Vertical Integration No Virus Cure: Ex-MLC Boss

07 Apr 2020

“The reality is that in a time of crisis, people need quality financial advice more than ever before. The idea that this is the time we should return to a subsidised and conflicted system would seem to be regressive.”

Large vertically integrated wealth managers may be seeking to take advantage of the coronavirus crisis to flog investment products, warns Koda Capital chairman and former National Australia Bank executive Steve Tucker.

Mr Tucker, who was chief executive of the bank’s MLC wealth management business for close to a decade before undergoing a Damascene conversion to the non-conflicted advice movement, rejected suggestions that larger players were better prepared to help consumers through the crisis than smaller independents.

“The reality is that in a time of crisis, people need quality financial advice more than ever before,” Mr Tucker told The Australian Financial Review.

“The idea that this is the time we should return to a subsidised and conflicted system would seem to be regressive.”

The comments follow the claim by IOOF chief executive Renato Mota on Tuesday that the business model of integrated financial advice and superannuation or funds management, which was slammed by the Hayne royal commission, was proving its worth amid the coronavirus downturn.

“Vertical integration was seen as bad, but now people need size and security,” Mr Mota said, adding that methods of cross-subsidisation had been helpful in keeping the costs of advice low for less wealthy consumers.

It also follows calls from some quarters of the financial planning industry for regulatory relief in order to free up time to handle escalating client inquiries relating to the market turbulence and federal stimulus packages.

Others have criticised financial institutions like AMP and Commonwealth Bank, who have pre-emptively moved to switch off commission payments owed to advisers ahead of legislation requiring them to do so.

Product versus advice

Having led one of the largest vertically integrated financial services providers, and instigated a move away from conflicted remuneration 10 years before the Hayne inquiry, Mr Tucker cautioned against any major rollback of regulations.

“We have to be careful that all of the progress that has been made in insisting that advice is always in the client’s best interests isn’t taken back a step by the idea that it is OK to subsidise advice with a financial product,” he said.

“The concept that subsidised advice allows you to reach the masses only works if the masses buy a product, which is potentially the problem.”

Mr Mota had added the caveat that the coronavirus crisis is not “an excuse to go back to ways that have let us down”, but Mr Tucker was concerned that any provider of both financial advice and financial products was prone to conflicts.

“People need to choose whether they are advice providers or product manufacturers. Just because there’s a crisis doesn’t mean suddenly those two things can sit side by side,” the former banker said.

‘Hayne’s big beef’

Daniel Brammall, president of the Profession of Independent Financial Advisers, an industry body that advocates higher professional standards, also took issue with Mr Mota’s claims.

“I don’t think it helps to defend vertical integration on grounds that consumers can benefit from it,” Mr Brammall said.

“You’ve got to remember that it wasn’t set up for the benefit of the customer; it was set up for the benefit of the business. Hayne’s big beef with the big end of town was that it had prioritised its own interests over the clients.”

The Canberra-based adviser said receiving “no advice at all” was preferable to receiving conflicted advice that could cause consumer harm.

The royal commission stopped short of recommending a ban on vertical integration but its interim report was scathing about the business model’s nefarious influence over the financial services industry.

“Vertical integration promises the virtue of efficiency, which is then passed on to consumers in the form of lower costs and greater access to financial advice,” Commissioner Kenneth Hayne wrote in September 2018.

“But the internal efficiency of the ‘one stop shop’ does not necessarily produce efficiency in outcomes for customers … [and] has an incentive to promote the owner’s products above others, even where they may not be ideal for the consumer.”

Alan Kirkland, chief executive of consumer advocacy outfit Choice, told the Financial Review that Australians should be wary of requests from the financial services industry to wind back regulatory reforms or defend past practices.

“This is not a time to be reducing the standards of advice,” he said.


Licensed by Copyright Agency. You must not copy this work without permission.

Subscribe to Koda insights

*Please note that the majority of research Koda produces and distributes is client-access only. Subscribing to the insights distribution list will only give you access to publicly available Koda reports.