignored requests by ASIC to lift the threshold for who can qualify as a sophisticated investor, siding with start-ups and fund managers concerned about the impact on inflows.

Dylan Greenway, a financial adviser at Impetus Planning, says individuals should consider the rights they are losing by being classified as a sophisticated or wholesale investor. He knows firsthand the issues that can arise in the sector as he continues to assist many First Guardian and Shield victims in their plights.

He says the advice industry has “come a long way” since the depths of the 2018 royal commission, but highlights areas that could still be improved, such as indexing the threshold for being classified as a sophisticated investor.

Conflicted pay and referral deals, although disclosed to sophisticated investors, heighten the risk of the financial advice industry again being the subject of a damaging scandal.

The industry has proven time and time again these risks can’t be managed. I’m not sure why the next time will be any different.

Read the article here: Financial advice sector won’t avoid scandals with Band-Aid solutions

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