12 December 2014

As various governments and regulators have struggled to create the right settings to ensure clients receive the best advice from financial planners and advisors, it seems to me they are fighting against over 30 years of embedded beliefs and systems.

Perhaps it’s inevitable that the market itself will need to solve this challenge.

The ownership of advice businesses has always made sense for the big players, which now control 80 per cent of financial planning companies in Australia, as they were able to subsidise the cost of the advice given by ensuring these channels utilised the services of the players. This has included the product and platform sales, which ultimately delivered strong profits to the owners.

The big institutions are often criticised for this practice; however, it has been embedded over decades and has allowed millions of compulsory superannuants to get access to cheap and reasonable advice over time, as well as to a suite of products.

Vertical integration

There have been various forms of this vertical integration over the last three decades. In the 80s these advisers (agents) were aggregated into general agencies, where groups were formed to deliver large volumes of sales, and could therefore demand volume bonuses from the suppliers of products.

Did this taint the advice? Possibly so. However, clients were generally looked after in the process. The payment of bonuses for volume does have the potential to influence the outcome for clients, and at times this was the case. But these practices developed across the world and most clients were happy with the arrangements.

In the 90s, the institutions paying the volume bonuses began to overlay quality controls on the system, to ensure there was a level of service provided by the aggregator in return for the volume bonuses that were being generated. This saw the birth of the broker model.

Aggregation was fine, however, and quality controls and compliance checks were being introduced to the system. This was accompanied by the introduction of The Financial Services Reform Act, designed to regulate disclosure and practices and improve the quality of the system without actually changing it.

Client outcomes

In the 2000s, these structures evolved again and we saw the emergence of the dealer/licensee model. Once again, governments and regulators were concerned with poor client outcomes and moved to improve practices and to protect consumers.

Unfortunately all these periods were punctuated by various scandals created by a system that enabled some bad practices to be rewarded, as payments for advice were made via commissions and for the volume of product being sold.

As the current government struggles to get the amended Future of Financial Advice (FoFA) package through, we once again see the difficulties in trying to legislate to unwind decades of embedded structural behaviors. We want and need an improvement in professionalism and quality from advisors, as well as outstanding products and services to allow the advice to be executed well.

The challenge is in legislating and then regulating to ensure the two parts of the system can exist side by side, while ensuring clients’ interests are put first at all times.

The market will provide

The reality is, in my view, that the market itself will provide the solution. The big five retail providers and the industry funds themselves will ensure clients can be delivered low cost advice in a way that ensures a reasonable outcome, while recognising they want these clients to use their products. Clients themselves will become aware of the possible shortcomings of this system and make choices according to their requirements.

Most importantly, we will see the emergence of a new style, independent professional services firm. These firms will offer advice services to clients that are entirely independent of the product providers, finally evolving into firms that enable the emergence of a true advice profession. Unencumbered by 30 years of structural integration, these firms will be increasingly sought out by clients and advisers alike, who will flourish in the new independent system.

As the fog of change clears, this new discovery will enable these firms to become the path finders of the new era, not unlike the explorers of old, when it was finally discovered that the world was actually round.